If the purpose of deregulation is really to improve the quality of peoples lives
by lowering the cost of a critical commodity, it is obviously failing miserablyas
demonstrated in California. To understand what has happened, we must begin with the past.
Prior to "deregulation," electricity was supplied by regional monopolies that
owned both the power plants and the transmission lines for the distribution of power. The
California legislature set the rate of return of profit for the utilities, and the state
Public Utilities Commission planned for future power needs and helped insure that rate
increases were fair and based on the "cost of service." While this system was
often abused because of the enormous political power of the electric utilities and their
ability to influence policymakers, it did keep in check the profiteering that we are now
witnessing in California.
By the mid-1990s, large industrial consumers sought to escape the high costs of power
in some parts of the country, like California, that came as a result of building expensive
nuclear power plants. At the same time, independent power producers like Enron were
actively lobbying to be able to sell power to these big consumers. Political pressure for
deregulation mounted because the breakup of the $300 billion dollar utility industry meant
huge amounts of money could be made. Enron, an important campaign contributor to the
Republican Party and to President Bush, lobbied for deregulation not only in California,
but at state legislatures across the nation and in Congress.
Despite warnings from consumer groups, deregulation has been heartily embraced
by both political parties, and under the Clinton administration, the U.S. Department of
Energy wrote its own federal deregulation bill that it promoted unsuccessfully.
In California, the utilities, at first, were skeptical of deregulation, because of the
high cost of power from their nuclear plants. However, they began to hunger for the
profits that could be made in a speculative market. They lobbied heavily for deregulation
because they knew that with their enormous political clout in the state legislature, they
could shape the outcome of deregulation.
The legislation, written primarily by Californias utilities, was extremely
complex, a vast program for a vast state. It was wrangled over in a series of rapid-fire
hearings, and rammed through the legislature at the last minute in a process that took
only three weeks. It was unanimously passed and signed into law by Governor Pete Wilson in
the fall of 1996.
The legislation, written and supported by utilities, privatized their profit and
socialized their risks. The most glaring example of this was the $28 billion dollar
consumer-funded bailout for their so-called "stranded costs." Stranded costs are
essentially mortgage payments that the utilities make to cover their purchase of expensive
boondoggle nuclear power plants. The utilities argued that the bailout was necessary
because they would now be assuming marketplace risk, and the uncertainty of their future
profits made the paying off of debts they incurred under regulation too burdensome. To
accomplish this bailout, rates were artificially frozen for 4 years, at what was then 50% above the national average cost of electricity. To date, ratepayers
have bailed out the utilities for approximately $20 billion dollars through added costs to
their electric bills.
In 1998, a coalition of consumer groups, Californians Against Utility Taxes, sponsored
an initiative, Proposition 9, which would have invalidated portions of the 1996
deregulation bill, and prevented the utility bailout. The proposition would have required
the utilities and their shareholders, not ratepayers, to bear the burden of the $28
billion bailout. According to energy analysts at the California Energy Commission, if
Proposition 9 had passed, residential power customers would have seen their energy costs
"fall between 18 to 32 percent." Californias utilities spent more than $30
million defeating Proposition 9, compared to the $1 million spent by consumer advocates.
The legislation not only provided them with a bailout, but it enabled them to go on an
international spending spree in which they purchased power plants. It also provided them
with capital they used to invest in other industries that they had been prohibited from
entering under the regulated monopoly system. Californias utilities have invested in
telecommunications and other types of high-growth services that they plan to sell in
conjunction with their sale of electricity. Between the bailout and their forays into new
industries, Wall Street applauded their moves because of their increased earnings
Also, the legislation provided incentives for Californias utilities to sell their
power plants to unregulated companies. They sold most of their fossil fuel plants at above
the book value, providing them with a significant profit. However, they retained their
nuclear and hydro-power generation, along with a small amount of fossil-fuel plants.
Additionally, the deregulation bill transferred pricing of Californias
electricity generation to the Federal Energy Regulatory Commission by creating the Power
Exchange, a private nonprofit organization that would operate the auction for wholesale
Most of the corporations that bought the California utilities power plants are
from out-of-state--such as Virginia-based AES, North Carolina-based Duke, and
Houston-based Dynegy and Reliant. Eleven companies, not all of which own power plants in
California, sell electricity into the Power Exchange, where electricity is bought and sold
several times (in paper transactions) before it is actually delivered to consumers.
