[Congressional Record (Bound Edition), Volume 147 (2001), Part 7]
[Extensions of Remarks]
[Pages 10243-10244]
[From the U.S. Government Publishing Office, www.gpo.gov]


[[Page 10243]]

                CALIFORNIA'S RUINOUS DEREGULATION CAPER

                                 ______
                                 

                          HON. NORMAN D. DICKS

                             of washington

                    in the house of representatives

                         Thursday, June 7, 2001

  Mr. DICKS. Mr. Speaker, as the West Coast continues to struggle with 
its energy crisis, threatening the economy of the Pacific Northwest 
this year as well as the rest of the nation, I believe it is 
instructional for Members of Congress to review the problems 
encountered during the California deregulation effort in order to put 
the crisis situation into the proper perspective. A recent article in 
the northwest energy journal, Clearing Up, presented the issues in a 
clear and thoughtful manner, and I would like to take the time to share 
this viewpoint with my colleagues today. The article was co-authored by 
Stewart L. Udall, who served as Secretary of the Interior as well as 
Administrator of the Bonneville Power Administration, and Mr. Charles 
F. Luce, who was undersecretary of the Interior Department and later 
Chairman of New York City's ConEdison Electric Utility. It presents a 
sobering review of the mistakes that were made as California 
implemented its version of electric power deregulation, and I am 
pleased to submit this article for Members to read.

                California's Ruinous Deregulation Caper

               (By Stewart L. Udall and Charles F. Luce)

