You’ve already received your first electricity bill for the winter and, damn, it’s high. Sure, it’s a little colder this year than last year, but that’s not the reason for the big increase. You can blame that on the free market.
Energy utilities have always operated under several layers of regulation to ensure an even distribution of power to everyone at all times. Not everyone pays the same price–large businesses often broker deals with energy companies that ensure them cheaper rates than you or I pay–but everyone usually pays a reasonable rate. Likewise, everyone has access to heat or lights with a simple flick of a switch; we don’t suffer brown-outs or rolling blackouts, like some areas of the Third World. This is accomplished under the oversight of the Federal Energy Regulatory Commission, whose sole responsibility is to regulate energy supply. The FERC falls under the Department of Energy.
But the Department of Energy and the FERC have long been under attack by oil, gas, and coal-extracting companies and power-generating firms. They don’t like it that a government agency can limit their profits. Under heavy lobbying, some legislators have begun to discuss downgrading the DOE from its cabinet-level position.
There are two levels to the power industry. There are power-generating companies–those firms that produce power by burning gas, oil, or coal or through hydroelectric dams, nuclear power plants, windmills, solar cells or other sources–and power-delivery companies (usually referred to as utilities), whose main role is to buy power from the power-generating companies, resell it to the public, and deliver it to your home or business. Some companies, like our local Puget Sound Energy, can do some of both, but for the most part companies specialize in one or the other.
Power-generating companies sell their power on the wholesale market to utilities and large, commercial customers, like Boeing and Kaiser Aluminum. Often these sales involve long-term contracts of several years duration with fixed prices, but not always. Sometimes, to meet extra demand because of a cold winter or very hot summer, utilities have to buy extra power on the “spot” market, at a price that’s higher than their contractual price.
Contracts between power-generating companies and utilities are governed by regulations, and utilities are limited in how much they can charge their customers. Rate increases have to be approved by state regulatory bodies. But power purchased on the spot market is not regulated. The spot market functions like a free market: anyone can buy from anyone else, and the price fluctuates according to demand. Until recently, the spot market has been small, and the prices reasonable, but deregulation has changed that.
Under FERC regulations, Washington State utilities are required to sell excess power generated in the summertime down to California utilities to power their air conditioners. In the wintertime, California utilities are supposed to sell their excess power back to us to run our heaters. This year, however, that neat equation completely broke down.
As you can probably guess, most of our “excess” power is produced by river water flowing through hydroelectric dams. But our dry summer and autumn left us with almost no excess power to sell to California. This left California’s three major power companies in a bind; they were forced to buy enormous amounts of power on the spot market, driving up the price. To push the price even higher, California power-generating companies took a lot of their power plants off line for “unscheduled maintenance”; consequently, they made out like bandits, selling extravagantly expensive power from a few generators. Spot prices, which have hovered around $20 to $30 per megawatt hour in recent years have shot up to as high as $5,000 per megawatt hour this year, and have hovered at the $500 to $1,000 range for days on end.
This is driving California’s three major utility companies to the edge of bankruptcy and is straining the pockets of Washington utilities, too. Washington power-generating companies, which now have a good supply of water behind their dams, are not eager to sell power to California utilities that don’t have the cash to pay. Earlier this month California declared an unprecedented Stage Three alert, when its power reserves fell below 1.5%, leaving the state on the brink of brown-outs.
The FERC stepped in and put a $150 price cap on energy sold in California. Washington utilities immediately protested, because prices have remained much higher here. Energy Secretary Bill Richardson has ordered Washington power plants to sell power to California utilities, regardless of their ability to pay, and this could make Washington prices climb even higher. Meanwhile, the California Public Utility Commission voted to sharply raise electricity rates in California to pay the more than $8 billion debt run up by California utilities buying power on the spot market.
Clearly, in California the free market has made billionaires of power-generating companies at the expense of the public. Free market promoters like to say that deregulation solves all problems and leads to better service and cheaper prices for everyone. That’s bullshit. More than half the states in the US have made some moves towards a deregulated energy market. A study done in March by the DOE shows that the power-generating companies and utilities in these states are more focused on their profit margins than on service, and power distribution has suffered as a consequence.
Forget California for a moment and let’s look in our own backyard. Rising power rates have forced a number of manufacturing companies to close down portions of their operations; these companies (Georgia-Pacific, Boeing, Equilon, Tesoro, and others) thought that the onset of deregulation would make prices fall. Instead of signing long-term, fixed-rate contracts, they decided to buy all of their power at spot rates. Now they can’t afford to pay power bills that have run as high as $60,000 per day.
Sure, it was a stupid move on their part to believe the free market rhetoric. But let’s not be smug; deregulation effects us, too. Seattle City Light has to buy a portion of its power on the spot market, particularly in the winter. Because of an increase in population and the high energy demands of the high-tech industry, that need is increasing, and our rates will increase accordingly.
In the meantime, local power generation won’t expand quickly enough to meet the need. Dryer summers and the need to spill water over dams (or dismantle some of them) to save endangered salmon will constrain hydroelectric sources. Who will build coal-fired and gas plants that may have to stand idle for most of the year, except for during the dry season? And do we really want these polluting sources of energy? If anything, there’s a crying need for more regulation, including a push to build clean energy sources, like windmill farms and solar generators.
Instead, we have criminal companies like Kaiser Aluminum, which is in a unique position to benefit from the whole deregulation boondoggle. Kaiser, you will remember, is the company that locked out its steelworkers in an effort to break the union. Kaiser is also one of a few aluminum companies that buys the bulk of the power generated by three Snake River dams that environmentalists want to breach. Kaiser has a sweet deal with the Bonneville Power Administration (BPA); its fixed contract allows it to continue to buy power at $22.40 per megawatt hour. A Kaiser company accountant figured out that Kaiser could make upwards of $52 million by laying off its workers and paying them reduced salaries, closing down the plant, and reselling its power back to the BPA at spot rates. This is piratical. No one should be able to steal money like this–but trust a company owned by Charles Hurwitz (who’s happily making a killing logging California’s last old-growth redwood trees) to take advantage of your need to heat your home in the winter.
Hurwitz is a free-market winner; you and I are the free-market losers. This energy deregulation madness needs to stop now and be reversed as soon as possible.