Multinational Monitor

JUN 2001
VOL 22 No. 6


Power Struggle: California’s Engineered Energy Crisis and the Potential of Public Power
by Harvey Wasserman

Hurwitz’s Power Grab
by Jim Valette

Attorneys General for Sale?
by Andrew Wheat


On Tax Cuts, Loopholes and Avoidance: Working for Tax Justice
an interview with
Robert McIntyre


Behind the Lines

Fossil Fools

The Front
The Taste of the U.S.A. - Whose Land Reform?

The Lawrence Summers Memorial Award

Names In the News


Power Struggle: California’s Engineered Energy Crisis and the Potential of Public Power

by Harvey Wasserman

The U.S. barons of fossil and nuclear fuel have used a contrived energy crisis in California and the nation as a pretext to declare an all-out assault on environmental protection. George Bush, Dick Cheney and their cohorts from the oil industry claim the rolling West Coast blackouts justify rolling over a century of carefully crafted environmental law.

But this rationalization ignores a telling detail: California does not have an energy shortage. And according to some of the state’s highest officials, the blackouts have been choreographed for massive price gouging by some of Bush’s closest associates and contributors.

The blackouts, rising electricity prices, government subsidies, utility bankruptcies and near-bankruptcies have many causes. But neither a shortfall in supply nor a surge in demand for electricity is among them.

California is in fact among the most energy efficient of states. Though its population and economy have soared, its overall demand for electricity has risen only modestly in recent years. The amounts of electricity it can generate in state or has contracts to purchase out-of-state are more than sufficient to meet overall and peak demand, and have been throughout the state’s crisis.

California’s electricity crisis was precipitated by a botched deregulatory scheme pushed by the very utilities now screaming about alleged losses, a plan that has immensely profited both the utilities’ parent corporations and a few pirate power generators close to George W. Bush.

California’s deregulatory disaster is a “failure by design,” prompted not by a real shortage, but by a corporate agenda, says Paul Fenn of the Oakland-based American Public Power Project.

In the view of the state’s leading consumer and clean power advocates, California’s consumers and taxpayers are victims of a massive, complex double-theft, first by the state’s biggest electric power utilities, and then by huge oil and gas companies close to George W. Bush.

Stranded Cost Catastrophe

There was very little public debate leading up to the Golden State’s decision to deregulate its electric utilities in 1996. The early battles were muddled and muzzled. The state legislature deliberated for a scant three weeks. The media barely covered those few hearings that were open to the public. Southern California Edison (SoCalEd) essentially wrote much of the legislation, AB1890, in its corporate offices.

When the legislature unanimously voted for the bill and watched its September signing by a beaming governor Pete Wilson, the utilities and their lobbyists gushed. This is “a great day for us,” cheered John Bryson, president of Southern California Edison, widely regarded as the bill’s chief architect. “We believe this plan is the best way to facilitate a smooth, timely transition to a competitive electricity market and maximize value for our shareholders and customers.” It was “a large achievement and a sound achievement for the state in terms of giving customers choice,” he said.

Ostensibly, AB1890 was meant to dismantle the regulated monopolies that had supplied California with electric power since the early twentieth century. Instead, consumers would be able to choose among competing suppliers. The bill presumed the electric market would fill with power companies vying to sell low-cost juice of all varieties, including “green power” from wind and solar.

But the state’s three biggest utilities — SoCalEd, Pacific Gas & Electric (PG&E) and San Diego Gas & Electric —made sure that before competition could come they were first reimbursed for their investments in nuclear power, which they argued was inefficient and could not compete in an open market.

In exchange for this payback, they engineered consumer rate caps that were to remain in place until the utilities collected up to $28.5 billion in surcharges for their obsolete generating plants. Once they collected that money, they said, rates would fall as competing generators came into the open market.

With abundant infusions of utility cash (the utilities spent more than $3.6 million lobbying to win the bill in 1996, and another $4.1 million to promote it in 1997), the state’s energy interests promoted AB1890 as a way to save customers money through the magic of the marketplace. In 1995, Bryson trumpeted deregulation as “the best, soundest way to move to a desirable competitive market that will benefit all customers, large and small.” SoCalEd, he said, was “committed to a 25 percent rate reduction effective January 1, 2000. As near as we’re able to tell, this [legislation] is consistent with our goal.”

A broad coalition of consumer and environmental groups knew better. They saw the “crisis” coming right from the start, and bitterly opposed the original AB1890. In 1998, as deregulation was taking effect, Herbert Chao Gunther of the San Francisco-based Public Media Center, Harvey Rosenfield of the statewide Foundation for Taxpayer and Consumer Rights, Ed Maschke and Anna Aurilio of the California and U.S. Public Interest Research Groups, Fenn’s American Public Power Project and others fought back. Operating on a shoestring budget, they gathered an astonishing 700,000-plus signatures to put on the fall ballot an initiative — Proposition 9 — that would have nipped the crisis in the bud. Among other things, Prop 9 would have restored regulation to the electric power system and prevented the huge “stranded cost” bailout that was AB1890’s central feature.

