Over the past year, the state of California experienced a series of major power cuts. How is it possible that such events, usually associated with the poorest Third World economies, can still happen in the world's richest country and, what is more, in the most affluent part of this country? The American Trotskyist group, The Spark, discussed this question in the May issue of their quarterly journal Class Struggle. We reproduce below an edited version of their article.
"Power blackouts are inevitable this summer in California" so warned US Energy Secretary Spencer Abraham in the middle of March, as a prelude to announcing that the Bush Administration would not impose controls over the soaring prices of wholesale electricity. Price controls would, he explained, "seriously aggravate the supply crisis, since they will discourage investment in new generation while eliminating incentives to reduce demand."
Only four days later so-called "rolling blackouts" cut off power to more than a million customers for periods from an hour to four or five hours. It was the first time since the end of World War II that power blackouts rolled around the whole state. Restaurants went dark in the middle of lunch hour. Homes and office buildings in many of the state's largest cities suddenly were left without power. Traffic signals went down, creating jams and contributing to accidents. People were trapped in elevators; hospitals were forced to shift to emergency supply in the middle of operations; people who depend on electricity for home-based medical equipment found themselves in life-threatening situations.
The usual explanations were trotted out. Downtown Los Angeles, so all the media proclaimed, hit an "unseasonable" 87 degrees. Southern Californians had switched on too many air conditioners. "Demand" had exceeded "supply."
Most of the media forgot to mention that Los Angeles itself, supplied by a municipal electric system, did not lose electricity. In fact, the problem was not too much demand it was a contrived shortage of "supply." The privately run power companies had switched off an additional production capacity equivalent to 2,655 megawatts - much more than the 615 megawatt increase in demand. In fact, the total power generating capacity taken off line by these companies for "routine maintenance" was equivalent to 12,367 megawatts, about half the power they were supplying when the lights were shut off.
In a nutshell, this is the so-called "electricity shortage" which has been rocking California for over a year now, from the moment when the terms of California's electricity deregulation became fully operational.
Electric power under regulation
Before deregulation, the map of electrical service in California was a crazy quilt of different companies. The majority of the state derived its electricity from three large private utilities: Southern California Edison, PG&E (Pacific Gas & Electric) and SDG&E (San Diego Gas & Electric). These three companies, which also produced and transmitted electricity, enjoyed a monopoly franchise that gave them the sole right to deliver services in the areas of their franchises; in exchange, their rates and terms of service were "regulated" by the state of California, and to some extent by the federal government. Exempted from these regulated service areas were some 30 cities, including Los Angeles and Sacramento, which produced and/or distributed their own electricity at lower rates than did the private utilities, the federal hydroelectric systems and some major industrial companies, which generated their own power.
Finally, there was the very special case of San Francisco's publicly owned power-producing system, which was given a federal grant in 1912 to dam and send water to the San Francisco area from Yosemite National Park, under the condition it also used the system of dams to generate and distribute low-cost electric power to municipal and other publicly owned electric systems. By 1925, when the power came on line, San Francisco had built a network allowing it to transmit power all the way to Newark, on the outskirts of San Francisco. But it stopped construction, pleading lack of money. Instead of distributing its cheap electricity to the population, the City of San Francisco sold it at a very cheap rate to the predecessor of PG&E which then distributed it at a very high rate to residents of San Francisco. After a long investigation, the US Supreme Court ruled that San Francisco had been violating the terms of its federal grant. But since then, despite numerous court orders and grand jury investigations, San Francisco residents have still continued to pay one of the highest electrical rates in the state.
No matter how they were owned, the major utilities, supplying the majority of the population, had one thing in common before deregulation: they were "vertically integrated" - that is, the same company was responsible for producing power, transmitting electricity over its grid, obtaining additional power from other companies when necessary and distributing all the electricity to its customers in the area it monopolised under a state granted franchise.
This was the situation in California before the industry was "deregulated." And more or less the same situation prevailed in most states, with the private utilities regulated, on a state by state basis, concerning rates, new construction and terms of service.
The rush to deregulate
The groundwork for California's deregulation was established by two federal laws one in 1978 and the more important one in 1992.
