Power Politics

Why a retreat from electricity deregulation is a victory for PG&E, and a loss for you and me

Comments (0) By Matt Smith Wednesday, Sep 20 2000

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In restructuring California's electricity market in 1996, legislators spawned the dream that a new market for electricity might emulate markets for raw materials such as beef. The century-old evolution of agricultural commodity markets, after all, helped make America the world's low-cost bread basket. The competitive restructuring of U.S. railroads in 1980 spawned the world's most efficient just-in-time cargo network. And the breakup of Ma Bell in 1984 spurred the swiftest creation of wealth any industry has ever seen.

But the case of electricity restructuring in California was different. Here, the regulated electricity monopolies -- PG&E, San Diego Gas & Electric, and Southern California Edison -- used their outsized political clout to fashion a "free market" that is not a free market at all. It's a botched abortion of measures designed to aid monopoly electricity providers, customers be damned.

Fred Harper

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This fact became painfully clear this summer when SDG&E became the first utility to charge full price for wholesale electricity. The utility's 1.2 million customers saw their bills double, then triple. As prices climbed, restaurants not forced out of business added electricity surcharges to their bills. Retailers mourned the calamity by dimming their lights. Residents evacuated desert homes, in flight from air-conditioning bills topping $400. Newly impoverished citizens swamped social service agencies. Prompted by panicked ratepayers' calls, President Clinton promised to provide millions in disaster relief.

Of all the things San Diego residents hate -- snow, gasoline taxes, Los Angelenos -- by summer's end they hated electricity restructuring most of all. They wanted their old, predictable, San Diego Gas & Electric bills back.

To get a real taste for this sentiment, I naturally called Jesse Knight, president and CEO of the San Diego Regional Chamber of Commerce. After all, his organization includes more than 80 restaurants, among the businesses most hurt by the skyrocketing electricity rates.

Knight would be among the first in line clamoring for a return to the monopoly days, right?

Not exactly. The good old days were actually bad, Knight says.

"People don't recognize that previous rates were outrageous," says Knight, who, as it happens, was a California Public Utilities Commissioner during the mid-1990s, when the government was hashing out electricity competition. "I think that it's really interesting that a lot of people say, "I want what my bill was last year.' But California's rates were the highest in the nation, and consumers happily went along. People didn't have the stimulus to react as they do now, with the exception of manufacturers who didn't want to come to California."

Introducing competition into the state's electricity markets was a smart way to try to fix the old system, under which creaky, arrogant utility monopolies worth $20 billion failed to construct adequate generation and distribution facilities, and then used their economic and political clout to gain approval for repeated rate increases anyway.

Every time their rate increases were challenged, the monopolies would unsheathe a quiver of powerful political weapons: First, there was massive campaign spending. PG&E gave $85,000 to Gray Davis' campaign committee last year, and has given $ 37,500 so far this year. Southern California Edison donated $105,000 last year, and Sempra, the holding company that owns San Diego Gas & Electric, gave him $61,000. Steve Peace, the state senator behind the 1996 electricity bill, collected $170,000 from energy interests for his 1998 re-election to the Senate.

Second, the utilities are among the state's largest employers of union workers, who represent a potent political force. A politician who enrages a utility just might find hundreds or thousands of union members working for his or her opponent.

And then there is the power of the pensioner. For example, thanks to its historic status as a government-protected monopoly, PG&E has had rock-stable stock prices for decades, and the company has been the star of countless pension portfolios. Pensioners are reliable voters, and every time the government has threatened to take a measure deemed detrimental to the company's stock price, PG&E has responded with veiled threats of pensioner backlash.

In a reasonable universe, competition would break this utility death-lock on electric pricing. New electricity generators and sellers would come into the market, and undercut monopoly prices, and it would no longer matter how much political stroke the utility monopolies had. The customer could choose the best price, and prices would fall far below the artificially high rates the utilities had been able to garner through their influence over the rate-setting process.

But in California, where utility politics is anything but reasonable, PG&E and its brethren decided to seduce and confuse, rather than fight, their de-monopolizing opponents. So far, this confusing seduction has been successful.

In their efforts to usher along the electric restructuring process onto a monopoly-friendly path, the state's major utilities hired an army of lobbyists who worked, successfully, to wrest restructuring decisions from the Public Utilities Commission, which began the restructuring effort, and move them to the California state Legislature. Once in the campaign cash-rich ferment of the Legislature, the monopolies fought for the right to collect from ratepayers the cost of the utilities' own bad investments.

This chunk of money was to appear on electricity bills as a "Competition Transition Charge." Ostensibly, this fee would repay utilities for power plants they had built under the monopoly regime that would no longer be economically viable in a competitive environment. Actually, it was a $28 billion bribe to utility companies, paid so they wouldn't obstruct the restructuring process. Because the bribe was tacked on to customers' electricity bills -- including electricity bills from providers who were competing with the established monopolies -- it had the corollary effect of confusing consumers, who had no idea exactly what they were paying for. (This confusion would come in handy later when PG&E would periodically offer threats of an anti-restructuring "consumer backlash" when extorting regulators for extra power charges, wholesale rate caps, and other monopoly-preserving perks.)