But the supporters of Proposition 9 ran into a hugely funded utility opposition that would not be denied. Still intoxicated by the promises of deregulation, William Hauck, chair of the Concerned Stockholders of California, a SoCalEd front group, spoke for the industry when he warned that returning to public regulation would dismantle “the competitive electricity market and customer choice, and will actually result in higher electric rates.”

Big energy steamrolled the campaign with a $40 million counteroffensive. The greens had only $1 million. California voters rejected Proposition 9’s proposal to repeal electricity deregulation by a 73-to-27 percent margin. (A parallel Massachusetts campaign was crushed on the same day, by a similar margin.)

It was a grim day for green and consumer advocates who had fought hard to avoid what’s now happened. Eugene Coyle, one of the state’s most respected energy analysts, and a host of others warned that the electric power industry was a natural monopoly that would never foster true competition. They showed that AB1890 was a cover for a massive bailout for the utilities’ bad nuclear investments. They demanded public control. They predicted disaster right from the start.

One early opponent of deregulation was Dan Berman, an energy expert working to win public utility ownership for his hometown of Davis, California. With Boston-based activist John O’Connor, Berman wrote in the 1996 book, Who Owns the Sun, “Today deregulation, cheap electricity, and natural gas are all the rage.”

“But few people are paying attention to what will happen when the price of natural gas and oil go up, as they most surely will, after falling by 75 percent in the last decade,” Berman and O’Connor wrote. “What will happen when the new, unrelated ‘independent power producers’ of cheap electric power fired by combined-cycle gas turbines pass on whopping rate increases to the public as the price of natural gas soars? Will big industry come weeping to the public, hat in hand, as the savings-and-loan investors did? Are the energy corporations crippling American industry by reinforcing an addiction to cheap fossil fuels and electricity? Will there be a massive ratepayers’ revolt when utilities try to stick consumers with doubled and even quadrupled utility bills?”

AB1890 did include measures that appeared to benefit ratepayers. The bill implemented an immediate 10 percent rate cut, and froze it into place for as many as four years.

“The same critics who now say the bill was written by the utilities to benefit the utilities were there in Sacramento in 1996 when the legislation was drafted and passed,” says Jon Tremayne, a PG&E spokesperson. “Their input, for instance, ensured that residential customers were included in the bill.”
But the resulting rates were still 50 percent higher than the national average. And the fixed rate blocked what would have been a natural decline with the onset of new renewables.

Deregulation opponents emphasize that had the natural transition to cheaper and more desirable wind and solar power been allowed to proceed along with efficiency and conservation programs being mandated by the Public Utility Commission (PUC) rates would have drifted downward as green supply increased and demand was held steady.

In the early 1990s, a major program for building renewable-based capacity was eliminated by the utilities through a legal filing in front of the Federal Energy Regulatory Commission. Had that renewable building plan been allowed to proceed, rates would have been on their way down throughout California.
Furthermore, AB1890’s so-called rate cut was financed by an elaborate bonding scheme that would force consumers to pay huge sums of long-term interest.

“In effect, the small customers are borrowing to give themselves this rate cut, which is like borrowing money to give yourself a raise,” said Coyle at the time. This is a “hidden tax that Californians will have to pay to private utility owners.”

Green Power Blocked

In the midst of today’s crisis, Vice President Dick Cheney, media pundits and others contend that the environmental movement has somehow blocked construction of new power plants that could have helped the state avoid the current crisis.

Consumer and environmental groups respond that the Federal Electrical Regulatory Commission (FERC) colluded with SoCalEdison to kill a clean generation initiative that would have provided enough additional generating capacity for the state to meet its own needs once deregulation began.

On February 23, 1995, responding to a SoCalEdison petition, FERC blocked a California Public Utilities Commission order that required the utilities to purchase more than 600 megawatts of renewable energy, primarily from wind and geothermal sources. Among other things, the FERC said — with what now seems terrible irony — “we have grave concerns about the need for this capacity,” mostly because the state commission” was relying on 1990 data, which FERC called “stale.”

Throughout the 1990s, California’s private utilities resisted the green demands for increased renewables and efficiency.

AB1890 further stifled competition to the benefit of the entrenched utilities that wrote the bill by making it more difficult for startups to lure new customers away from the established giants. But AB1890 included complex procedural roadblocks that made it virtually impossible for communities to band together to form buying groups that might circumvent the established monopolies.

As Paul Fenn puts it, AB1890 “raises serious questions about the ability of small consumers to exercise any market power. Unless residents and small businesses have the means to purchase power in aggregate through their local governments, ‘consumer choice’ will mean little more than paying higher rates to a middleman or to your current utility.”

PG&E’s Tremayne disagrees. “AB1890 provided the opportunity for customers to band together through aggregation and go out on the open market and seek better rates. That was not available prior to deregulation.” People are not doing this now, Tremayne says, because “the market is all screwed up. Those lower rates are not out there. Some significant steps need to be taken to stop the out-of-state generators from gouging California customers. Whether it’s short-term price caps at the federal level or those generators acting in a responsible fashion, we have to have changes that address the problems of the market.”