PURPA (the Public Utility Regulatory Policies Act) was passed in 1978, during the Carter Administration, under the pretext of freeing the US from "OPEC's grasp." It required utilities to connect with and buy power from producers of "alternative energy" (that is, not based on the burning of fossil fuel). Not only did PURPA open the way for other companies to enter the electric power field including many of those that were selling natural gas (that is, fossil fuel); it also gave the utilities the right to increase their rates and thus their profits for producing "alternative" power. These higher charges were justified under the mantra of "making the US energy sufficient."
EPA (the Energy Policy Act of 1992), passed during the first Bush administration, went much further in changing the structure of the electric power industry. It exempted wholesale producers and marketers of electricity from much of the federal regulation which, so far, had prevented large interstate utilities from developing. The FERC (Federal Energy Regulatory Commission) was given responsibility for overseeing but not setting prices of wholesale electricity. EPA was pushed forward, and passed with the overwhelming support of both parties, under the pretext that new providers of electricity would spring up and "competition" between them would pave the way to greater efficiencies, lower prices and better service.
Almost as soon as the 1992 federal law was passed, Californian industrial corporations began to push for full deregulation in the state - that is opening up the retail franchise still held by the utilities - in the hope of obtaining cheaper electricity supply. In the beginning, the three utilities opposed deregulation. After all, regulation meant that they were guaranteed a certain comfortable rate of profit, calculated on their expenses of generating and supplying electricity, with all their investments amortised by bonds whose payments were included in the total bill. But relatively quickly, it seems they decided that "deregulation," if worked right, might be a bonanza for them also. In any case, they joined in the push for retail deregulation.
Eventually, in 1996, the California legislature rushed to give the utility industry what it wanted, taking only three weeks to pass a deregulation bill unanimously.
The "free market" not so free for consumers
California's deregulation was designed, supposedly, to introduce "competition" into an industry which, by nature of its technology and investment patterns, had been highly monopolised. Deregulation required the three utilities to divest themselves of most of their electric power production facilities. With "competition" thus assured, the utilities were to be freed from further state "regulation." "Competition" and the free market were meant to bring lower rates, more efficient service and new investments in the aging power infrastructure.
In fact, the utilities did not sell most of their production facilities, nor did the law require them to do so. The law allowed the "parent" company of each of the utilities to establish still more subsidiaries, completely freed from any regulation whatsoever, to which they transferred the most profitable plants of their utility company. Last December, it was estimated that Edison still retained 70% of its production capacity either directly in its own name or in the name of other subsidiaries of the "parent," Edison International. PG&E transferred its hydroelectric system, which generates 15% of California's electricity, to US Generating Company of Maryland, a wholly owned subsidiary of PG&E's "parent" company, PG&E Corp. Effectively, the utilities used the requirement of divestiture to get rid of the plants they no longer wanted their "alternative energy" plants, which had higher costs of production, and their oldest fossil fuel plants.
Despite the claims that deregulation would give consumers the "right to choose" their own supplier of electricity, up until now effectively there has been no one else from which residential consumers could choose, no competition based on lower rates.
In fact the law provided for a rate freeze at a very high level, designed to allow the utilities to recoup the cost of their so-called "stranded assets" - i.e. investment which had still to be paid off or had become unprofitable. Only afterwards would a "guarantee" of rate cuts totalling 20% begin to kick in. But in fact, as it turned out, customers also had to pay the cost of these cuts in the form of a new exceptional item at the bottom of their bills for a whole decade.
By contrast, industrial users have been given not only the right, but also the possibility to choose. Within only three years, big industrial corporations had signed contracts with other companies for one-sixth of the power that the utilities had previously supplied them, at rates averaging 15% less than they had been paying.
The most important feature of Californian deregulation was that it effectively allowed the utilities to escape responsibility for providing electricity. The 1996 California deregulation set up two "non-profit" entities, charged with that responsibility. One was the Power Exchange, which was to bring together the buyers and sellers of electricity in a kind of mini-commodity market, where rates were set minute by minute by the availability or lack of power, and where the same kilowatt of electricity might be bought and sold many times before it reached the final consumer, pushing up its cost on each sale. The other was the ISO (Independent System Operator), which was to buy electricity on an emergency basis in order to keep electricity in the grid when it couldn't be obtained through the Power Exchange. It was by holding electricity back from the Power Exchange that producers were to push up prices so astronomically for the ISO, a practice which the producers called "gaming the ISO."