Another new privately run entity, the Independent System Operator (CAISO), acts as a
traffic cop, directing electricity to where it was needed.
Myth # 1: Deregulation does not work because California did not deregulate enough.
Advocates for deregulation say that if the rate freeze was removed and consumers paid
for the real cost of electricity through a free market, there would not be a problem. But
they fail to mention that over the past few months, the cost of wholesale electricity has
at times been almost 4,000 percent higher than before deregulation because of the
speculative nature of the electricity market. If all the costs were passed on to
consumers, the average residential monthly consumer, who paid approximately $55 a month
before deregulation, would have been paid approximately $600 a month when prices spiked in
California this winter.
Second, the utilities agreed to assume a risk under deregulation, in return for the
bailout and rate freeze. However, now that their plans have soured, they want to renege on
the deal that they lobbied for in 1996. The retail rate "freeze" was designed by
and for the states electric utilities, as a way to subsidize them for their bad
business decisions of the past, such as nuclear power plants.
Until the spring of 2000, the utilities greatly benefited from the artificially high
rates that were "frozen" in 1996 at 50% above the national average for
electricity. These outrageously high rates included: 1) reimbursement for their
cost-of-service (all of the expenses associated with producing power); 2) approximately an
11.75% profit margin; and 3) the $20 billion dollar bailout for utilities bad
investments of the past. The outrageous utility bailout is listed as a "Competitive
Transition Charge" (CTC) on every Californians electric bill.
The Utility Reform Network (TURN), a consumer advocacy organization in California,
explains the bailout and rate freeze:
This opportunity [the rate freeze], however, included the explicit risk that some costs
might not be collected by the end of the rate freeze. With the advent of
higher-than-expected power prices in recent months, these utilities now argue that they
never took a risk for the costs of power under the rate freeze and therefore should be
compensated for money spent to buy power for its customers.
To make matters even worse, the utilities overestimate the cost of electricity that
they claim to have "under collected" from consumers in their frozen rates. As a
result of the price spikes that began in 2000, the utilities are asserting that consumers
have to pick up the exorbitant cost of wholesale electricity. The utilities claim to be
"owed," approximately $12 billion dollars.
In fact, this number is wildly exaggerated, because the utilities did not sell all of
their power generation (they retained nuclear plants, hydra-electric facilities, and a
small amount of fossil generation). Under deregulation, the electricity from all utility
owned or contracted generation is resold into the Power Exchange. During periods of high
energy prices, the net revenues associated with this generation can be substantial. But,
instead of offsetting the costs of purchasing power for customers, under the current
rules, these utility owned units provide no direct benefit to rate payers in the form of
lower energy procurement prices.
For example, if it costs PG&E approximately 1.4 cents per kilowatt hour to generate
hydro-electricity and they sell this power at the Power Exchange for approximately .40
cents per kilowatt hour, they make an huge profit. This profit should be subtracted from
the amount that the utilities estimate they have been overcharged for wholesale power.
But, the utilities have not subtracted in their estimates of how they have been
overcharged, their own substantial profits in wholesale market, which is roughly estimated
at $6 billion dollars. This means that the $12 billion dollar figure that they claim to
have over-paid in the wholesale market is wildly inflated by at least $6 billion.
Because of the profiteering on electricity trading at the Power Exchange, the city of
San Francisco initiated a lawsuit on January 18, 2001, against a number of companies for
unfair business practices. The companies being sued include Dynegy Power Marketing; Enron
Power Marketing, Inc.; PG&E Energy Trading Holding Corporation; Reliant Energy
Services; Sempra Energy Trading Corporation (owner of San Diego Gas and Electric),
Southern Company Energy Marketing, Duke Energy Trading and Marketing, NRG Energy, Inc. and
Morgan Stanley Capital Group, Inc.
The California Public Utilities Commission comments that the pricing patterns in the
Power Exchanges "day ahead" and "day of" markets raise questions
about the bidding behavior of market participants that cannot be coincidental.
California is suffering today because of no regulation not because of
Myth # 2: Deregulation will lower costs for consumers.