There were some incentives for conservation and renewables written into AB1890, largely sponsored by the Natural Resources Defense Council, whose chief San Francisco-based energy advocate, Ralph Cavanagh, energetically supported the bill. But the provisions proved marginal at best.

Meanwhile, Cavanagh, with support from the Energy Foundation, supported the utilities at every turn, including acting as a key leader opposing the 1998 grassroots referendum aimed at repealing AB1890.

Cavanagh’s role in helping to pass AB1890 and then defending it from repeal has earned him widespread outrage and contempt from the state’s green/consumer groups. He still opposes legislation that would take mandated efficiency measures away from utility control and give it to municipalities.

The California experience, warns the state’s green/consumer coalition, should stand as a warning to energy activists against accepting the marginal green provisions being tacked onto the Bush/Cheney energy plan.

Too Cheap to Meter?

AB1890’s driving force was a utility-sponsored provision to pay the utilities up to $28.5 billion in surcharges for investments in nuclear power, a technology once billed as “too cheap to meter.”

In 1996 hearings, SoCalEd and PG&E branded their nuclear reactors at San Onofre and Diablo Canyon as too uneconomical to compete in the competitive free market that deregulation would allegedly bring.

They demanded that ratepayers compensate them for these and other bad investments before deregulation kicked in. That was the rationale for freezing rates at the 1996 established level.

The utility argument, echoed in states around the nation, was that since regulatory agencies had approved the nuclear investments, the public had an obligation to compensate the utilities for their nuclear expenses before opening the electricity market to competition.

Those watching closely argued that not only did this arrangement constitute an outrageous bailout for the utilities, but that the subsidies would be siphoned off for uses that would be of no benefit to Californians. Taken as a whole, warned Gene Coyle at an August 1996 press conference, deregulation and the torrent of cash it would generate for the utilities “will not build infrastructure in California. PG&E and Edison will likely invest it overseas, in places like Indonesia and Australia where both companies are already active. In fact, the entire $27 billion is a liquidation of California assets, with almost all of this ratepayer and taxpayer money likely to flow to foreign investments.” That prediction proved prescient.

PG&E’s Tremayne responds that the company was under no obligation to reinvest in California. “Under deregulation, the utility’s investors — the shareholders of this company — were to get paid back for the investments they made years and years ago. [After the company sold its California generating plants] the shareholders either received the dividends by stock repurchase programs or by investing that money in other investments, including generation facilities outside of California. The way deregulation was set up, [it] intended to do exactly that — pay the utility investors back money that they had invested in power plants that they were now forced under law to sell. So the shareholders essentially recovered their investments and reinvested them. This was done under the direction of the Public Utilities Commission, in synch with state law.”

Both SoCalEd and PG&E say they have suffered huge losses in the last year or two, as the wholesale energy market has spun out of control, though these are losses for the utility subsidiaries, not necessarily for the parent companies which own generating companies as well as the utility subsidiaries’ power distribution system. PG&E, the utility subsidiary, not the parent company, has run to bankruptcy protection (handing its executives huge bonuses the day before). In mid-May a federal judge barred consumer groups from participating in those bankruptcy proceedings, meaning the prime suitors in those hearings will be the very power generators who jacked up wholesale prices in the first place.

But by most accounts, the utilities’ losses are billions less than the stranded cost bailouts they’ve laundered to their parent corporations. “It’s a mafia operation,” says Paul Fenn. “What happened to all that money?”

The Public Media Center’s Gunther says the parent companies have spent much of this “rogue cash” as if they were “drunken sailors.” Just as Coyle and others warned when AB1890 first became law, Pacific Gas & Electric’s owner has made huge investments in power supply networks in New England and New York through its National Energy Group affiliate. SoCalEd’s parent, operating through its Mission Energy subsidiary, has been deeply immersed in controversial speculations in Indonesia during the regime of the deposed dictator Suharto.

“The money has not gone to help things in California, that’s for sure,” says Gunther. “But where is it?”

Follow the Money

While an angry California public increasingly demands to know what its own utilities did with their money, they have also been forced to confront a second band of power magnates — the oil and gas companies close to George W. Bush.

To create competition, the AB1890 deregulation bill of 1996 established a complex scheme by which the utilities divested some, but not all, of their power plants. Those promoting the bill claimed the utilities would become pure distribution companies that would battle one another for the business of small customers.

The transmission wires that delivered the power would remain as regulated monopolies.

And then the generating facilities would, in theory, be bought by dozens of small, entrepreneurial power companies. The magic of the marketplace would drive prices down and service up.

The key to the utilities’ deregulation scheme was the assumption that wholesale electric prices would stay low. SoCalEd and PG&E had devised its cap on consumer prices based on the idea that they could dominate supply.
In fact, the utilities did not divest themselves of all their power plants. And, for a series of complex reasons, they failed to enter into long-term contracts with the new generators, thus leaving the utilities dependent on spot markets, where short-term prices could shoot up without notice.

Whereas long-term contracts might have established stable prices over time, the spot market — where energy is sold daily, often in small quantities — is prone to price spikes. Those spikes are supposed to be moderated by the Federal Electrical Regulatory Commission. But over the past year demand on the spot market has regularly been higher than the supply generators make available at any given moment. Prices soar, leaving utilities little choice but to bid prices up dramatically in an effort to procure the electricity to supply their customers.