Rate increases: "a necessity in a free market"
The very first result of this arrangement was an enormous increase in profits for the three utilities. In the first two and a half years after deregulation, Edison and PG&E made $4.4 bn in profit in addition to the $17 bn they recouped for their "stranded assets." The two utilities, which were soon to threaten bankruptcy, also raked in $5.6 bn by selling off some of their oldest plants at a premium to out-of-state utilities or energy producers. Some companies paid as much as two and a half times a power plant's market value, indicating, as a brokerage service said, "just how lucrative executives believed the market to be."
Right up to the end of 2000, Edison's and PG&E's parent companies were buying up power plants and other companies outside of California and repurchasing their own stock. According to filings made with the Securities and Exchange Commission, this buying spree came to a grand total of $22 bn in little less than two years.
As for SDG&E, its rates were unfrozen in July 1999. Now rates would go down or so the politicians who passed deregulation had promised. But the most amazing thing happened: electricity rates in the area serviced by SDG&E soon shot UP. The spring of 2000, it seems, was "unusually hot"! Power, was "scarce" Consumers were warned of the possibility of blackouts. During the month of May 2000, the price of energy on the Power Exchange jumped past $100 a megawatt hour compared with only $30 five months earlier. Blackouts rolled around the state in June, cutting off power to 100,000 customers. Prices of power sold on the Power Exchange continued to shoot up, reaching $150 in June for a megawatt hour.
In fact, there was no shortage of electricity in the spring and summer of 2000 in California, despite all the claims. The very peak demand for power was 45,600 megawatts of electricity, which was 14,400 megawatts less than the total supply potentially available to the state. Later studies of official records clearly showed that the utilities and other power producing companies had waited to take their generating facilities off line for ordinary maintenance and repairs until they were in the midst of the hottest days of the year, when demand for power was the greatest when in the past, they never would have shut down.
The utilities, already rolling in money, were simply laying the groundwork for enormous rate increases. SDG&E, now freed from any regulation of rates, within a year tripled its rates to consumers. Business Week commented on February 5 of this year, "Rate increases are unpopular, but they're a necessity in a free market."
Necessity? In any case, they were certainly the aim of deregulation.
Awash with profits
The three utilities were not the only companies to gather in enormous profits in this situation.
The seven biggest private generating companies which together produce 40% of the power for California increased their profits in 2000 dramatically, with quarterly increases running as high as 700% over the year before. The five California power plants which Reliant Energy bought from Southern California Edison, for example, produced over one-third of its total income last year, even though they were only a small part of its holdings. Reliant Energy, which had been number 114 in the 1999 "Fortune 500," shot up to number 55 in 2000. Duke Energy, which also moved into the California market, moved up from number 69 to number 17.
The El Paso Natural Gas Company is another of the oil industry companies which rushed into the state of California to take advantage of deregulation, "to compete". In 1996, El Paso Natural Gas, a subsidiary of El Paso Energy, was a pipeline company that transported natural gas to California. Under oil industry deregulation it was required to sell space in its pipeline. In a somewhat secretly arranged auction it sold off 40% of the space in its pipeline to ... El Paso Merchant Energy, another subsidiary of El Paso Energy. El Paso Merchant used its control of 40% of pipeline space to increase natural gas prices by over 400%. As a result, El Paso Natural Gas was able to increase electricity prices in the 25 California "alternative energy plants" which it had bought and which were not even fired with natural gas!
This manoeuvre by El Paso to reduce the flow of natural gas to the utilities was not taken against the interests of the California utilities. Far from it. In 1996, executives from El Paso Natural Gas met with executives from Southern California Gas and San Diego Gas & Electric in Phoenix. A Los Angeles Times investigation dug up notes made by an El Paso vice- president at the meeting, notes which show that the three companies agreed to kill pipeline projects that would have brought more and cheaper natural gas into California to fuel its utilities. Within four weeks of the Phoenix meeting, Southern California Gas cancelled its plans to build a new pipeline in the southern part of the state, giving the project over to El Paso to do what it wanted, which turned out to be nothing; El Paso, in turn, halted work on a northern pipeline which would have brought in cheaper Canadian gas.
In less than five years, El Paso Energy, trading energy like shares of stock, turned a $2bn pipeline stake into a $50-bn financial conglomerate, controlling dozens of companies. According to the Los Angeles Times, El Paso Energy, after going on a buying spree, "owns a stake in key sectors across the energy spectrum collecting, transporting, marketing and generating and has access to virtually every market in the nation with the exception of the Pacific Northwest...boasting that it moves a quarter of this country's natural gas to 70% of the US population." So much for introducing "competition"!