       California's ill-conceived experiment in deregulating the 
     generation of electricity has been an economic disaster for 
     the Golden State. This fiasco has burdened its two biggest 
     utilities with a $12 billion debt and left them teetering on 
     the precipice of bankruptcy. It has inflicted heavy losses on 
     businesses and agriculture that are dynamos of the state's 
     economy, and confronts homeowners with the prospect that, for 
     years to come, they will have to pay higher prices for their 
     electricity.
       The near-term outlook is bleak. Not only do summer 
     blackouts in California appear inevitable, but that state's 
     crisis is spilling over into four Pacific Northwest states 
     (Oregon, Washington, Idaho and Montana) that are linked to 
     California by a giant transmission system. Energy shortages 
     in the Pacific Northwest will be worsened because last fall, 
     despite drought conditions in the Rocky Mountain headwaters 
     of the Columbia River, the Secretary of Energy sacrificed 
     Columbia River hydropower reserves when he forced Bonneville 
     Power to draw down its reservoirs to help California avoid 
     further blackouts.
       Having led a West Coast-wide effort in the 1960s to build 
     the Pacific Coast Intertie (PCI) that ties together 
     electrically California and the Pacific Northwest states--and 
     gave them the most versatile and efficient electric power 
     system in the whole country--we are shocked and saddened to 
     find these states in the grip of a full-blown energy crisis.
       The PCI, built in the 1960s and since enlarged, links the 
     hydroelectric generators of the Columbia, the greatest power 
     river in North America, with the steam-power generators that 
     provide the bulk of California's electricity. PCI consists of 
     three EHV 500,000 kv alternating current lines and one EHV 
     1,100,000 kv direct current line. The pioneering direct 
     current line, stretching from The Dalles, Oregon, to Los 
     Angeles, is one of the largest and highest capacity d.c. 
     lines in the world. Altogether, the PCI has the capacity to 
     move up to 7,500,000 kw of power between the Pacific 
     Northwest and the length of California.
       Over the past 30 years, the PCI has been a bulwark that 
     helped keep electric prices low and increased reliability of 
     electric service in both regions. The economic and 
     environmental benefits flowing from the PCI have been 
     enormous.
       Initially, the PCI made possible Canada's ratification of 
     the U.S.--Canadian Columbia River Treaty after negotiations 
     had been stalled for more than ten years. It did so by 
     opening California's markets for British Columbia's 50% (1400 
     mw) share of Columbia River Treaty power generated at down-
     stream U.S. dams. California obtained a block of low-cost 
     non-polluting Canadian power, and the Pacific Northwest 
     received valuable flood control protection from Canadian 
     storage dams as well as its 1400 mw share of Treaty power.
       The PCI has continued to benefit both California and the 
     Northwest in many ways: exchanges of Northwest day-time 
     excess hydro capacity for California's night-time excess 
     energy; sale of surplus Northwest energy to California when 
     Columbia River flows peak in spring and summer; sales of 
     California wintertime surplus energy to firm up Northwest 
     hydro; and emergency back-up service for both regions when 
     disaster strikes. In the first ten years of its operation, 
     the PCI, in addition to other benefits, saved almost $1 
     billion in fuel oil that California's utilities did not have 
     because they could substitute surplus Northwest hydropower 
     that otherwise would have washed to the sea. Considering the 
     benefits from fuel displacement, and other benefits that can 
     reasonably be anticipated over the 50 year life of the lines 
     it will on average repay its initial entire capital cost of 
     $600 million for each of the fifty years.
       Until California's deregulation power and energy moved over 
     the PCI at prices regulated directly and indirectly by 
     federal and state governments. Now, with deregulation, many 
     intertie sales have no cap. California, desperate to keep its 
     lights on, is bidding up the price of electricity in all the 
     western states and Canada. Instead of being a boon to 
     consumers of both regions, the PCI, because of deregulation, 
     has become a key factor in pushing the price of Northwest 
     wholesale electricity to the highest levels in more than 70 
     years. California's deregulated wholesale electric energy 
     prices are siphoning power needed by the Northwest, causing 
     double-digit rate increases to Northwest consumers, closures 
     of electro-process plants, reduction of irrigated farming, 
     and excess draw-down of Columbia reservoirs that portends 
     summer power shortages and threatens Columbia River salmon 
     runs.
       We believe the chaos caused by California's deregulation 
     experiment raises profound questions about the future of the 
     electric power industry. It should force policymakers to 
     study the track record of our nation's traditional electric 
     power system. How did this seminal industry serve the needs 
     of our nation during the last century? Has it, overall, 
     provided reliable, low-cost electricity for its customers? Or 
     is it stodgy and outdated, a relic that is impeding the 
     advent of an era of low-cost electricity that will confer 
     widespread economic benefits for one and all?
       The panacea posed by the deregulators was a brainchild of 
     ``experts'' and consumer activists who, we believe, did not 
     sufficiently consider the eminently successful history of 
     this all-important business. It is our view that the 
     deregulators made a grievous mistake when they based their 
     hasty ``reforms'' on an assumption that the time-tested, 
     existing system could be dismantled overnight and replaced 
     with a free market substitute that in theory would benefit 
     all Americans.
       Any analysis of this issue must begin with a recognition 
     that the electric power industry is the most important 
     industry in the country. Unlike any other enterprise, it 
     affects the everyday lives and lifestyles of almost every 
     citizen, and provides the primary, irreplaceable source of 
     energy for America's businesses.
       Once it was apparent to the public that Thomas Edison's 
     inventions offered precious, wide-ranging benefits to 
     householders and businesses alike, a consensus developed that 
     insofar as possible, the price of electricity should be 
     reasonable and it should be universally available. (This 
     promise was not fulfilled until the New Deal era when, 
     through the Rural Electric Administration, the national 
     government made it a priority to bring power to the country's 
     farms, ranches and small towns.)
       The initial consensus soon enlarged into a pragmatic 
     concept that the surest way to keep costs reasonable and 
     fulfill aims of social equity was (a) to give local electric 
     companies an exclusive franchise, and (b) to pass laws 
     establishing state and federal regulatory agencies with 
     authority to control prices, scrutinize profits, and oversee 
     the decisions made by these companies to carry out their 
     responsibilities to their customers.
       As part of this service system that emerged, heavy burdens 
     were imposed on the power companies. In return for their 
     exclusive franchises, they assumed the legal obligation of 
     ``public utility responsibility.'' They were required to 
     operate efficiently and to respond with dispatch to the needs 
     and demands of the individual customers and communities they 
     served. They were likewise required to anticipate the growth 
     needs of their service area and to make whatever investments 
     were necessary to be prepared to take care of seasonal and 
     daily ``peak loads.''
       Such a rigorous regulatory regimen determined that the 
     electric power industry would concentrate on reliability and 
     be cautious and, above all, oriented to public service. Close 
     supervision meant that this enterprise was governed by 
     standards and expectations that did not apply to other 
     businesses. For example, although its executives bore heavy 
     community responsibilities, rewards were conservative: there 
     were no handsome bonuses and few stock options because the 
     system did not allow windfall profits or create banner years 
     when profits doubled or tripled. Indeed, the economic culture 
     of power utilities was reflected in the circumstance that the 
     prices of their stocks were steady and their stocks were 
     usually purchased by thrifty folk attracted by a tradition of 
     reliable, annual dividend payments.
       Because they had public franchises, electric companies were 
     confronted with performance standards few other industries 
     had to deal with. Electricity was so vital that utilities 
     were expected to be pillars who, in important ways, carried 
     their communities on their shoulders. With reliability as the 
     touchstone of their daily existence, companies can never 
     relax: the only failures the public might condone involve 
     outages or disruptions caused by supposed acts of God--and 
     even then, criticism mounts if the response of emergency 
     repair crews is not prompt and efficient.
       Implicit in deregulation, the local utility no longer would 
     have ``public utility responsibility.'' In fact, no one would 
     have utility