Thus California was put at the mercy of a handful of out-of-state energy speculators, most notably Duke Power of North Carolina, and Dynergy, Reliant and Enron, all of Texas. These are very big players, who more closely resemble the OPEC cartel than feisty Silicon Valley-type competitors that free market zealots envisioned.

According to Washington, D.C.-based Public Citizen, Enron, Dynergy and Reliant gave in excess of $1.5 million to Bush’s campaign and inauguration committee, and to the Republican National Committee. In all, Public Citizen says nine power companies and a trade association with substantial interests in the California energy market gave more than $4 million to Republican candidates and party committees in the 2000 campaign. Bush’s new Secretary of Energy, Spencer Abraham, was the energy industry’s largest single campaign recipient during his failed U.S. Senate re-election bid in Michigan. Kenneth Lay, president of Enron, the largest U.S. natural gas supplier, is one of George W. Bush’s key contributors, and very closest advisers. So is James Baker III, his father’s former Secretary of State, and a principal at Reliant.

So while Governor Gray Davis and much of the California legislature received big campaign contributions from the state’s utilities, the power companies that manipulated their power supply had their key connections in Washington, which they made good use of.

In a national radio address on May 19, Davis charged that “price gouging” sent the state’s annual power bill soaring from $7 billion in 1999 to as much as $60 billion in 2001. Davis blamed it, “pure and simple,” on “unconscionable price gouging by the big energy producers — most of them, incidentally, located in Texas.”
While Bush has emphatically rejected price caps, widespread charges that his backers’ price manipulations are illegal have been given new heft by Loretta Lynch, head of the California Public Utilities Commission. On May 19, the San Francisco Chronicle reported that whistleblower evidence indicated “that generators illegally manipulated prices by deliberately withholding electricity during shortages.”

Lynch told a state Senate committee that in at least one instance three power plants simultaneously reduced output, causing prices to spike, and then restored output to cash in. “We certainly see a pattern,” she said, while warning of possible criminal prosecutions to come.

By and large the targets of those charges have invested heavily in George Bush, and stand to gain billions if his national energy plan moves ahead. When push came to shove in the California case, they were vastly rewarded by the FERC’s crucial refusal to cap prices at which they were selling power to California on the spot market. They also benefited from the FERC’s prior opposition to investments in renewables and efficiency, which would have dampened the demand that helped fuel the crisis.

Lynch and the CPUC are not the only state officials warning of legal retribution. On May 2, Lt. Governor Cruz M. Bustamante filed a civil lawsuit against Dynergy, Duke Energy, Mirant, Reliant Energy and Williams Energy Services, alleging that they have systematically engaged in a price-fixing conspiracy to manipulate California’s electricity market to “extract” unlawful profits that are draining the state’s treasury.

“A cartel of five out-of-state generators has been holding us hostage through a practice of illegal and unfair price-fixing,” Bustamante says.

“The energy crisis is not a problem of supply,” says Democratic California Assemblywoman Barbara Matthews, who joined Bustamante in filing the suit on behalf of California taxpayers. “It’s a problem of manipulation of our supply by out-of-state generators. Generators withhold power, create artificial shortages and play the ‘Great American Shell Game’ at the public’s expense. We will not tolerate this any longer.”

While Duke Energy and the others would not comment on the lawsuit, the company says it is “committed to continue playing a major role to help California address its electricity shortfall and the high prices many felt [last] summer.” Duke officials say they are working to solve the problem by modernizing and bringing additional generating capacity online at existing power plants as well as signing long-term wholesale electricity contracts with Pacific Gas & Electric (PG&E). But the companies are keeping the terms of those contracts secret.

Public Citizen reports that Enron showed a 42 percent increase in profits last year, Reliant a 55 percent jump and Dynergy a 210 percent rise, all thanks to federal regulators’ refusal to cap wholesale prices.

As energy analyst Eugene Coyle puts it: “We’ve been FERCed.”

In April 2001, FERC did finally agree to a price cap scheme that is at best a mixed bag. But in the hot summer of 2000 — with Bill Clinton in the White House — FERC stood by while wholesale prices soared.

San Diego Gas & Electric, having collected its final stranded cost money, was allowed by the Public Utilities Commission to unfreeze its consumer prices. The first shockwave of the deregulation disaster hit southern California consumers. SDG&E doubled and tripled its bills.

Consumer rates for SoCalEd and PG&E, however, remained capped. As wholesale prices soared, these large utilities claim to have lost more than $12 billion. When they — and Governor Davis — appealed to President Bush to re-cap wholesale rates, Bush refused, yielding spectacular profits for his friends at Enron and Reliant, among others, not to mention the utilities’ parent companies, Mission Energy and the National Energy Group.

It is this vise — between skyrocketing wholesale prices combined with frozen retail rates — that has prompted the contention that the problem in California is not a failure of deregulation, but rather that there simply hasn’t been enough. The utilities have been desperate to end the rate freeze for consumers that they themselves invented.