Likewise, there is the case Enron Corp., a "marketing" company, that is, a company which neither produces nor distributes electricity and natural gas it only buys and sells them. Business Week describes Enron this way: "it has pioneered the financialisation of energy, making the company more akin to Goldman Sachs than Consolidated Edison. Its impressive profits stream is squeezed out of a torrent of often low-margin trades, in which it buys and sells a dazzling variety of contracts." Between 1997 and 2000, Enron's profits tripled. It, too, has zoomed up in the "Fortune 500," going from number 94 in 1996, number 18 in 1999, to number 7 in 2000. Its CEO earned a $7m bonus in 2000, up from "only" $ 3.9 m the year before.
We shouldn't, of course, forget the financial markets, when recording the rogues' gallery of profit-makers. The acquisitions and mergers which have accompanied deregulation have been mostly underwritten by Wall Street. On California's bonds, alone, their commission will mount up into hundreds of millions of dollars.
When the politicians talked about deregulation producing "competition," they forgot to explain that this would be a competition to see which company could make the highest profits, not which one would charge the lowest prices.
The tools of extortion: "Stage 3 alerts" and blackouts
As spectacular as the summer of 2000 was, it was only a shadow of what was to come. Demand for electricity went down in the fall, as it usually does, but "shortages" inexplicably got worse. In December, a month when usage was low, Californians were told they had entered a "Stage 3 Alert," that is, they could be subjected to blackouts for an hour or more with no advance notice. When blackouts were ordered, almost one third of California's total capacity was off line for "routine maintenance" and it was kept off.
With blackouts punctuating the bidding, wholesale power prices became the subject of wild speculation on the commodity markets. The average price in December was almost $275 a megawatt hour, nine times what it had been the year before. And in the "spot market," a megawatt hour of electricity hit the astronomical level of $1500.
The two utilities whose rates were still frozen (Edison and PG&E) produced balance sheets to prove that they were losing money. Threatening bankruptcy, they demanded an end to the rate freeze, despite the deregulation law.
Of course, the balance sheets they produced were somewhat incomplete: they forgot to include the amount of money they each made in selling electricity wholesale, either directly or through subsidiaries of their parent companies. It's true the two utilities had to purchase electricity in the state's Power Exchange at a big loss. BUT, both Edison and PG&E sold power they produced into that same exchange at a very big gain. PG&E's hydroelectric installations, for example, produced power at the rate of $1.40 a megawatt hour while the going rate when they peddled that same hour of electricity was in the hundreds of dollars!
Also missing from their balance sheets was the money they had paid out in huge dividends in August 2000 to... their parent companies, thus ridding themselves of any excess cash they might have been able to use to buy electricity. Finally, in the short period between the summer's mini-crisis and December, Edison and PG&E both moved billions of dollars of assets over to the unregulated subsidiaries of their parent companies. As late as January, PG&E's parent company set up still another subsidiary, the National Energy Group, to which it transferred PG&E's power trading and merchant generating operations.
The two utilities didn't mention these things and the California Public Utilities Commission didn't ask. It quickly put through a rate increase ranging from 9% to 15% in early January.
Not enough, said Wall Street. Two bond-rating agencies downgraded the two utilities' debt to little better than junk bond quality, effectively making it impossible for them to borrow further. Their stock fell dramatically. It appeared that bankruptcy was almost a certainty. The big energy producers announced that as of March 1, they would cut off all credit to the utilities for natural gas which the utilities use in their own generating plants. More blackouts rolled around the state.
Credit Suisse First Boston Corporation noted on its website that the blackouts were "likely intended to soften up the Legislature and the voters to the need for a rate increase....That prospect [of blackouts] helped energise some legislative and banker concessions that got us over the hump." These comments came in an article in which the Wall Street firm encouraged investors to acquire holdings in power generating companies which supply electricity to California. The same Wall Street firm also provided experts from its financial department who for no charge helped the Democratic speaker of the California legislature write another bailout bill for the two utilities.
After a spate of posturing by the state's politicians, its legislature voted the bailout written for them by Credit Suisse. $10bn dollars in bonds would be floated, to be repaid by consumers in their bills, to cover the utilities' losses. Another five billion was voted by the legislature to begin buying power in the spot market for the two utilities.