Deregulation has been sold to the public as a way to lower prices. Unfortunately, the
inverse is often true, with deregulation resulting in higher prices over time. When
deregulation legislation sailed through the California legislature with unanimous
bipartisan support in 1996, proponents claimed that consumers would see at least a
20 percent reduction in their electric rates eventually. Now, as wholesale prices have
skyrocketed since last year, proponents argue that consumer rates will have to increase
to encourage more competition. Long-term contracts are being promoted as the anecdote for
the crisis. But, the price being quoted for electricity under these contracts is at least
three times more expensive than under regulation. What happened to lower rates under
The answer is that Californias power producers have no restrictions on the prices
they can charge for electricity, and regulators no longer set minimum energy reserve
requirements to prevent power shortages. Advocates of deregulation said that prices and
reserves would be set at optimum levels by the free market. But the opposite has been
true. Power marketers restrict supplies by reducing the amount of electricity that is
produced, creating shortages and price spikes (see Myth 4). Predictably, gaming the system
has meant skyrocketing profits for power marketers in California.
An analysis of the effects on consumer prices in another deregulated energy
industrynatural gasis a good indication of what will happen to consumers
electric bills if they are left to the vagaries of a deregulated market. Since the natural
gas industry was deregulated a decade
ago, wellhead, or wholesale, costs have actually fallen. But the price at which natural
gas is sold to residential consumers has skyrocketed. In 1984, just prior to complete
deregulation, residential prices for natural gas were 44 percent above the wellhead price.
By 1987, it was 110 percent above. By 1999, it was 181 percent above. At the same time,
prices to larger, industrial consumers rose, but not as much as for residential
consumers. In 1984, industrial prices were 28 percent above the wholesale price of
electricity. In 1987, they were 39 percent of the wellhead price. By 1999, it was 42
percent of the wholesale price. This price discrimination indicates a noncompetitive
Even with high natural gas priceswhich according to economic theory causes
sellers to increase suppliesreserves are low and there are indications that some
type of market manipulation may be occurring. It seems that we have our own natural gas
cartel operating in the U.S., which behaves like OPEC. With government regulators no
longer protecting consumers and defining the rules of the road, control has been ceded to
a handful of energy companies that in many cases are also the business of selling
electricity in places like California.
At the very least, if the market is not being manipulated, years of experience show
that the natural gas market is failing for consumers. After 15 years of higher prices, it
is time to reexamine natural gas deregulation.
Meanwhile, we have a very different example set by publicly owned electric power
systems. While energy companies defend their high prices, Californias 30 communities
with municipally owned and controlled power offer the same electricity at lower prices.
The City of Los Angeles Department of Water and Power charges 20 to 25 percent less
than comparable privately run utilities elsewhere in the state.
Myth # 3: Prices for electricity are being driven up because the demand for electricity
Planning for new power plants is based on the need for electricity at the time of year
that maximum usage of power occursthe time of peak demand. Indeed, Californias
Independent System Operator (CAISO), the traffic cop for the transmission of electricity
under the deregulated market, has records showing that the states peak demand for
electricity in 2000 occurred on July 12 and was approximately 45,600 megawatts. (For
comparison, a large nuclear power plant is approximately 2000 megawatts.) California uses
the most electricity in the summer, when air conditioners run.
CAISO uses this information about demand to find out how much energy must be produced
by various plants to meet Californias energy needs. The agency records the highest
amounts of demand by hour within the state of California. The data shows that while demand
did soar in May, in four out of the past six months--July, August, October and
December--California saw a lower peak demand in 2000 than during the same months in 1999.
Overall, according to the California Energy Commission and confirmed by California
Public Utilities Commission President, Loretta Lynch, the average amount of electricity
used throughout the day, grows at about 2% a year. This does not mean that peak demand is
growing; it does mean that consumers use more power at midnight because they are using
In fact, recently, there have been blackouts when demand was less than 30,000
megawatts, approximately 15,600 megawatts less demand than the peak amount of electricity
needed in California in the summer. Obviously, it is supplies of electricity being held
back, not demand that is causing the problems with deregulation
Myth # 4: The problems are being caused because there is not enough power to supply
So, why are suppliers short? Because under deregulation, power producers have no
incentive to run plants at full capacity. As noted above, California has 55,500
megawatts of power generating capacity and 4,500 megawatts of power on contract. Following
is a breakdown of plant ownership:
- unregulated power suppliers: 21,231 megawatts (40%)
- public agencies: 11,934 megawatts (23%)
- qualifying facilities, large industrial consumers and others: 11,745 megawatts (22%)
- utilities: 8,245 megawatts (15%)
Of this power, the Independent System Operator has access to approximately 45,000
megawatts to provide electricity for the state. But large numbers of power plants are not
running at full capacity or are down for unscheduled maintenance, keeping supplies short.