In the breach, the utilities convinced Gray Davis to use state funds to buy power, continuing to deliver huge profits for the gas companies. But while escalating his rhetoric against the out-of-state suppliers, Governor Davis has refused widespread consumer demand that he use the state’s leverage to take over the assets of the utilities that were still in the process of collecting more than $20 billion in the stranded cost cash bailout, money they promptly laundered to their parent companies.

In all, the double rip-off has yielded at least $20 billion for the utility parent corporations, and another $20 billion for the Bush-related gas companies, all for which California has nothing tangible to show. While PG&E has filed for bankruptcy protection, SoCalEd continues to pressure Davis for concessions, and the gas producers continue to demand that the taxpayers guarantee the purchase of power at rates that appear to fluctuate wildly based not on supply, but on their willingness sell at uncapped prices.

Fossil & Nuclear vs. Clean and Public

In the midst of a convoluted crisis that has so vastly enriched George Bush’s supporters, the utility and gas industries are now furthering their agenda on other fronts. Bush and the industry’s Congressional allies — most importantly Republican Senator Frank Murkowski of Alaska — want to lift environmental restrictions so that more power plants can be built, as Davis has already done within California. Alaska should be drilled, they say, as well as sensitive protected offshore eco-systems along both coasts and in the Gulf of Mexico, and virtually anywhere else the oil companies think they might make money.

But oil, however, has virtually nothing to do with solving an electricity crisis. Nationwide, less than 4 percent of U.S. electricity is generated from oil. The percentage is even smaller in California.

And then there’s the push for more nuclear power plants. Around the April 26, 2001 anniversary of 15 years of fallout from the Chernobyl catastrophe, the mainstream media filled with talk of a revival of atomic energy. Not one of the major stories carried coverage of the huge stranded cost bailouts that had prompted the California crisis in the first place, or the fact that the builders of those nuke plants had labeled them “uncompetitive.”

Nor was there much mention of the February 3 fire at San Onofre that knocked out a turbine and may keep that nuclear plant off-line for months, at a cost of up to $100 million. In the midst of the state’s worst energy crisis, this disaster knocked out, in a flash, fully 25 percent of SoCalEd’s generating capacity, and 25 percent of the state’s nuclear capacity, enough to supply more than 1.1 million homes.

Little attention has been devoted to the fact that wind power is now far cheaper than all other sources of new generation except brown coal. At 2.5 cents/kilowatt hour, it is far cheaper than any projected costs for new nuclear capacity, and is even lower than natural gas in many instances. In 2000, Germany, which is moving to shut its 19 nuclear reactors, brought on line 1,300 megawatts of wind, 200 more than was lost at San Onofre. Great Britain has just committed $2.5 billion to offshore turbines. The Public Utilities Commission of Minnesota has deemed wind its “least cost” alternative and ordered at least 300 megawatts of capacity to be added to the 400 already in place. A major wind farm along the Oregon-Washington border began construction in February, and will go on line in December. It is widely known that the Great Plains between the Mississippi and the Rockies are the “Saudi Arabia of wind,” with virtually infinite capacity. With current technology, and with additional offshore capacity, wind power could meet much if not all the nation’s electric needs long before a new generation of nuclear reactors could be built.

Even atomic energy’s staunchest supporters acknowledge it would take at least five years to bring new reactors on line, far more than it would take to bring on vast new supplies of still other alternative technologies, most importantly photovoltaic cells (PV), which transform sunlight directly to electricity. Within five years, PV is expected to plummet far below even the most optimistic projected costs of atomic power. Increased efficiency and conservation are already far cheaper.

PG&E’s Tremayne says conservation is only part of the solution. “PG&E is a leader in conservation efforts and has been for 20 years. Our programs have been looked at from across the country as models of how to institute energy efficiency programs with high customer participation. As a result, Californians are the most energy efficient — in terms of per capita consumption — in the country.”

“The problem is that over the past 10 years demand has grown and supply hasn’t,” Tremayne says. “We’ve been able to rely upon the Pacific Northwest and the Southwest to supply power to help California meet its needs: As much as 8,000 or 9,000 megawatts on any given summer day. But those two West Coast regions have experienced significant growth as well over the last six years, so they don’t have the available power to export any longer. We haven’t built any new power plants in California” in a period where 600,000 new residential customers have been added each year.

But as Paul Fenn puts it, the crisis “is not about supply. There’s plenty of capacity around. It’s a problem of who controls the supply, and the money that pays for it. That’s why local control of electricity supply is critical to real solutions and why the idea of gutting environmental laws under the auspices of energy relief is such a horribly impotent gesture.”

“We’re so afraid to let these companies go under,” Fenn complains. “But when all is said and done, the public would be better off letting them go down and using eminent domain to buy their assets. At least then we’ll have gotten something tangible out of the deal.”

While Governor Davis has talked about possibly buying the utilities’ transmission lines, the green/consumer community is increasingly demanding public utility ownership. But Fenn and others are not particularly eager to have the state run a single public-owned utility. Rather, they look to a more local-based solution.

