Online NewsHour: The high cost of deregulation -- November 30, 2000



	THE COST OF DEREGULATION
November 30, 2000

Twenty-three states have enacted legislation to deregulate electricity rates, and 16 others are thinking about it. But California's pioneering efforts have already provoked an angry consumer backlash. Spencer Michels reports..

Sept. 21, 2000:
U.S. leaders consider tapping the strategic oil reserve.

Sept. 13, 2000:
Fuel crisis in Europe.

June 21, 2000:
The effects high gas prices are having on Americans.

March 15, 2000:
Rising gas prices cause partisan disputes.

Feb. 17, 2000:
Clinton plans to help heat the Northeast as oil prices rise.

Nov. 23, 1999:
Oil prices rise across the world as OPEC decreases exports.

Dec. 21, 1997:
The Kyoto Treaty debate.

Oct. 22, 1997:
The federal government proposes stricter emissions standards

Browse the NewsHour's coverage of Europe, the Economy and Transportation.

Department of Energy

OPEC

SPENCER MICHELS: In a San Diego strip mall, the owner of the tiny Younglin oriental vegetarian market is having a hard time. Yuman Young owes $2,000 to San Diego Gas & Electric-- SDG&E-- an amount he can't come up with. Like many San Diegans, his electricity bill has skyrocketed this year.

SPENCER MICHELS: So this is your bill in March, right?

YOUNG: Right. And in March, the bill comes to about $478.

SPENCER MICHELS: Then we have May.

YOUNG: In May it goes to $670 something.

SPENCER MICHELS: $674.

YOUNG: Yeah.

SPENCER MICHELS: And then we skip...

YOUNG: We skip a month.

SPENCER MICHELS: ...June, but in July...

YOUNG: Then in July it goes to about $1,300.

SPENCER MICHELS: $1,300.

YOUNG: Yeah.

SPENCER MICHELS: And the same in August.

YOUNG: And the same in August.

SPENCER MICHELS: Over $1,300.

YOUNG: Right.

The effects of deregulation

SPENCER MICHELS: Young's main electricity expense is his frozen food freezer that he keeps at minus 17 degrees. But people without such appliances have seen residential and commercial bills double and triple as well. San Diego is the first California city to suffer the effects of the deregulation of electricity, which was enacted by the state legislature in 1996. The theory was that by taking away the monopolies enjoyed by state-regulated utility companies, like SDG&E, new competition among electricity producers would result in a drop in rates. But since such simple market economics would take a while, the legislature imposed a temporary rate freeze to protect most parts of the state from higher prices. In San Diego, the freeze came off this year, letting the market set the price-- a very high price. SDG&E is owned by Sempra Energy, where Stephen Baum is CEO.

STEPHEN BAUM, CEO, Sempra Energy: It's been a terrible shock to our customers, seeing real-time prices for the first time. And those prices are way out of sight because the wholesale market is broken and needs to be fixed.

SPENCER MICHELS: The vast wholesale market is something new. California Utilities used to own most of the power plants, the high voltage transmission lines, and the system to deliver power to homes and businesses. Under deregulation, the utilities still deliver the power, but had to turn operations of the transmission lines over to a state agency. In addition, they had to sell their power plants. So now almost all power is sold to the utilities on a wholesale basis by producers or generators. And according to Baum, they charge what they can get.

STEPHEN BAUM: There's been a very large wealth transfer from the customers in the state of California to the generators. We don't think the market's workably competitive. There aren't enough players and there's not enough generation. Until that occurs, you're going to have dislocations at very high prices.

SPENCER MICHELS: The situation keeps getting worse as California's population keeps increasing, especially in the hot central valley. Air conditioners and other appliances put a strain on a system already stressed by increased demand in other states, where some of California's power comes from. According to university of California economist Severin Borenstein, deregulation has aggravated the already tight situation.

SEVERIN BORENSTEIN: Production in the state has really been stretched. And that does two things: One is it naturally just creates a tight supply/demand situation that's going to drive prices up; the other thing it does, though, is it also puts the producers in a very strong position to push prices up even higher. And I think there's no question the generators are trying to make as much money as they can.

SPENCER MICHELS: Duke energy, headquartered in North Carolina, is one of the new generators in the California market. Duke spokesman Tom Williams says much of its power was sold before prices rose, and that profits are plowed back into new plants.

SPENCER MICHELS: The utilities and the consumer groups seem to think that the and utilities say generators are making a lot of money on this crisis. Is that true?

TOM WILLIAMS, Duke Energy Corp.: Duke Energy sells the bulk of its power in the forward market. It was sold a year ago for the plants we have in this state now. So the power has already been sold, and the price of natural gas has gone up two and a half times since last summer. So there is a very tight supply situation, but we're reinvesting our profits back into the market to fix the problem.

SPENCER MICHELS: In fact, Duke is investing $1.1 billion to modernize two inefficient power plants it bought from the utilities. As part of the deal, it also had to buy this old PG&E plant in Oakland, which has been running overtime because of the power shortage. Over the last two decades, only a few companies have actually begun construction of new power plants, because of what they saw as the uncertainties of the regulatory climate. This plant near San Francisco, being built by Calpine, will supply enough electricity for half a million homes. It will be ready by next summer. Calpine Vice President James Macias says his company predicted the shortage of power and took a risk.