As if by magic, the utilities debt received the approval of Wall Street. And brokerages began to recommend buying up issues not only from the power generating companies but also from the parent companies of the two utilities.
Equally magically, the threat of blackouts suddenly ceased until January's extortion drama went into re-runs in March. On the same day power was cut in March, California's governor, Gray Davis, asked the state legislature to authorize an additional $0.5bn to buy power for Southern California Edison and PG&E, two of the state's three major private utilities, both of which were once again threatening to declare bankruptcy if they were forced to go on buying electricity. The state legislature also gave its approval for purchasing their grid, that is, the high tension electric transmission lines which transfer power between producer and distributor. (But so far PG&E has held back the sale, most probably figuring it can get a better price if it does.)
So now more bonds are to be sold, increasing the state's indebtedness by almost 80% in less than a year. Already politicians are discussing the need to cut back "non- essential" programs. In other words, Californians can expect to see cuts in all those programs which benefit the population as we've learned by now, those are the programs the politicians consider "non-essential."
Finally, at the end of March, the legislature, the governor and the Public Utilities Commission all agreed on new rate increases running as high as 47%.
Will the bonds and all these rate increases resolve the problem? "Heavens no!" answered Assemblywoman Jackie Goldberg, who added, "It's a necessary step, but we're certainly not out of the woods yet."
As if to emphasize the point, PG&E, after having racked up enormous bills, including to the state, after having divested almost all its profitable assets to other subsidiaries of its parent company, issued bonuses totalling $50m to its top 400 managers in early April only to declare bankruptcy two hours later!
Don't blame deregulation, blame California
By the time the crisis in California broke out into the open, 24 other states had either deregulated or were in the process of doing so. And while their experiences were not so horrendous, they were nonetheless telling. In 1999, New York state and Illinois had both undergone a series of blackouts and price spikes. Rates in New York were more than 40% higher during the summer of 2000 than the previous summer.
Nowhere did the results inspire much consumer confidence. But what happened in California put the issue on a whole different level. Several states, including Arkansas, Nevada, New Mexico and West Virginia, declared a moratorium on deregulation. One state, Oklahoma went so far as to revoke the implementation of its deregulation law. And several states which had been considering the matter either let it drop or voted against deregulation.
A campaign was begun, therefore to blame California's supposedly "uncontrolled appetite for electricity" for what was beginning to happen elsewhere, so as "rescue" deregulation. Business Week, for example, quoted Chuck Watson of Dynegy, one of the new energy marketing companies: " California sucked all the electricity from the Western states. It is reverberating throughout the country.'"
Similar comments flowed out of the White House day after day. California was turned into a national pariah, draining power from everywhere, pushing up electric bills everywhere. The problem, according to Bush, was to put a wall up around California, to prevent California's problems from bringing down the electric grid of the whole Western half of the country, if not the whole country.
In state after state, utilities sent out notices with their electric bills explaining that although the market was in the process of deregulation in their state too, consumers need not worry, because California was "different."
Of course, California does present a picture of the future. If California deregulated "badly", then so will the other states: most of their deregulation laws were modelled on California's. According to a study issued by the US Department of Energy in 1996, the bill for "stranded costs" could reach as high as $500bn nationwide. A Brookings Institute expert in regulatory policies, commenting on what can be expected, declared, "The whole notion that there's such a thing as a just price is kind of an anachronism from New Deal days. Especially as we move closer to some form of deregulation, we've come to understand that the price is what the traffic will bear."
There may be some differences in the language of the laws from state to state, but all the laws, federal and state, have a single aim: to free up companies which already were enormously profitable, leaving them the possibility to charge whatever the "traffic" that is, the market will bear. And, as we've seen in every state where deregulation has made progress, the market will bear quite a lot.
Patching up what the marketplace destroyed
In many countries, electricity utilities were built up by the state, precisely because of the unwillingness or inability of private capitalists to undertake the enormous investment required to build the infrastructure needed to deliver electricity widely. In the United States, publicly owned municipal systems appeared in the 1880s and 1890s. But gradually, private capital moved in to take them over, then to build them, under monopoly franchises bestowed by states or cities.