That point of view has gotten powerful backing from James McClatchy, publisher of the Sacramento Bee, and one of the few dissenting voices in the major media’s coverage of the California crisis. Beyond the state’s taking over the transmission lines, McClatchy wrote in a February 18 editorial, “the next step would be for the state to buy the associated generating facilities.”

“Any final solution,” says McClatchy, “would have to include public ownership of the generating plants that PG&E and Southern California Edison sold to speculators, as well as the facilities they still own.”

The way to deliver the power, McClatchy adds, would be through “existing locally owned and managed utility districts,” as well as through ones newly organized to handle the job. “With public ownership of these systems,” he says, “would come increased public transparency on all aspects of the operations — where there is little now — and thus less opportunity for sweetheart deals with friendly financiers or broker,” leaving less room for “the rapaciousness of speculators and selfish political partisanship.”

PG&E’s Tremayne denies that public ownership of the companies’ generating plants will solve the current crisis.
“Our facilities continue to be regulated under a cost-of-service structure under the Public Utilities Commission. So our generation is being provided to customers here in California at cost and aren’t part of the problem. The real problem comes from the out-of-state generators that have been gouging the market for a year. That’s where people need to be focusing their efforts.”

As for local ownership of the distribution or transmission system, Tremayne says that wouldn’t solve the problem either. “Those [distribution] costs are regulated by the CPUC and the FERC. The problem is in the generation market. It doesn’t matter who owns the distribution or transmission system — the problem will still exist if we don’t get control of the generation market.”

The Municipal Alternative

The greatest of the untold stories of the California crisis is the stunning success of the state’s two municipal-owned utilities, the Sacramento Municipal Utility District (SMUD) and the Los Angeles Department of Water and Power (LADWP). Both have not only weathered the storm, but thrived in it.

McClatchy and others point to SMUD and the LADWP for keeping rates stable for their customers while reaping substantial profits selling power into the grid.

In June 1989, Sacramento voted to shut the district’s one nuclear reactor, at Rancho Seco. S. David Freeman, who now runs the Los Angeles utility and previously ran the Tennessee Valley Authority, led SMUD into an era powered increasingly — though modestly — by wind and PV facilities, including enough rooftop solar panels for some 6,500 families.

SMUD also inaugurated an unprecedented campaign for increased efficiency. It offered its customers $100 rebates for retiring wasteful old refrigerators (refrigerators account for 20 percent of the average household’s electricity consumption). It distributed energy-efficient light bulbs. It promoted solar water heaters and PV panels. It also planted thousands of shade trees to slash summer air conditioning demand.

SMUD’s progress occurred amidst a state-wide deregulatory wave that headed in precisely the opposite direction. In the rest of the state, public conservation and efficiency programs were weakened with the deregulation of wholesale supply. The uncertainties of impending consumer price deregulation stalled strong statewide movements to build windmills and install solar panels. And AB1890 freed the utilities from the renewable and efficiency programs mandated by the Public Utilities Commission — which SoCalEd’s Bryson had once headed.

This record confirmed public interest advocates’ belief that deregulation was incompatible with environmental concerns. Meanwhile, Dan Berman says SMUD was doing “the kinds of things you expect a utility owned by the public to do. It’s what we want to see all over California.”

Berman has worked for years to win a municipal utility for his home town of Davis. Parallel campaigns have sprung up elsewhere throughout the state. The San Francisco Board of Supervisors has approved a fall referendum for municipal ownership, and five East Bay towns, including Oakland and Berkeley, will hold similar votes. San Diego may also vote on municipal power, and other cities, towns and counties are virtually certain to join in, though they will face massive utility resistance. In mid-May, San Francisco’s board of supervisors announced it will take bids on at least 50 megawatts of solar power to be installed in the city and paid for with public bonds — an effort that may be joined by Sacramento.

“SMUD is a role model,” says Berman. “If we’re to see any progress at all,” public power and municipal control is crucial.

Nuclear opponents have long argued that if the hundreds of billions that went into reactors like the ones at the core of the California crisis had gone instead into renewables and efficiency, nothing like California’s current crisis would have ever happened. Critics who predicted the disaster that is AB1890 insist that electricity is a service, not a commodity, and that its production and distribution can never be left to an uncertain market that will always be subject to the whims of private utilities and the barons of fossil fuels.

“The last thing the utilities and the independent power producers want is public ownership,” says Fenn. “But municipal power, controlled at the local level, is ultimately the key. Until we get it, things are only going to get worse.”

“Deregulation of the electricity monopoly is a failure,” adds McClatchy. “The monopoly should be returned to the tax-paying consumers who support it and depend on it.”

Harvey Wasserman is the author of The Last Energy War: The Battle Over Utility Deregulation and a senior advisor to Greenpeace USA.

Modest Demand, Withheld Supply

No one disputes that a mismatch between supply and demand underlies the California energy crisis. But consumer advocates point out that the data show California's energy demand to be growing slowly, not surging as many news reports suggest. And, they say, the electricity shortage reflects not any real limits on supply, but the market manipulations of the independent generators.

