Policymakers point their pudgy fingers at greedy power generation companies. Generation companies point their digits at hungry consumers. Consumer groups point at avaricious utilities. Greedy Wall Street investors just point their magic wands and poof! The entire electric system in California collapses.
Greed, indeed, is the underlying cause of California's energy crisis.
It's a lot of other things, too, but the comet-struck electric disintegration in the last few weeks are the embers of a decade of money grubbing.
Tracing the electric system's collapse from today backward, greed plays the major role at every step.
Today, and for the last month, investors represented by Wall Steet were greedy enough to become the supernova that melted down utilities. Investors in utilities, a place that used to be safe to park one's money, started getting nervous as the price of procuring electricity with the wholesale markets' recent price escalation. To protect nervous investors, analysts like Standard & amp; Poors repeatedly downgraded Pacific Gas & Electric and Southern California Edison's securities until they bottomed out at junk bond status last month. Greed in this case was protecting what money was left in their investments by cashing out and keeping new investments from flowing into utilities.
At the same time, greed from investors in companies that generate power selling into the wholesale market wanted to protect their skyrocketing profits gleaned from those high prices on the wholesale market. As utility securities kept being downgraded, power plant owners pulled the bridge up over the moat and said they were not about to keep sending energy to utilities who may not be able to pay the exorbitant costs they were charging for their power. And so, the power began to trickle off, which sent prices even higher.
Regressing on the Way-Back Machine, it was greed by large consumers of energy in the early-1990s that started deregulation. California, then, was in economic doldrums. The defense industry had tanked. California's electric rates were 50 percent higher than the national average. Companies were threatening to move out of state. Big business pleaded for deregulation because it thought business on its own could do a better job of scaring up cheap electricity if businesses were allowed to get away from utilities and buy energy on the wholesale market. And in so doing would add more profits to their bottom line.
The all-Republican California Public Utilities Commission went along with the plan, and thus, greed on behalf of big business begat deregulation.
Even when the economy began turning around in 1995 and businesses no longer threatened to leave, the deregulation virus permeated the formerly staid offices of public utility commissioners. The virus then spread to lawmakers, who also saw it as both inevitable as well as a way to reel in more campaign contributions and good public relations. Lawmakers took over, slamming regulators as inept do-nothings.
What lawmakers ended up assisting was the preservation of utilities' blanket of long-term interest on their investments, no matter how foolish the investment. In so doing, they also made Wall Street more warm and cozy about the prospects of deregulation. California utilities did make a couple of minor sacrifices, but in the end, ratepayers were left on the hook for just as much investment capital and most of the interest to be shoveled to utility shareholders. Those bad investments were paid off last year, but it still wasn't enough for utilities or Wall Street.
As the greed time machine moves still backward, a decade ago, at the core of the lack of new power plants to supply for current electric demand was, uh, greed.
A few years before the deregulation seed began to sprout, new power plants were supposed to be built. The state opened up electric generation to new developers because utilities had done such a bad job of building economical plants — like huge nuclear facilities. Utilities didn't like being kept away from building new power plants one bit. In particular, Edison's greed to keep all the new generation to itself or have no new power plants built at all was the downfall on the supply side. After being hammered for years by Edison's attorneys, the California Public Utilities Commission gave up and no new plants were built to slake today's energy thirst.
What constitutes the electric industry so it stands to be deregulated in the first place? Deregulation doesn't sound complicated — one day an industry is subject to rules and regulations and the next day it's not.
The electric industry is somewhat akin to the airline industry. The part of the airline industry that was deregulated is the part that takes people and cargo from here to there — the commodity of travel. But, the government kept a monopoly on the part of the industry that ensures airliners don't bump into each other in the skies — air traffic control. The business of planning for taking a trip — the travel agent part of the equation — was never regulated in the first place. The vital electric industry has three ingredients, all of which have been regulated for over 60 years: generation (the commodity), transmission (similar to air traffic control) and distribution (the travel agents' section, although distribution has always been regulated).
This past year, deregulated electricity sellers have learned to get the most out of the market for their power. Playing the capitalist game in a free market for electricity still is not illegal, despite charges of "gaming" the system. What's basically happened is that generators are waiting until the last minute to put in bids for selling their power. The last minute is when the electric grid operator is desperate and prices are at their highest. Thus, big profits for those who know how to play the game.
Mike Florio, senior attorney at San Francisco-based consumer group The Utility Reform Network, predicts the state will take over what's left of utilities' generation assets like PG&E's huge hydroelectric system. (Unfortunately for taxpayers, it's a drought year.) For the fossil-fueled plants that utilities have already sold off to free-market generators, its going to be difficult and will take years of litigation to institute eminent domain to get them in the state's fold.
Finally, Florio advises continued conservation. "The cheapest kilowatt is the one you never buy."
J. A. Savage is senior correspondent for the independent weekly California Energy Markets.