Be Wary of Deregulation

Next time some major industry starts talking about the glories of deregulation, consumers should hold tightly to their billfolds.

The rush to deregulate has intensified over the past 25 years as lobbyists for airlines, cable television, financial institutions and telephone, natural gas and electrical utilities have succeeded in convincing compliant local, state and national legislative and regulatory bodies to let corporations escape consumer protections.

These well-financed campaigns for deregulation invariably are centered around grandiose claims about consumer benefits of “free market” competition. Against an onslaught of high-powered corporate lobbying, warnings and questions from citizens groups are either ignored or buried as after thoughts in news stories and legislative hearings. All too often the rosy scenarios about “consumer benefits” have faded into horror stories of higher prices and poorer service and taxpayer-financed corporate bailouts.

California, the nation’s most populous state, has become the “poster child” for electric utility deregulation gone bad. A 1996 state deregulation plan which was supposed to make electricity cheaper has resulted in vastly higher energy costs for consumers and businesses. California residents and businesses paid nearly 11 billion dollars more for electricity last summer than the previous year. The state now faces the possibility of power shortages manipulated for price maximization. This possible manipulation was pointed out by the California Public Utility Commission last summer.

Even California’s current Democratic Governor, Gray Davis, who has tiptoed cautiously into the controversy, calls the state’s deregulation “a colossal and dangerous failure.” But, now the big question is how the mess is to be cleaned up and, more important, who pays?consumers or the big utilities which promoted the deregulation scheme in the mid 1990s?

Two investor-owned utilities–Southern California Edison and Pacific as and Electric have turned their public relations and lobbying teams loose around the state with sob stories about their financial plight. Lurking behind all the corporate hand-wringing is the hope that the politicians can be cajoled into providing a bailout financed by the taxpayers. High on the corporate wish list is authority for a bond issue to be financed by consumers through higher electric rates a scheme that would burden electric rate payers for years to come.

The Governor has called for the establishment of a California Power Authority and more state control over power generated in the state along with increased production and conservation measures. As yet, he has not
endorsed the utilities’ bond scheme, but the final chapter on the utility lobbying efforts will be written in a special session of the state legislature.

What should make California consumers (taxpayers) nervous is Governor Davis’ inordinate concern about the possibility that the investor-owned utilities might be required to face up to their mistakes in a bankruptcy. “I reject the irresponsible notion that we can afford to allow our major utilities to go bankrupt,” Davis told the legislature in his annual “State of the State” message. “Our fate is tied to their fate.” That is the kind of dangerous philosophy that, too often, has fueled the costly idea in state and federal governments that the taxpayers are responsible for bailing out the mistakes of corporations. Contrary to the fears stoked by the utilities, the companies will not disappear in a bankruptcy. The corporate entities simply will be restructured with new management under supervision of a Bankruptcy Court. There may well be losses for the shareholders, but that risk is part of being an investor in our economic system.

At least one California consumer organization The Foundation for Taxpayer and Consumer Rights has come up with data that suggests that the utilities have vast world-wide assets that could more than cushion their financial problems in California without reaching into consumers’ pockets for higher rates and a bailout.

As Harvey Rosenfield, president of FTCR, said: “Edison Can Bail Itself Out.”

Figures compiled by Rosenfield show that Edison International’s assets are valued at $37.9 billion. Rosenfield says that some of these assets like Edison’s Massachusetts’ trading affiliate ($45 million), the logo on the Anaheim Angels’ baseball stadium ($25 million), investments in Mission Windpower Italy, B.V. ($43 million), a 40 percent stake in Contact Energy, New Zealand ($676 million), and plants purchased from Commonwealth Edison of Illinois ($4.9 billion), among others – should be sold before the well being of the company becomes the responsibility (“fate” in the words of Governor Davis) of California
taxpayers. The consumer advocate also urged the company to cut the bloated salaries of its top executives ($7.5 million) and $371 million of shareholder dividends as further buffers against bankruptcy.

Consumers should not be coerced into a monstrous bailout as this electric drama unravels in California. It will be interesting to see who stands up for the consumers against the utilities in California. California has an opportunity to set an example for the nation an example which establishes clearly that consumers should not be required to pay for failed deregulation schemes, corporate mistakes and greed. Citizens in other areas of the nation should realize that their states are not immune from the type of deregulation disasters that have
befallen California.