Deregulation Bites Back in California

"Why California needed to deregulate, it was all corporate greed--the big free-market ideologues,” exclaims Bernardo Garcia, Region 5 Director for the Utility Workers Union of America.

Labor unions across the world have argued that privatization and deregulation of essential services harm consumers and workers and put everyone at tremendous risk. Rarely are people like Garcia proved so obviously right.

California was the first state to aggressively adopt deregulation of the electrical industry.

Under the terms of deregulation, California taxpayers paid billions of dollars to the utilities for “stranded costs”--outdated nuclear power plants and other generating facilities. Utilities were forced to sell off 50 percent of their generating capacity, with incentives for greater divestiture.

Utilities would then buy power from the wholesale generating market. Consumers’ rates could not increase for a specified period of time, based on the amount of stranded costs that taxpayers had absorbed. San Diego, with the lowest stranded costs, was the first area to allow rate increases. Rates doubled and tripled early last year, leading to a consumer revolt, and the state imposed temporary rate caps.

Since then, wholesale rates have shot through the roof, but with consumer rates frozen, the utility companies are teetering on the verge of bankruptcy. According to the California Labor Federation, California paid $10.9 billion more for electricity last summer than the year before, and the state has struggled to keep the lights on.

“The main issue here is what kind of control is the public going to have over basic utility services,” explains Eric Wolfe, business rep in IBEW Local 1245 in San Francisco. “Deregulation attempted to sell the idea that the market could efficiently allocate electric resources. That is completely false. Traditionally, gas and electric resources have been provided by regulated utilities that had an obligation to serve the public. That is what has been lost--the obligation to serve.”

While your average Californian has only recently noticed the effects of deregulation, utility workers have seen this coming for nearly ten years. “From 1990 to 1998, there was a 27 percent decline in employment in electric utilities across the country,” says Garcia. In California, Pacific Gas & Electric alone downsized nearly 5,000 people in preparation for competition.

In response to the crisis, utility unions have formed the Coalition of California Utility Employees (CCUE) to lobby for re-regulation and to intervene in regulatory proceedings. On January 8 CCUE asked the Public Utilities Commission to prohibit any layoffs during this crisis, and the commission has asked the companies to demonstrate why layoffs would be justified.

Prior to CCUE’s motion, Southern California Edison eliminated over 1,400 jobs. According to Wolfe, “Axing those 1,400 people saved them enough money to buy five minutes of power a day on the wholesale market. These utilities could lay off their entire workforce and not come close to having enough money to buy power at today’s rates.”


Saving the utility companies from bankruptcy is one of CCUE’s primary concerns. “With bankruptcy,” Wolfe says, “the energy policy for California will not be determined by elected public officials but by a federal bankruptcy judge whose first allegiance by law is to the creditors and shareholders, not to the customers who need the power and not to the workers who provide it.”

Organizations such as Public Citizen have cautioned against a bail-out of the utility companies because of their extensive cash reserves--SOCAL Edison has more than a billion dollars on hand--but Bernardo Garcia says that cash is “nothing compared to the money they owe.” Wolfe concurs: “If you look at who is benefiting from unregulated markets, you will find some utilities, but overall you see unregulated power brokers are just making a killing. Follow the money if you want to understand what is going on in California.”

In late January CCUE sent dozens of rank and file members to lobby successfully for AB1X, a bill authorizing the state to buy long-term power contracts. The bill provides $10 billion in bond money to fund the measure and allows for rate increases as necessary. “We viewed it as unattractive, but it was the first step to averting a bankruptcy,” explained Wolfe. “The idea is to enable the state to bargain directly with power providers, hopefully at much lower prices. They have to stop the bleeding.” Prior to AB1X, the state quickly plowed through $400 million it had set aside to keep the lights on.



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The utility companies have not been innocent victims, however. In the midst of the crisis, they have tried to sell off several power-generating assets, although the Utility Workers Union has successfully intervened to prevent the sale. The percentage of power generation owned by California’s utilities must by law enter California’s grid at cost of production.

CCUE wants the industry re-regulated and to get the utilities back into the generating business. Explains Eric Wolfe, “You need somebody driving the bus, somebody that is responsible for forecasting demand, planning supply, and who can factor in vigorous conservation efforts and nurture growth of renewable technologies which will some day be needed to replace the fossil technologies. The market can’t do it. It can either be a regulated utility or it has to be done directly by the state, and sooner or later they’re going to figure that out.”


Free-trade pundits blame the crisis on not enough deregulation, since utilities have not been able to pass costs on to consumers, but two California cities point to a different answer.

Los Angeles and Sacramento both operate their own municipal utility districts (MUDs)--the residents of those cities own the power generation and distribution. These MUDs have managed to satisfy all their energy needs without raising rates. Garcia says the MUDs are producing at the same cost as five years ago, proving that too much regulation is not the source of the crisis.

Since the MUDs are publicly owned, they were not required to divest their generating capacity and have shielded their residents from the rolling blackouts and emergency alerts suffered by the rest of the state. This experience has led people in a number of cities to push for control over their local systems.

San Francisco owns its own generating plant in Yosemite, and there is a growing movement to create a San Francisco MUD. CCUE overall does not take a position on municipal takeovers, but IBEW Local 1245 opposes them, and the San Francisco Labor Council has a long-standing resolution against endorsing candidates who support public power. Wolfe explains the position: “If San Francisco was to municipalize today, overnight, they would be buying power in the same corrupted wholesale market as the utilities. the end they might not end up with any better deal for power.”

Perhaps more to the point, the IBEW “prefer[s] bargaining with private companies under the NLRA, than bargaining under state or local laws.”


CCUE has called on Governor Gray Davis to use eminent domain to seize power-generating plants. The California Labor Federation has adopted “ten points of consensus” on the energy crisis, beginning with avoiding bankruptcy and pushing re-regulation and ending with a call for the state to take control of generating plants if the crisis is not quickly resolved.

The Federation could arrive only at “points of consensus” because of differences between utility workers, who are among the highest paid union members and who have long participated in a “partnership” with their employers, and low-wage workers in SEIU and HERE, who are the hardest hit by rate increases. On February 5 Davis seized over $450 million worth of utility assets to prevent the sale of long-term contracts to circling creditors.

Utility deregulation is still proceeding in over a dozen other states. Texas approved deregulation in the midst of California’s crisis, and in Michigan, utility companies are running phone messages assuring consumers that rate hikes will be phased in gradually over time. There is a real risk that other states, instead of halting deregulation, will implement gradual hikes to accustom consumers to the new order of business.

“I think other states would be nuts to ignore the example that California has set,” notes Wolfe incredulously. “Don’t go this way. Danger ahead. Lights out, folks. Stick to what you know.”

While California’s example might not be enough to prevent deregulation in other states, the threat of state seizure of assets might be.

So far, the AFL-CIO has called only for stricter “standards of service and reliability,” but as California labor is realizing, more drastic measures may be needed.