The tighter the supply, the more prices rise. As much as 13,000 MW of capacity was
off-line in January for undisclosed reasons. According to The Wall Street Journal,
on August 2000, 461% percent more capacity was off-line than a year earlier.
Because details about why these plants are off-line is confidential, the public is
literally left in the dark. According to CAISO, many suppliers are not even complying with
the requirement to turn in an annual plan for when they will have plants off-line for
maintenance, and there are no penalties for this lack of cooperation. Regardless of
whether one suspects that power producers are intentionally taking capacity off-line to
hike prices, these statistics illustrate that under deregulation, the public has little
control over pricing and reliability.
The fact is that today, the state of California has access to more capacity than the
45,000 MW of summertime peak demandthe maximum amount used during the highest usage
time of year.
California has 55,000 megawatts of in-state electricity generating capacity through
about 1,000 power plants. In addition, the state is able to import about 4,500 megawatts
of electricity, which is under existing long term contracts. These thousands of megawatts
of capacity could easily meet demand if wholesaler suppliers were not manipulating the
system. The situation would be even better if energy efficiency strategies were maximized.
New plants are not needed; instead, stricter scrutiny of existing plant operations is
needed. Even so, many new plants are already under construction, which will even
further increase the amount of electricity that is available.
Myth # 5: Californias environmental laws are preventing new power plants from
being built in the state.
It is untrue that Californias environmental laws have prevented new plants from
being built and are responsible for the current crisis. As noted earlier, there is enough
existing capacity tied into the states grid to meet even summertime peak demand. And
while the states sensible environmental laws get the blame for the lack of new
construction, it is important to note that Californias utilities did not want to
make investments in new power plants. The states utilities blocked decisions by the
CPUC to build new capacity because under deregulation, the utilities realized they would
have assumed the economic risk for bad decisionsrather than consumers who paid
for past mistakes as part of rates.
Southern California Edison (SCE) even went so far as stopping the development of 1,500
MW of new renewable energy and cogeneration (the heat from industrial processes is used to
generate electricity) projects. This more environmentally friendly electricity would have
been available to help meet the current crisis, and would have cost of under 5.5 cents per
kilowatt-hour. But, SCEs Chief Executive Officer, John Bryson, in the mid-1990s
petitioned the Federal Energy Regulatory Commission (FERC) to stop the construction of
Before deregulation, California had a planning process for building the
infrastructure for the energy sources to meet demand. In 1993, this Biennial Resource
Planning Update (BRPU) process set a price that was below 5.5 cents per kilowatt (a much
lower price than the cost of power from long-term contracts today), and a bidding process
was initiated. The cost of environmental damage was taken into consideration in the
bidding process. The Public Utilities Commission accepted bids
and planned to build 1,500 MW of new wind, geothermal and cogeneration plants. Bryson then
started a petitioning process at FERC, which resulted in none of the generation being
built because he did not want to risk investments in new capacity. FERC voted to not allow
the California Utilities Commission to require the new projects. Today, California is
suffering from the FERC's bad decision and Bryson's efforts to stop new renewable energy
capacity from being build.
Even so some power plants were built, according to the agency that permits new power
In the 1990s before the state's electricity generation industry was restructured, the
California Energy Commission certified 12 new power plants. Of these, three were never
built. Nine plants are now in operation producing 952 megawatts of generation
April 1999, the Energy Commission has approved nine major power plant projects with a
combined generation capacity of 6,278 megawatts. Six power plants, with a generation
capacity of 4,308 megawatts are now under construction, with 2,368 megawatts expected to
be on-line by the end of the year 2001.
