the bull is back

Michael Pollak mpollak at panix.com
Wed Apr 25 05:05:15 PDT 2001


On Mon, 23 Apr 2001, Bob Morris wrote:


> I guess my main point is, yes, pricing gouging happened, and is still
> happening. However, IMO, it is the not the or primary sole cause.
> California's own deregulation plan was flawed, to put it mildly, with
> most of the State government asleep at the wheel

How is that a but? The flawed deregulation plan was also price gouging. It was written by the utilities. They decided offer capped rates in return for 20 to 28 billion dollars, figuring they were making a killing. Then then invested that money in other properties and distributed it it to their shareholders -- in other words, they confiscated public money and made it into private wealth. But now that their calculation that rates would never rise has been proved spectacularly wrong (so much for the rationality of market actor), they want to keep the billions and renege on their agreement by raising the rates anyway. The laws that allowed them to ringfence off that money, protecting the shareholders from the "risks" they supposed took and fobbing them off on Californians, is a great example of property as theft.

On the orig dereg, here is an excerpt from Harry Wasserman in The Nation:

The Nation

February 12, 2001

California's Deregulation Disaster by Harvey Wasserman

<snip>

California's dereg disaster began in 1996, when the state's three dominant utilities banded together to force on their ratepayers "the largest corporate ripoff in American business history," as Ralph Nader has put it [see Wasserman, "The Last Energy War," March 16, 1998]. At the time, Pacific Gas &amp; Electric (then the nation's largest privately owned utility), San Diego Gas &amp; Electric and Southern California Edison were caught in a squeeze between their big industrial customers, who were threatening to generate power on their own, and the burden of their own bad investments in obsolete generators, mainly nuclear power plants. They were also tired of having their rates regulated by the state's ninety-year-old Public Utility Commission. What they wanted was to cash out of those bad investments, keep their big customers and make profits at will, without regulation.

So they proposed the following: Regulation of distribution lines will stay intact. We will separate the business of generating power from the business of distributing it to the public. We will spin off much if not all of our generating capacity (though in fact much of this was done only on paper, with power plants merely being transferred to the distribution companies' parent corporations). Then, as pure distribution companies, we will compete with other resellers for customers, who can choose their suppliers and even purchase "green" energy from companies selling wind and solar. Competition will rule. Prices will go down.

The price tag for Californians? Somewhere between $20 billion and $28.5 billion in upfront "stranded costs," i.e., direct paybacks to the utilities for their bad generating plants. These charges would be levied through "transition fees" and other surcharges, buried in customers' bills but adding up to as much as 30 percent of monthly payments. During the time it would take to pay back those bad investments, retail prices would be frozen. The California Public Utility Commission would also get $89 million in ratepayer money to promote the new scheme, giving utilities a leg up on whatever competition might materialize.

A bill, AB 1890, was drafted in SoCalEd's offices. After a few perfunctory hearings, the legislature passed it unanimously and Governor Pete Wilson, then a presidential candidate, eagerly signed it. Some consumer and environmental groups were furious about a wide range of issues, most notably the reactor bailouts, which they worried (correctly) would prolong the operating life of deteriorating nukes and other polluters. So in 1998, as the bill was taking effect, a broad coalition put a repeal on the ballot. Surmounting virtually impossible odds, the coalition gathered more than 700,000 signatures in less than five months. Initial polls indicated the measure would be a close call, but the utilities spent $40 million, calling in their chits with labor, ethnic and other organizations around the state. The repeal went down, getting 27 percent of the vote.

But in their haste to cash out, SoCalEd and PG&amp;E made some critical miscalculations. Most important was their assumption that there would always be a surplus of cheap wholesale electricity. So they sold off too much of their generating capacity and had too little of their own supply at a time when rates were still frozen. Then came a hot summer and a cold winter. Natural-gas prices shot up. Some key generators went down. Storms knocked out transmission lines. The nukes had problems. The utilities found themselves at the mercy of independent producers who'd snapped up generating capacity and could manipulate the wholesale market. Having dismantled key efficiency programs, the utilities now realized that their customers, buying power at fixed costs, had little incentive to conserve. So demand quickly outstripped cheap wholesale supply, which now spiked up at the whim of those with power to sell. PG&amp;E and SoCalEd became wounded, bleeding whales at the mercy of sharks they could not control.

