Who Killed P.G.&E.? And What's Next in the Deregulation Disaster
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home / ftcr / commentary

Apr 09, 2001

Who Killed P.G.&E.? And What's Next in the Deregulation Disaster

by Harvey Rosenfield
 
Who killed P.G.&E.? P.G.&E. did.

P.G.&E. wrote the 1996 deregulation law, reaped its financial rewards for three and one half years, and now it and its shareholders are bearing the consequences of deregulation.

Five years ago, P.G.&E. joined with Edison, San Diego Gas & Electric, and the energy industry to ramrod "deregulation" through the California Legislature. Until last June, deregulation was a license to steal. That dirty legislative deal froze residential and small business electricity rates at record high levels through 2002. The freeze forced the utilities' customers to pay off over $20 billion in the utilities' bad debts, roughly $9 billion for P.G.&E. alone.

The utilities also chose to sell off most of their power plants, built over previous decades with ratepayer money, to energy companies based in Texas and other states.

Floating in dough, the utilities went on an international spending spree, while they increased dividends to investors and jacked up their CEOs' executive compensation to $2 million plus.

The Mugger Gets Mugged

But starting last summer, the eight energy companies that now owned the power plants decided they wanted to cash in on the financial bonanza. Thanks to the deregulation law, they were free to do so. Using their unregulated control over our electricity supply, and by manipulating the supply of electricity to create temporary shortages, they boosted wholesale prices far into the stratosphere. Suddenly, the rate freeze that had enabled the utilities to overcharge consumers for three years had the totally unexpected effect of preventing the utility companies from passing through to consumers the higher wholesale costs of electricity. In effect, the muggers themselves got mugged.

Though they had reaped the financial rewards of the law they wrote, the utilities and the shareholders refused to accept the downside risks. They began agitating lawmakers for a bailout.

For months, Governor Davis had promised no rate increases, hoping simply to avoid having to choose between sticking consumers with massive rate increases or displeasing Wall Street by protecting ratepayers. But the utilities, and the energy firms they owed money to, were getting impatient. For Davis, the blackout blackmail threat of rolling power outages became a greater fear than public outrage over utility rates.

Last Thursday, the Governor capitulated to the demands, proposing a "26%" rate increase that itself was an exercise in manipulating numbers. His plan, which included an over-bailout of the utilities' losses, would have required at least a 100% increase according to our calculations. But P.G.&E. realized that a bailout had little chance of getting through the Legislature, and even if it did, no chance of getting passed the voters next year. We have said we would put an initiative on the ballot to reverse any such bailout.

So P.G.&E. decided to try its luck in bankruptcy court, where the company will argue that the deregulation law they wrote was invalid, and that the ratepayers must be retroactively forced to pay all of P.G.&E.'s losses.

P.G.&E. didn't have to declare bankruptcy. Its parent company, created to take advantage of deregulation, has over $30 billion in assets, a huge portion of which it siphoned out of the utility subsidiary over the last few years. Indeed, the company gave raises and bonuses to over 6,000 employees just hours before filing for bankruptcy. It could have bailed itself out, but chose not to.

P.G.&E. -- likely to be followed in short order by Southern California Edison -- is merely the most visible victim of the deregulation scheme it promoted.

Millions of San Diegans were the first victims, last summer, when their rate freeze was lifted. They were forced to pay the skyrocketing price of electricity. No one offered to bail them out. Now, the same wholesale energy companies that have instigated shortages and blackouts, boosted prices by as much as 3900% over 1999 prices and have reaped record profits, are setting their sights on the rest of California.

And that's the problem: Nothing in Gov. Davis's "crisis plan" addresses the core problem that we have handed our electricity system over to a greedy energy cartel -- America's own OPEC.

Davis: Too Much, Too Late

In his five-minute prime-time speech Thursday night, Governor Davis choice to protect Wall Street and the energy companies at the expense of Main Street. The Governor's plan can be summarized this way: "Turn off the lights, get out your checkbook and sit in the dark until your utility bill comes."

After his speech, Davis jetted off to La Jolla for yet another fundraiser. The true extent of the Governor's surrender was revealed only to Wall Street analysts who, 45 minutes after his TV appearance, got a nearly two hour confidential presentation from the Gov's staff and the posse of consultants he has hired at taxpayers' expense ($11 million).

They were told the whole truth: that the Gov. wants to make Wall Street happy by bailing out the utilities. That he wants to make sure all the energy companies are paid in full. That he is not likely to sign a windfall profits tax on the thieves that are gouging us or do anything that would upset Wall Street or the energy industry.

No doubt Gov. Davis has calculated that to run for President in 2004, he'd have to assure Wall Street and its wealthy denizens that he was one of them. So he decided to take the hit with the voters on a rate increase that would be mortgaged out over fifteen years anyhow. The irony is that by declaring the third largest utility bankruptcy in American history, P.G.&E. destroyed the Gov.'s credibility with Wall Street. (He'll now try to assuage that with a fast deal on an Edison bailout). Gov. Davis would have been better off politically if he had stuck with the voters. Instead, he's alienated everyone.

Bankruptcy Beats a Legislative Bailout

Bankruptcy is no picnic for P.G.&E.'s pensioners and workers. But it's a much better forum for dealing with a utility's debts than the Legislature. Bankruptcy is the ultimate open process -- it's before a court of law, out in the open, and all interested parties are represented. With pro-utility officials like Davis and Assembly Speaker Robert Hertzberg only a handful of lawmakers, led by Sen. President John Burton, would stand between the ratepayers and another rotten deal. Deal-making behind closed doors in Sacramento is how we got in this mess in the first place.

The bankruptcy court has the power to cut through the corporate shell game and force P.G.&E.'s parent firm to give the utility back the money it siphoned off over the last few years, as well as unwind any last minute feather-bedding. But it cannot rewrite the deregulation law to order a bailout, nor can it usurp the role of the state Public Utilities Commission in regulating rates. With an army of lawyers at their disposal, the utilities and energy companies will do their best to defraud ratepayers in the bankruptcy court. That's why it's crucial that California ratepayers are represented directly. FTCR plans to intervene in the bankruptcy proceeding on behalf of taxpayers and consumers -- a potentially enormous expense. If you haven't already done so, please make a sizable financial contribution to this effort. (Donations are tax deductible).

Now that bankruptcy will permit P.G.&E. to write-off its deregulation-related losses, the Legislature should reject a desperate move by Davis to redeem himself with Wall Street by rescuing Edison with ratepayer money. In short, lawmakers must stop worrying how to prop up the utilities. Instead, they should finish work on legislation to create a public power agency with authority to engage conservation and renewable technologies (SB 6X) and establish regulatory protections for small consumers (SB 18X).

Unless the wholesale energy supplier issue refunds for their overcharges and lower prices, the Legislature must pass a windfall profits tax (SB 1X) to recoup the money stolen from us. Further blackouts will require the state to seize the power plants; we have already paid the energy cartel more for electricity in the last three months than the companies paid to buy all the plants from the utilities ($3.2 billion). Only firm and forthright action will restore a reliable and affordable electricity system. It's still an open question whether Sacramento is up to the task, or whether we voters will have to do the job ourselves at the ballot box.






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