In addition, another 14 electricity generating projects, totaling 6,734 megawatts of
generation and an estimated capital investment of more than $4.3 billion, are currently
being considered for licensing by the Commission.
Although new power plants are under construction and in the planning process, the best
way to address Californias energy needs is through energy efficiency measures and
renewable energy projects. Building more centralized plants may be a way to obtaining
higher profits for power producers, but it is a poor investment in light of the new
technologies that are rapidly becoming available. For instance, the expanded use of
distributed generation, where small amounts of generation (roof top solar power is an
example) is located on a utility's distribution system for to help meet energy demand.
Energy efficiency is always the cheapest and best method of lowering the demand for
electricity. It cuts energy use, saves consumers money, offers predictable financial
requirements, and benefits the environment by reducing energy use. Examples include: the
use of compact florescent bulbs--which last ten times longer than conventional ones and
use one quarter of the energy; double-paned windows; and more efficient appliances and
industrial production lines.
According to the Center for Renewable Energy and Sustainable Technology, higher energy
efficiency standards for central air conditioners (over the course of its lifetime) would
save as much electricity as more than 1.2 million Californians would use. And more
efficient clothes washers would save the electricity consumed by more than 700,000
Renewable energy projects should be built to replace old, dirty generation. Renewable
energy projects can now be built at the same cost as conventional facilities. Today wind
turbines show great promise, tomorrow, fuel cells are likely to change the face of energy
production. Renewable energy offers dependable, even fixed-cost power that is particularly
important in a state that is facing blackouts and price roller coasters.
Myth # 6: Deregulation is good for the environment.
While deregulation creates short-term incentives to gouge consumers by artificially
ensuring low supplies of electricity, in the long run deregulation creates economic
incentives for power suppliers to sell more electricity. As prices rise, suppliers push to
build new plants in an attempt to maximize profit. At the same time, deregulation provides
an incentive to keep cheap, dirty coal power plants running longer. The market forces
driving deregulation will not shut down old plants and replace them with cleaner ones.
Instead, the old plants will run, and new plants will be built as well, because
deregulation encourages more energy use.
This situation means that nationally the likely environmental effects of deregulation
will be sharply increasing emissions, particularly if existing coal-fueled power plants
remain exempt from air pollution standards.
In addition, because a speculative electricity market is inherently volatile, and
because some suppliers have an alarming amount of market power, a larger reserve margin of
power is necessary. The independent power producers are using the uncertainty of the
market to push for relaxing environmental regulations, to drill for natural gas in
sensitive areas and to build more power plants and more transmission lines.
If utility deregulation continues on its current course, not only will air pollution
increase and ecologically sensitive areas be degraded, but our global climate will be
further threatened by more greenhouse gases.
Myth # 7: Californias energy crisis is best resolved through state, not federal,
actions (as stated by President Bush).
Unfortunately, the Clinton Administration promoted electricity deregulation
relentlessly, and now the new Republican Administration is supporting the same reckless
deregulation scheme that we are seeing unfold in California today.
The Bush administration argues that blame for the current crisis lies with the state:
allow the utilities to pass their costs on to consumers and ease the states
environmental standards to quickly build new power plants to increase supply.
The cause of Californias deregulation crisis is the result of the removal of any
government oversight on producing and selling electricity. With government regulators no
longer present to protect the public interest, power producers and marketers are charging
outrageous prices for electricity, and the utilities then attempting to pass on the cost
to consumers (see Myth 3).
While the Bush administration seems content to blame the state for the problems with
deregulation and to claim that raising rates and building new power plants would solve
everything, the federal government is sitting on the one action that will directly address
todays high prices. Under the authority of the Federal Energy Regulatory Commission
(FERC), which is now chaired by Bush-appointee Curt L. Hebert, Jr., the federal government
is the sole entity that can impose cost-based rates on these power producers. If the
administration was willing to order power plant owners to sell their product at the
cost-of-service (the cost of generating power) and a reasonable profit, Californias
utilities could buy the electricity needed and the pressure to raise consumers
electric rates would be removed. Meanwhile, the state could investigate the price-gouging
and act thoughtfully in solving the problems caused by deregulation.
