(542.5240) Harvey Wasserman / WISE Amsterdam - Deregulation of electricity supplies has been an ongoing development in many regions of the world over the last couple of decades. Many schemes for deregulation have had teething-troubles, but nowhere has it gone so disastrously wrong as in California. True to its trend-setting reputation, California was one of the first US states to implement deregulation legislation, opening its electricity markets to competition in April 1998. The power crisis is one Californian trend that the rest of the world is anxious not to copy.
According to the press, the latest phase of the crisis was precipitated when storm damage on the West Coast on 12 January was aggravated by a cooling system fault at the Diablo Canyon nuclear power plant. Large power cuts were avoided then by emergency imports of hydropower from the neighboring state of Oregon. The incident demonstrated the instability of the California grid, as predicted by Thomas Feiler of the Rocky Mountain Institute last year. Many commentators have assumed however that the main problem is a severe lack of generating capacity.
There is no electric supply shortage threatening California, or the US as a whole, only a series of complex, cynical manipulations, which have ramped prices sky-high, yielding enormous profits for a few distributors and generators. Other utilities, forced to buy in electricity at these sky-high prices and re-sell it to consumers at much lower prices, now face bankruptcy. The two utilities most affected are Pacific Gas & Electric and Southern California Edison, who between them have lost at least US$10 billion.
The deregulation bill which is the root of this crisis was drafted by the California utilities now facing bankruptcy and was rammed through the legislature in 1996 by their own lobbyists. The catastrophic outcome of this bill was accurately predicted in intricate detail by a wide range of grassroots, consumer and environmental groups that challenged the deregulatory scheme in a 1998 statewide referendum. The utilities that are now in crisis spent at least US$40 million to defeat this referendum.
The same utilities walked off with more than US$20 billion in "stranded cost" bailouts to pay for their poor decisions to build nuclear power plants. However, nobody seems to be able to account for where all the money went, or to have a concrete plan for getting the money back. Much of the money seems to have been invested elsewhere. Southern California Edison invested at least US$5 billion in Asia; Pacific Gas & Electric has bought out much of the power generation in New England and upstate New York. What is more, it seems that the utilities have organized their corporate structure to protect these assets if their distribution companies go bankrupt.
The public might actually gain if these utilities go bankrupt and are taken into public ownership. The public-owned utilities that supply Los Angeles and Sacramento are both prospering in the midst of the crisis. These municipal utilities deeply invested in energy efficiency and renewables (wind, solar and biomass) which has provided them with a stable supply during the crisis.
Public ownership also gives citizens a chance to reject nuclear power. Sacramento citizens voted in a referendum in 1989 (53% in favor) to shut down Rancho Seco, the city's only nuclear power plant.
To see why deregulation has been such a disaster in California, it is worth looking at the history of the US electricity industry. In the 1880s, when Thomas Edison and others first made electricity a saleable commodity, rampant competition created chaos. Wires were strung everywhere, power plants popped up in bad places, and service was abominable.
But as the Morgans and Rockefellers inevitably swooped in to create stable monopolies, the public rebelled against price gouging and centralized private control. The monopolies were confronted with the threat of being taken over by angry consumers.
So Samuel Insull, the godfather of the new industry, came up with a compromise: regulation. From 1907 through 1920, virtually every state established its own regulatory commission to set rates and monitor growth and service in the electric power business. The commissions were rapidly subverted by the utilities themselves. And there were massive flaws in the scheme, most notably its propensity to encourage the construction of massively expensive, inefficient and dirty power plants, especially nuclear ones.
Along the way, massive abuses brought on the New Deal installation of the Federal Energy Regulatory Commission, and other national controls. Since then, state and federal regulation has provided the nation with a relatively stable and reliable electric supply system. It has been stodgy and short on technical innovation. It has also stemmed the tide of public power, which still, where it's in place, provides cheaper and more reliable electricity than the private Investor Owned Utilities (IOU's), regulated or otherwise.
And, in fact, regulation is still in place in 27 US states. Though Texas has insisted on deregulating in the midst of the California debacle, the spectacle of chaos in California has pretty much stopped what looked like a national avalanche of state deregulations dead in its tracks.
The power generators are using the crisis as an excuse to demand construction of ever more fossil and nuke generators, despite the environmental consequences and despite the fact that these take years to build and so cannot solve the crisis in the short term.
The fastest-to-build form of new generating capacity is wind power. The second largest wind power facility in the US is currently being built on part of the Nevada Test Site, and is expected to be on line by the end of 2001. Solar power is another option, particularly in sunny California. There is also still plenty of scope for energy efficiency measures, which can be cheap and quick to implement.
Renewables and energy efficiency have another advantage: they increase the stability of the system as a whole. Renewable energy is generated in much smaller plants, which are distributed throughout the grid, thus boosting the reliability of the entire system. A fault at one small plant causes much less stress on the system than a fault at a large coal or nuclear plant. Saving electricity increases the stability of the system by reducing the load on the grid.
Several lessons can be drawn from the California crisis. Firstly, the complex market mechanisms in the Californian deregulated market are unstable and vulnerable to market manipulation. Secondly, we see the cynical behavior of the nuclear industry which, having just received one of the largest corporate bailouts in history, is back again asking for more handouts to build new plants, even though it is far from clear what happened to the existing bailout money. Thirdly, despite US enthusiasm for privatization, it was the public-owned utilities that performed best, providing their customers with a reliable supply during the crisis. Fourthly, renewables and energy efficiency have extra benefits not widely recognized up to now, such as stabilizing the electricity system.
Sources:
- www.msnbc.com, 18 January 2001
- Trouw, 13 January 2001
- RMI Solutions, vol. 16 #2, fall/winter 2000 (Rocky Mountain Institute)
- The Power Line, July 1989
- ENS, 18 January 2001
Contact: Nuclear Information and Resource Service, 1424 16th St. NW #404, Washington, DC
20036, US. Tel: +1-202-328 0002, Fax: +1-202-462 2183
Email nirsnet@nirs.org
Web site www.nirs.org
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