A comprehensive San Francisco Chronicle study in March showed that California's energy demand is in fact rising slowly . "The industry has painted the summer of 2000 as the equivalent of a 100-year storm in meteorology — an event so powerful and unexpected that the existing infrastructure was devastated by its force," the Chronicle reported. "The statistics show that 2000, taken in total, was nothing of the sort." Overall electricity usage in California rose approximately 2 percent a year in the 1990s.

Most importantly, peak use —the demand level that actually stresses the system — was lower at the end of 2000 than in the previous year. While peak demand was high in May 2000, in four out of the last six months of 2000 — July, August, October and December — peak demand was lower than in 1999, according to an analysis of statistics from California’s Independent System Operator (CAISO) by Public Citizen's Critical Mass Energy and Environment Project.

California's available capacity and electricity on contract vastly exceeds its peak demand. In total, California has 55,500 megawatts of power generating capacity and 4,500 megawatts of power on long-term out-of-state contracts — approximately 15,000 megawatts more than peak demand, Public Citizen reports, citing statistics from CAISO.

The problem California is facing isn't supply, say the consumer/green groups, it is that the power supply companies, now a separate industry segment from the utilities, simply refuse to make the supply available. The independent power generators' alleged market manipulation is now the source of numerous lawsuits and investigations.

— Robert Weissman

Power Plays:
Where did the California Utilities money go?

When California lawmakers voted unanimously to deregulate the state’s electricity market in 1996, California’s three biggest utilities — PG&E, SoCalEdison, and San Diego Gas & Electric (SDGE) — owned most of the state’s power generating plants, as well as most of the state’s distribution grid and power lines. The companies operated as regional monopoly utilities, with strict regulatory oversight over retail electricity rates.

Once deregulation began, however, the companies rapidly began to restructure. First, they “unbundled” their assets — selling off some of their power generating plants while keeping their distribution grid and power lines and other assets such as nuclear and hydro power generation facilities.

The money from the power plant sales and high utility charges was siphoned off to the utilities’ parent companies (e.g., PG&E restructured in 1997, creating a separate holding company called PG&E Corporation), which then passed the money on to other unregulated subsidiaries, which acquired new generating facilities in other states and (in the case of Edison International and SDGE) other countries. The parent companies built a diverse array of new assets and services, including natural gas pipelines, storage and processing plants.

Since the summer of 2000 price spikes, PG&E and SoCalEdison have claimed they are going broke by having to pay the difference between high electricity prices charged by wholesale power suppliers in the newly deregulated market and lower fixed retail rates that the utilities themselves originally negotiated with state regulators.

Claiming they needed relief or else they would be forced to declare bankruptcy, the utilities convinced the state to begin spending $50 million of taxpayer monies per day to purchase wholesale electricity on their behalf. The state began buying super-high-priced electricity on the wholesale market, including on the spot markets where prices were orders of magnitude higher than just a couple years before, and conveying the electricity to the utilities. By May, California taxpayers had spent more than $6 billion, with no end in sight. As the state’s budget surplus quickly eroded, Governor Davis proposed floating $13.4 billion in bonds to cover the cost (the bonds are to be paid off over 15 years by ratepayers via higher electricity rates).

Meanwhile, federal regulators (FERC) agreed in January to allow the companies to organize their corporate structure so as to preemptively shield their assets during bankruptcy proceedings.

Less than two months later, on April 6, PG&E — the utility, not the holding company — filed for bankruptcy, leaving consumers and taxpayers in even more of a bind.

But was the company really bankrupt? While the utility was losing $300 million a month in wholesale power purchase costs, its parent company was pulling down a healthy profit. At the end of 2000, the PG&E Corporation (the parent company) reported $30 billion in assets and $20 billion in revenues for the year. It had an ownership interest in 30 independent operating plants in 10 states, including a number under development. In October 2000, it spent nearly $8 billion to acquire 44 new turbines.

Moreover, between 1997 and 1999, PG&E transferred $4 billion to its parent corporation. In the first nine months of 2000, PG&E transferred an additional $632 million. An audit sponsored by the California Public Utility Commission (CPUC) concluded that “historically, cash has flowed in only one direction, from PG&E to PG&E Corp. and then to the unregulated affiliates.” Similarly, SoCalEdison transferred $4.8 billion to its parent corporation (Edison International) between 1995 and 2000.

CPUC’s audit also found that PG&E Corporation (the parent) is expected to receive an additional federal tax refund of up to $1 billion “largely due to losses sustained by PG&E.”

The San Francisco-based Utility Reform Network explains in its report “Cooking the Books” that the utilities’ position was “akin to a situation in which one pocket is empty and another is full of cash. A reasonable person would check both pockets before assuming that they are penniless.”

PG&E’s Jon Tremayne responds that deregulation was set up “to pay the utility investors back money that they invested in power plants that they were now forced under law to sell. So the shareholders essentially recovered their investments and reinvested it. This was done under the direction of the Public Utilities Commisssion, in synch with the state law.”

With support from the FERC, PG&E maintains that its California subsidiary is completely separate from the parent holding company, despite the fact that the two companies have virtually identical boards and file a joint annual report with the Securities and Exchange Commission.