But, Enron, Reliant, and the other power producers and power marketers operating in
California heavily financed the Bush administration. Bush and his new energy secretary,
Spencer Abraham, who lost his recent run for the Senate and who once advocated the
abolition of DOE, received more than $2.5 million from energy interests during the
campaign and for the inauguration events. The new power suppliers for California are
making so much money from their profiteering that they will maintain pressure on the Bush
Administration to keep the current system in place.
To date, the only federal action Bush has called for is to drill in the unique and
pristine coastal area of Alaskas National Arctic Wildlife Refuge to tap into a
supply of oil that would amount to only a sixth month supply of oil and would take 10
years to bring to market. Furthermore, oil is rarely used for electric power generation
Myth # 8: Californias three big utilities were forced, against their will, to sell
their power plants.
As described in the introduction, Californias three big utilities lobbied
intensely to pass the 1996 deregulation bill, which provided incentives for them to sell
their power plants. Some nuclear and hydropower facilities were retained by the utilities.
The California utilities believed that they would thrive from electric utility
deregulation and become international energy companies.
The sale of the power plants, along with the infusion of consumer-funded subsidies,
gave the two utilities accelerated depreciation, enabling them to build up cash on their
parent companies balance sheets to finance the stock buyback plans and pour
investments into Mission Energy, the National Energy Group and other unregulated
divisions. According to a report released by TURN in October 2000, the generation owned or
contracted by Pacific Gas and Electric (PG&E) and Southern California Edison (SCE)
produced large profits between May and August of 2000, amounting to $2.7 billion. Because
the power is credited to stranded costs, the average monthly collection of stranded costs
was accelerated by 79% for PG&E and 56% for SCE. Accelerated depreciation has provided
large amounts of cash for the utilities.
However, now that they have been beat at their own game by bigger and meaner companies
like Enron, and they are crawling back to the legislature and begging for another consumer
Myth # 9: Californias utilities are close to bankruptcy and need to be bailed out.
Californias two major utilities, Southern California Edison (SCE) and Pacific Gas
& Electric, claim to have racked up such significant losses under deregulation that
they are threatening to file for bankruptcy. In 1996, when the promise of huge profits
loomed large they agreed to assume some risk, now that the market has failed they are
demanding that the state provide direct assistance. or else they will no longer be able to
afford to supply their customers with electricity.
But their parent companies, using the money they made from selling their power plants
and from the bailout have spent more than $22 billion on power plants, stock buybacks and
other purchases that far exceed their alleged $12 billion debt from California operations.
Edison International and PG&E have done this both through those two companies and
through affiliated companies, Mission Energy (a subsidiary of Edison International) and
National Energy Group (a PG&E subsidiary).
Created in 1990, Mission Energys revenues and profits didnt take off until
1999, when expensive investments began to pay off. A recent Public Citizen analysis showed
that Mission Energy, along with a few other smaller Edison International subsidiaries,
spent more than $10 billion on non-California investments since December 1998--more than
double the SCEs stated debt of $5 billion. In addition, Edison International has
spent $2.35 billion on stock buyback programs since deregulation began.
PG&Es high-growth subsidiary, National Energy Group, hasnt been as
forthcoming, electing not to disclose the purchase price of many of its recent
acquisitions. Information gleaned from several news reports reveals that since 1999,
PG&Es purchases outside California and the Pacific Northwest have totaled at
least $9 billion. This far eclipses PG&Es alleged $6.6 billion deficit from its
California operations. PG&E spent more than $1 billion on its own stock buyback plans
since the onset of deregulation.
Myth # 10: Electricity deregulation is working in other states.
Electricity deregulation has passed (or been adopted by a regulatory process) in 23
states plus the District of Columbia. However, because of the situation in California,
Utah has repealed its deregulation bill and New Mexico has delayed its the implementation
of its deregulation legislation. Of the states that passed bills, only a handful of them
have begun changing their energy supply systems. Some places, like Washington, D.C.,
negotiated long-term contracts at reasonable rates, which will put off by several years
the disasters of a truly deregulated market. And in almost all states, deregulation is to
be phased in over a period of years. To make the legislation politically viable, price
caps, mandated rate reductions and other benefits that will be sunset were included.