[[Page 10244]]

     responsibility. In its place, the ``invisible hand of the 
     market place'' presumably would assure a plentiful supply of 
     electricity at fair and reasonable prices. The profit motive, 
     it was assumed, would induce independent generators to 
     foresee the future demand for electricity and build the power 
     plants needed to supply that demand at reduced electric 
     rates--very risky assumptions.
       In the context of the California fiasco, Dr. Alfred Kahn, 
     an authority on U.S. business deregulation, recently put the 
     sui generis aspect of electric service in perspective when he 
     referred to the ``uniqueness of power markets.'' The trouble 
     with the theory that free-market competition might, in the 
     long run, deliver cheaper power to customers is, as we have 
     just seen in California, that such markets are inherently 
     volatile and people and businesses require uninterrupted 
     access to electricity.
       Even if benefits expected from deregulation are eventually 
     achieved, they may be unevenly distributed and may carry 
     heavy baggage. Independent generators almost certainly will 
     negotiate more favorable contracts with large customers who 
     will have superior bargaining power. The small customer, the 
     ordinary householder, will pay for the discounts granted the 
     large customers.
       Independent generating companies will lack incentive to 
     provide energy conservation (let alone finance conservation 
     as some utilities now do); their profits increase as sales 
     increase. Nor can they be expected to invest in community-
     building organizations and projects now supported by local 
     utilities. Relatively few independent generators may serve a 
     particular market; the fear of politically imposed ``price 
     caps'' (i.e. re-regulation) may scare others away. If that be 
     the case, price competition may be less than vigorous, and 
     the few independent generators that serve the market may be 
     tempted to increase prices by delaying construction of new 
     plants and by scheduling maintenance outages to stimulate 
     price increases. Further, they will be tempted to build new 
     units that are the least expensive and quickest to build--
     ignoring the public interest in assuring diversity of 
     technology and fuels. Already in California where virtually 
     all new power plant construction will be gas-fired turbines, 
     there is serious concern that supplies of natural gas will 
     not be sufficient either for these plants or for the rest of 
     California's economy.
       It is significant that Los Angeles, whose municipally-owned 
     electric utility was exempted from deregulation, has not been 
     damaged by the deregulation rampage in California. It is of 
     far greater significance that today, U.S. regulated power 
     companies provide overall service whose prices and 
     reliability provide an example envied by the rest of the 
     world.
       Decision-makers also should bear in mind the possibility 
     that technology may make unnecessary the drastic deregulation 
     of the type California has found so disastrous. Fuel cells 
     that convert hydrogen to electricity without any pollution, 
     and that can be built in small modules, appear to be close to 
     commercial viability. Small gas turbines are also said to be 
     coming on the market. Solar and wind technology may become 
     attractive for small as well as large applications. These and 
     possibly other new technologies hold promise of giving 
     consumers, large and small, choices of installing their own 
     on-site generation. Without unnecessarily disrupting the 
     traditional organization of the utility industry, self-
     generation and the competitive threat of self-generation, 
     could give electric utilities competition that would achieve 
     the benefits claimed for deregulation.
       Experience cries out that it would be wise for the nation 
     to pause and ponder all alternatives before further 
     deregulation experiments are undertaken.

     

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