JAMES MACIAS, Vice President, Calpine: You could see the fundamentals forming of the need for more power. There hasn't been a big power plant like this built in the state for decades.

SPENCER MICHELS: Macias says the utilities should have contracted for power at lower rates before it was actually needed. He expects that the profits power companies are making now will decline as more power comes online.

JAMES MACIAS: We're doing pretty good. We're being rewarded for having the vision and the foresight to come in here and build this... this needed supply. But they're not going to last. As soon as this... More of the supply comes in, the prices will come down and they'll be... They'll be depressed again. They have to come down. This economy, again, can't support these higher prices.

New plants won't help now

SPENCER MICHELS: Although 20 new plants are in the planning stages, it takes five years to design and build just one. With very little additional supply in the immediate pipeline, the director of San Diego's utility watchdog group, Utility Consumers Action Network, says regulators must get involved to return rates to reasonable levels.

MICHAEL SHAMES, Consumer Advocate: They could have immediately put... Reinstated a price cap. They could have immediately said, "hold on a second, folks. We're not going to tolerate this. We're not going to see a region like San Diego thrust into a depression."

SPENCER MICHELS: But Michael Shames says some legislators and regulators were ruled by their uncompromising belief in a free- market ideology.

MICHAEL SHAMES: There were a number of people, well-placed people, who were so ideologically driven to force competition to work in a market such as energy that they didn't want to look at the signs when they saw that the experiment wasn't working. They didn't want to acknowledge it wasn't working, and they were prepared to sacrifice a city-- San Diego-- a state-- California-- and possibly a country, in order to see their ideologically driven vision work.

WOMAN IN COMMERCIAL: They lied to us about deregulation. They said our rates would go down.

SPENCER MICHELS: Shames' consumer group was so outraged at the price increases, they bought TV ads and urged civil disobedience.

DIANNE JACOB: (ad) Join me and other San Diegans and let's send a message. Pay only what is fair. When your SDG&E bill comes, pay what you paid last summer. That's fair.

SPENCER MICHELS: At the California public utilities commission, president Loretta Lynch agrees that regulators could remedy the situation. But she says it's not up to the state. Only the federal energy regulatory commission has the power to cut back prices.

LORETTA LYNCH: If the federal government allowed power plant owners to make a reasonable profit instead of an excessive profit, then that would drop the price of wholesale power. And if that price dropped, we would not be in the pickle we're in today.

SPENCER MICHELS: Federal Energy Regulatory Commission President James Hoecker replies that simply using price controls discourages investment in an industry that needs it.

JAMES HOECKER: What my friend, President Lynch, has said reflects a kind of thinking that markets can never be made to work, and that ultimately we have to resort to cost-based, profit kinds of regulation of utilities. And I think that this market has marched past that as an option.

SPENCER MICHELS: In November, the Federal Energy Regulatory Commission proposed a major change: Utilities would not be required to buy power from the power exchange-- a kind of stock market for electricity where prices have soared. Instead, the utilities will be able to buy directly from producers. The federal agency has launched an investigation into California's troubles, hoping for a long-term solution.

SPOKESPERSON: This legislation today has the ability to provide immediate and real relief for San Diegans.

SPENCER MICHELS: The California legislature struggled this year with what to do short-term for the people of San Diego. The debate centered around a proposal to cap electricity bills at $65 a month, retroactive to June 1.

CHARLENE ZETTEL: What is San Diego's problem today will be California's problem tomorrow.

STATE REPRESENTATIVE: You know who we can thank for this problem? Do you want to get right down to brass tax? You can thank all of the knuckleheaded people in this legislature and in government in general... in general who have stood in the way of doing the smart and sensible thing that anyone would have the sense to do in the real world, and that is to provide for their future needs by increasing production. We need to build some facilities to produce power.

STATE REPRESENTATIVE: All debate having ceased, the clerk will open the roll. All members vote who desire to vote.

SPENCER MICHELS: The San Diego rate cap passed, but the state is still far from a solution. Higher electric rates are forecast for the rest of the state as the caps come off in other cities. And even more troubling is the fact that the price rollback is being bankrolled by the utilities since they still have to pay the generators for the power, but can't pass those prices on to their customers. Economist Borenstein says other states better examine California's experience before proceeding with deregulation.

SEVERIN BORENSTEIN: I think most states that are deregulating right now, if they have a tight supply situation, are very likely to see spikes just like ours. The best advice I think for most of these states is to take a break, not move forward on their deregulation, watch the experiments that are going on in California and in New York and Pennsylvania and in Texas and in a number of other states, and learn from them, because we're learning a lot from them as we do this.

SPENCER MICHELS: The success or failure of deregulation across the country will depend partly on easy access to power transmission lines so that electricity can be transferred more readily to where it's needed. The federal government is working on that problem.