Also, electric utilities across the country were given huge bailouts for their bad
investments in nuclear power and other items as part of the deregulation deals in their
states. These so-called "stranded-costs" were passed on to consumers. According
to a report by the Safe Energy Communications Council, utilities in 11 of the states that
have deregulated (California, Illinois, Massachusetts, Michigan, Montana, New Hampshire,
New Jersey, New York, Pennsylvania, Ohio and Texas) are demanding or have already received
more than $112 billion to bail out their failed investments.
States such as Massachusetts, where utilities were bailed out, have had no electricity
suppliers willing to serve residential suppliers. The idea that there is competition in
the market has become a joke. Power suppliers that sprang up to serve customers in New
England, Pennsylvania and New Jersey are now "dumping" their customers back to
the old utilities. The new suppliers simply cannot compete in the region's electricity
Pennsylvania, which has been touted as a deregulation success, does not really have a
deregulated market. The state's utilities went through a regulatory process to determine
how much their bailout should be. The cost of the bailout was included in the price of
electricity that each utility can charge. Each investor-owned utility has a regulated
price of electricity; depending on how large a settlement it received for its
"stranded cost" recovery. This is basically a regulated price for electricity,
which depending on the utility, will be in place for as many as nine years.
This regulated price of electricity is keeping prices in check in Pennsylvania. It
means that suppliers must keep their prices lower than the regulated price to be
competitive. For instance, PECO Energy has a winter price or 5.57 cents per kilowatt-hour.
But many of the utilities in the region retained ownership of their plants, so suppliers
must buy electricity from the utilities that are still regulated. This has meant that many
suppliers have gone out of business.
No matter where deregulation has occurred, problems are already arising. For the past
two summers, blackouts have plagued residents and businesses in other deregulated markets
where prices on the wholesale market have spiked, most notably in Chicago, New York City
and northern New Jersey.
New York City is an instance in which consumers were subject to the vagaries of the
market and prices skyrocketed because of the volatile, speculative market for electricity.
New York used a regulatory process to deregulate. Consolidated Edison, which serves New
York City, was allowed to pass all of its costs on to consumers. So when price
spikes occurred, bills skyrocketed, raising rates 43% for residential consumers and 49%
for commercial users. Obviously, passing on the cost of a speculative market for
electricity will not make deregulation a success.
Additionally, deregulation is encouraging dozens of mergers and acquisitions in the
electric industry. We have seen this type of consolidation in other industries, and it has
meant higher prices and poorer service in most cases for consumers.
Weve seen what mergers do to consumers when we look at the airline industry. The
largest airlines have engaged in numerous mergers, reducing competitors at every turn.
They are masters at price discrimination, forcing business travelers to pay fares several
times higher than vacation travelers, who can plan for travel weeks or months in advance.
They also use their ticketing computers to send price signals to each other in a game of
collusion that keeps profits up. Major airlines maintain "fortress hubs" where
they have a monopoly on air service, allowing them to set prices due to lack of competing
airlines. Deregulation in the airline industry has also led to terrible service, which is
Consolidation does not lead to competition, lower prices or better service. On the
contrary, it allows a handful of companies to exert market power and prevent consumers
from receiving good service at reasonable prices. But, unfortunately, utility analysts
predict that only a handful of companies will survive deregulation, if it continues to be
embraced, and that these same companies will sell any number of services. This concept,
called convergence, will mean that consumers will be forced to use a single company to
provide necessary services such as power, water, telecommunications and Internet access.
Prices for all of these services will be "bundled" (included in a single price),
which will leave little room for price comparison.
Policymakers should think seriously, and there should be a public debate, before
deregulation reaches this level. The bottom line is that if deregulation doesn't help real
Americans, we shouldnt continue to pursue it.
Electricity is an absolute necessity that should not be a speculated product. Consumers
have a right to affordable energy, produced in the most environmentally sustainable
fashion possible. But, when treated as a speculative commodity, the cost and supply of
electricity becomes uncertain. This situation invites price-gouging and profiteering, as
we are witnessing today in California.
We must critically analyze the intentionally perpetuated myths by the proponents of
deregulation, because it is clear that what many pro-deregulation politicians are saying
just is not true. We need to carefully look at their assertions, or we will not only
continue to bailout utilities, we will higher prices, less reliability, and a threatened
environment. It is time to hold policymakers accountable for the mess they have created,
and roll back dangerous electric utility deregulation schemes.