Samuel Insull, one of Thomas Edison's first lieutenants, pushed the idea of state regulation, as a way to justify private capital's control over the industry. According to the Edison Electric Institute, the electric utility industry's trade group, Insull's proposal for state regulation "became increasingly appealing to private companies in the face of public enthusiasm for the growth of municipal [that is, publicly owned] electric systems. Privately owned companies surmised that the public might be more supportive if their companies were regulated so that customer interest could be protected."
The problem was not simply that of convincing the "public." The fact is that private capital was unable to standardise the industry. Equipment, frequencies and voltages varied from one utility to the next, making connections or transfer of power difficult or even impossible, not to mention the impediments this chaotic situation put in the way of widespread production of electric appliances. Nor was private industry able to provide the capital necessary to build up an electric power industry; that was assured by the state agencies which set rates. Whatever limits states might have set on the upward movement of rates, the fact is that state supervision of the utilities guaranteed the fledgling electricity industry not only a more than adequate profit, it also guaranteed the reimbursement of investments.
The development of the utilities kept pace with the vast expansion of capital which had marked the end of the 19th century, leading to ever larger companies, greater concentration of capital and eventually to the great financial trusts or "holding companies" which monopolised and controlled almost every important industry. By the 1920s, stock market speculation led to a vast movement of mergers and acquisitions, creating super-giant empires.
The utility industry was one of the most highly concentrated. During the decade from 1919 to 1928, over 4300 utilities vanished, gobbled up by other companies. Three quarters of these were in the electricity utility field. By 1932, 42% of electricity generated in the United States was controlled by only three holding companies.
The classical example of these holding companies was the empire set up by the same Samuel Insull who had earlier argued so strongly for state regulation. It was a vast pyramid of thousands of power producing or distributing subsidiaries and smaller holding companies. Insull himself was chairman of the board of 65 different companies in his pyramid. His son directed dozens more.
An executive of General Electric once described the Insull holdings this way: "It is impossible for any man to grasp the situation of that vast structure... it was set up so that you could not possibly get an accounting system which would not mislead even the officers themselves." Not to mention the impossibility of any public regulatory agency, organised as they were by state or even locality, to assess the real costs and income of utilities so controlled even if it had wanted to do so.
The holding companies charged the utilities which rested at the bottom of their pyramids exorbitant amounts of money for "financial services," for construction carried out by other companies owned by the same financial group and for fuel which was supplied by still another of the group's companies. According to a study done at the time by the Congressional Research Service, "a holding company might own unregulated coal mines in addition to its regulated electric utilities. The regulated utilities might buy coal from the unregulated affiliated coal mines at 50% above the prevailing market rate. The profit would accrue to the coal company while the cost would be passed on to the electricity consumers by State regulators who could not control the internal activities of the interstate holding company."
The great trusts composed of these holding companies were not involved in directing and coordinating the supply of electricity. They were not interested in its extension throughout the nation. Nor were they concerned with integrating far-flung electrical systems into coherent networks which could provide back-up supplies of power when systems went down. Capital's sole concern was the creation of far-flung financial empires and the accumulation of financial rewards.
As a result, as late as 1932, nine out of ten farms nationwide were still without electricity. In the South, it was worse; in Mississippi, less than one in a hundred had power. And blackouts were common in the cities which did have power. Of course with the bursting of the speculative bubble in 1929, many of the pyramid empires collapsed. Electricity was cut off in 30 states.
It was in response to sudden power blackouts that the PUHCA (Public Utilities Holding Company Act) was passed in 1935. Whatever concern Congress and the Roosevelt Administration had for consumers was far surpassed by their concern for all those businesses harmed by the collapse of electric power and for the bondholders and stockholders - who lost an estimated $700m in one such collapse.
The PUHCA established limits within which holding companies could act. Effectively, it restricted utilities to functioning within a single state, or at least a closely connected geographical area. And it limited these companies to three layers, which made their books somewhat less opaque. Finally, holding companies were limited to owning productive companies which were functionally related to the service they provided. As usual, there were loopholes, and very large ones. And no utility ever went broke while it was regulated, other than through outright fraud by a utility management. But the PUHCA, and the regulating agencies which derived from it did allow the utility industry to start functioning again, providing what other industries needed, a stable and consistently priced supply of power.