<end excerpt>

And on ringfencing see below. The crime is not that they violated any rules. Rather, the crime is the rules. And it was all done very recently, when everyone was watching. The stock of the parent companies immediately went up, reflecting the judgment of experts that the theft was perfect.

February 8, 2001

Utility Money Shift Causes Outrage

By THE ASSOCIATED PRESS

Filed at 12:47 p.m. ET

SAN FRANCISCO (AP) -- It all sounds so sneaky to Californians facing sharply higher energy bills, but diverting billions of dollars from the state's two biggest utilities made perfect sense on Wall Street.

In the four years since California decided to deregulate its electricity market, holding companies Edison International and PG&E Corp. have milked cash from their now-impoverished utilities to enrich investors and affiliated businesses that are prospering amid the current chaos.

The financial juggling act, documented in state-ordered audits of the utilities, has reinforced the perception that Southern California Edison and Pacific Gas and Electric wouldn't be so destitute if they had hoarded the cash that they accumulated between 1996 and 1999.

``It's quite clear that the parent companies vacuumed out the utilities and siphoned out all the wealth so they could put it where they thought it would be safe,'' said Nettie Hoge, who heads The Utility Reform Network, a critic of the utilities.

The California Public Utilities Commission was expected to open an investigation Thursday into how Edison and PG&E shifted assets around. The PUC is examining whether the utilities intentionally violated rules that allowed them to set up the holding companies only if they didn't harm customers.

``It's easy to understand why everyone seems to get outraged and wonders who was watching the store while all this went on,'' PUC Commissioner Carl Wood said. ``But what people are forgetting is that the store wasn't being watched by design.''

Neither Edison nor PG&E returned phone calls seeking comment about the planned investigation. Both companies have insisted their actions were legal, accepted business practices.

The utilities say they have suffered combined losses exceeding $12 billion since May. They've incurred the losses buying wholesale electricity at high prices they can't recover from customers under the state's deregulation law.

The PUC likely will focus on efforts by Edison and PG&E to insulate their thriving unregulated businesses from the financial meltdown of the utilities. The holding companies used a technique known as ``ringfencing,'' which makes it difficult for courts to seize the assets or profits of a business to pay the bills of affiliated companies.

The holding companies have coddled these businesses -- Edison's Mission Group and PG&E's National Energy Group -- because they don't face the same regulations governing utilities.

Since 1996, Edison invested $2.5 billion in the Mission Group and just $153 million in SoCal Edison, according to a state-ordered audit by KPMG. During that period, the Mission Group returned $400 million in dividends to Edison International while SoCal Edison turned over $4.7 billion.


>From 1997 to 1999, PG&E invested $838 million in its unregulated
subsidiaries and provided nothing to its utility, according an audit by the Barrington-Wellesley Group. During that same time, PG&E's utility paid its holding company $4 billion.

Consumer activists believe the money shifted from the utilities to the unregulated businesses should be factored into a proposed ratepayer-backed bailout under consideration in the Legislature.

``Ratepayers should not be asked to dig into their pockets when the companies aren't willing to dig into theirs,'' Hoge said.

But Wall Street is apparently convinced that lawmakers stand little chance of piercing the ring. The state-ordered audits found no evidence that ringfencing violated any rules.

Besides investing heavily in their unregulated businesses, both parent companies dipped into the utilities' coffers to provide shareholders with dividends and stock repurchases.

Edison International spent $4.6 billion on shareholder dividends and stock buys from January 1996 through November 2000, according to the audit. PG&E spent $4.8 billion from January 1997 through September 2000.

The cash crunch at the utilities prompted their holding companies to suspend their dividends this year, causing a double whammy for shareholders, who've recently seen heavy losses.

Edison ended Wednesday at $13 a share on the New York Stock Exchange, falling more than 50 percent from its 52-week high. PG&E finished regular trading at $12.90 a share, roughly a 60 percent decline from its high of $31.75 in September.

The utilities have come under fire for not hoarding more money, but analysts say Wall Street wouldn't have tolerated billions of dollars sitting in money-market accounts.

``That's an invitation for someone else to take over the company,'' said Standard & Poor's analyst Peter Rigby. ``That's just dumb business.''

__________________________________________________________________________ Michael Pollak................New York City..............mpollak at panix.com



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