The company may not be entirely in the clear. PG&E admitted in April in a quarterly filing with the U.S. Securities and Exchange Commission that, depending on the terms and conditions of the company’s reorganization plan adopted by the company’s Bankruptcy Court, creditors of the bankrupt PG&E utility unit may be able to grab some assets from PG&E National Energy Group, a subsidiary the parent had intended to insulate through its restructuring plan.

— Charlie Cray

Recent Purchases or Commitments
of PG&E Corporation
(parent of PG&E Company)
and Edison International
(Parent of SoCal Edison)

Subsidiary What they built/bought/where
($ billions)
PG&E Corporation  
Nat’l Energy Group 810 MW Southhaven power plant in Mississippi
Nat’l Energy Group 44 turbines, 15 other projects from Societe General
PG&E Generating Okeechobee County, FL power plant
to be completed 2003
Nat’l Energy Group Madison Windpower in New York
Nat’l Energy Group Attala 500 MW power plant, MS
Energy Trading
Tolling rights to peaking plant in suburban Indianapolis
Nat’l Energy Group
Tolling rights to Liberty power plant in suburban Philadelphia
PG&E Stake in True Quote trading software
PG&E Aerie broadband pipeline project
PG&E Generating Pleasant Prairie, Wisconsin power plant
Nat’l Energy Group Lake Road power plant in Killingly, CT
US Gen
New England Electrical Systems hydro, coal, oil, gas generation plants
(4,800 MW total capacity; 18 plants)
PG&E Corp. Valero (gas pipelines, processing)
Edison International  
Citizens Power P&L Cal Holdings/Boston
Edison Capital Swisscom, telecomm network
Mission Energy Italian Vento Power Corp.
Mission Energy
Commonwealth Edison’s 12 Plants in Illinois
Mission Energy
Ferrybridge & Fiddler’s Ferry - power plants in England
Mission Energy
40 percent stake in New Zealand’s Contact Energy
Mission Energy Homer City power plant, PA
EME del Caribe
EcoElectrica co-gen facility in Puerto Rico
Mission Energy
1,230 MW coal-fired power plant Paiton, Indonesia (40% stake; under construction since 1994)
Sources: Public Citizen Critical Mass Energy and Environment Program, company annual reports, 10K filings.

Recent Sempra Energy
Purchases or Commitments

(Sempra was created by the 1998 merger of Pacific Enterprises, the parent of
Southern California Gas and Enova, the parent of San Diego Gas & Electric)

Subsidiary Purchase/Location
($ millions)
Sempra Energy
Sodigas Pampeana S.A./Sodigas Sur S.A. (Argentina natural gas holding co.s)
Baja natural gas pipeline (joint venture w/PG&E)
Chilquinta Energia S.A., Chile’s third largest electricity distributor;
deal includes Energas S.A.,
gas distributor
SEI Luz del Sur S.A.A., Peru. (included in above deal)
SEI ECOGAS Mexicali pipeline
Termoelectica de Mexicali (Mexico) 600 MW gas-fired power plant
(online 2003)
ECOGAS Chihuahua, Mexico (privatized by PEMEX); gas distribution.
SEI DGN De La Laguna-Durango (Mexico)
gas pipeline and distribution.
SEI Transportadora de Gas Natural
de Baja California, Mexico, pipeline.
SEI Natural gas pipeline, Arizona to Tijuana,
Mexico (PG&E will develop US portion).
PE Natural gas/propane distribution (Uruguay)
(15 percent interest in
Conecta consortium)
SEI Sempra Atlantic Gas (Nova Scotia)
exclusive natural gas distribution rights.
SEI Bangor, Maine natural gas distribution
SEI Frontier Energy nat. gas distribution, NC
Sempra Energy Trading subsidiary purchased from
Trading (SET) Consolidated Natural Gas,
Stamford, CT
SET (Internet utility company)
Sempra Energy 550 MW Elk Hills power plant
Resources (SER) Bakersfield, California (online 2003)
SER 1200 MW Mesquite Power plant,
Phoenix, AZ
SER 500 MW combined cycle plant,
Boulder City, Nevada
Sempra Energy
1200 properties, including housing in Houston, Modesto (CA), Puerto Rico
and the Virgin Islands
Aerie Networks nation broadband fiber optic network.

Sources: Public Citizen Critical Mass Energy and Environment Program, company annual reports, 10K filings.

Giving it to California Consumers:
A Review of the Double Rip-Off

Thanks to the opposition from utilities and FERC, California has been deprived of the natural-based energy sources the environmental movement tried to win for it.

Thanks to AB1890, the state has been forced to pay surcharges of $20 billion or more to bail the utilities out of their bad nuclear investments. Thanks to the independent power generators, the state is being gouged for billions to buy electricity it might have otherwise gotten from in-state green sources and increased efficiency.

Thanks to Governor Davis’s unwillingness to leverage state money or eminent domain into a takeover of utility assets, the electric grid and production facilities remain owned by utilities and the power producers who caused the crisis in the first place, leaving the state as vulnerable as ever to future manipulations.

And now, thanks to the hysteria whipped up by the rolling blackouts, the state is being inundated by new privately owned, fossil-fuel-burning generators that will escalate pollution levels by rolling over decades of hard-won environmental protections.

— H.W.


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