Other legislation at the time paved the way for extending electricity throughout the country via the great hydroelectric projects like the Tennessee Valley Authority, Hoover Dam, and the Grand Coulee, Bonneville and Shasta projects; and via economic encouragement for rural cooperatives.
William E. Leuchtenburg gave a striking picture of what the development of electricity cooperatives meant in rural areas: "The REA [Rural Electrification Administration] revolutionised rural life. When private power companies refused to build power lines, even when offered low-cost government loans, Cooke [head of the REA] sponsored the creation of nonprofit co-operatives. In the next few years, farmers voted, by the light of kerosene lamps, to borrow hundreds of thousands, even millions, from the government to string power lines into the countryside. Finally, the great moment would come: farmers, their wives and children, would gather at night on a hillside in the Great Smokies, in a field in the Upper Michigan peninsula, on a slope of the Continental Divide, and, when the switch was pulled on a giant generator, see their homes, their barns, their schools, their churches, burst fort in dazzling light. Many of them would be seeing electric light for the first time in their lives. By 1941, four out of ten American farms had electricity; by 1950, nine out of ten."
The electricity generated by federally funded hydroelectric and other projects also helped pave the way for establishing many municipally owned systems, replacing the privately owned ones which had gone belly up with the crash of 1929. Whereas in 1929, over 90% of power was produced by private utilities, today, even after years of public projects being turned over to private industry for a song, the figure is less than 75%.
The cost of the market
Electric utilities now join all the other industries that have been "deregulated" over the last quarter of a century airlines, financial institutions, railroad and trucking industries, telephone and cable television and natural gas. Electric utilities were, in fact, among the last to be deregulated. The results of some deregulations were downright catastrophic; in others they simply drastically increased prices, led to the development of monopolies, or both.
For instance the airline industry has been moving increasingly toward monopolisation, via mergers and "alliances." The airlines have divided up the country among themselves, with each airline being given control over a few "hubs". As for the promises once made for cheaper service: service has been cheapened, that's true, with safety compromised, but the price for travel has skyrocketed.
Just before the natural gas industry was deregulated in 1984, residential prices for natural gas were 44% above the well-head price, that is the price charged to utility customers. Three years later, the residential price was 110% above; by 1999, 181% above. So-called "competition" brought with it greater monopolisation, and much higher prices. In fact, it was the vast amounts of money made in natural gas deregulation that gave a number of companies like Enron, Dynegy, and El Paso Natural Gas the stake they needed to enter the electric power industry in such a big way.
Across the board, deregulation has been accompanied by a rush toward greater concentration of capital, with the enormous increase in profits that could be predicted. It took only four years after the full deregulation of the telephone service for the eight large regional phone companies which provide almost all local services in this country to merge into four companies and they are now trying to merge into only two. This has not produced the benefit to consumers which was promised. Just the opposite. But this control over the industry has given local telephone companies a return on equity at least 70% higher than the national average.
In the utility industry, 55 applications for mergers were filed with the Federal Energy Regulatory Commission between January of 1992 and July of 2000. This is the fastest pace for utility mergers and acquisitions since the 1920s, and it has led to a rapid increase of concentration in the electric utility industry. According to the US Department of Energy (DoE), in 1992, the ten largest private utilities owned 36% of all generating capacity in the country. By the end of 2000, the top ten owned 51% of all such capacity. John Bryson, current CEO of Edison International, the holding company which owns Southern California Edison, recently predicted that there will be only 10 energy conglomerates left worldwide in ten years time. The current disaster in California gives a hint of what that will mean for the prices we will pay for electrical power and decreasing access to it.
With deregulation, we are returning to the past and not a glorious one. Electricity is a basic service, a necessary one for life to go on in any industrialised society. Yet the people who today control it care nothing for what they are doing, neither to the electrical system itself nor to the population who depend on it.
In pursuit of ever higher profits, they are ready to shut off electricity, creating life-threatening situations. They are ready to rob people of the money they need to pay for their other daily needs, with rates which double, treble then threaten to treble still again. The stories pensioners who must choose between eating and heat or between a medical prescription and electricity are not simply the stuff of urban myths. They are the true picture of where capitalism and its "free market" are taking us today.
"If you believe in markets, you can't blanch at the sight of victims" so said Bill Eastlake, an economist with the Idaho Public Utilities Commission, arguing to continue his state's deregulation "experiment." And that says it all! That is capitalism spelled with a capital "C."
May 2001