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March 2005 IBEW Journal

After the 2001 meltdown that sparked soaring prices and rolling blackouts, exposing Californias electricity deregulation plan as a gargantuan folly, state legislators temporarily disabled the law. Last fall, California Governor Arnold Schwarzenegger had a chance to stop electricity deregulation once and for all by signing a bill passed by the state legislature that revoked the market-based approach. The bill had the strong backing of the IBEW and many utility industry stakeholders.

Instead, he vetoed the legislation, paving the way for his own "hybrid" deregulation plan that has Californians suffering flashbacks from four years ago and observers wondering if its a signal of the national reemergence of electricity deregulation.

Californias flirtation with a new form of deregulation comes at the same time an influential conservative organization denounces it, and industry groupsonce restructurings largest backerschallenge it on the federal level. Many states are grappling with deregulations legacy: higher prices, less reliability and the possibility of another blackout like the one that struck the Northeast in 2003.

"Apparently we still havent learned the costly lessons of a market-based approach to delivering electricity," said IBEW International President Edwin D. Hill. "Garbage in new and improved packaging is still garbage."

Deregulations Toll on Utility Industry

Before utility deregulation came along in the early 1990s, electricity was a solid, steady industry. Regional utilities, which generally owned generation plants, were responsible for transmission and distribution to customers. Utilities petitioned for rate increases and permission to build power plants from state commissions. Customers received the power they needed and companies made a profit.

The Energy Policy Act of 1992 broke up the comfortable balance, allowing power producers to generate electricity and sell it to transmission companies. Electricity deregulation appealed the most to the Northeast and California, where electricity prices were high. Industry and government officials in such high-cost states found in the theory of electricity deregulation an alternative that offered competition, and thus the possibility of lower prices. It never worked.

The national legislation allowing for deregulation threw the system, so-called vertical integration, on its head. Electricity providers, sometimes hundreds of miles away from users, compete in the market to sell power. With a national law in place, each state went about crafting its own deregulation laws. In California, utilities were forced to sell their generation plants. Other states, particularly Southern states where electricity was fairly cheap, resisted deregulation altogether.

Deregulation offered more opportunities for profit taking and market manipulation than it did for lower prices for consumers. Utilities whose priority had once been to provide reliable service now were chiefly concerned with the bottom line. Accountants and corporate manipulators replaced longtime industry professionals heading utilities. Competition resulted in cost cutting. Worker training programs and maintenance budgets were slashed. The industry has lost 150,000 jobs since deregulation.

"The objective was no longer serving the customer, but making money," said Jack Casazza, a lineman and former utility industry executive now heading Power Engineers Supporting Truth (PEST), a group of 200 industry professionals formed after the 2003 blackout. "That was the real harm done by deregulation."

Casazzas group and the IBEW maintain that deregulation was the ultimate culprit responsible for the August 2003 blackout that shut down the grid in eight Northeastern states and part of Canada. In January, PEST published an in-depth explanation for the blackout titled "Blackouts and Blunders: The Failure of Electric Power Policies in the United States" that spreads the blame throughout the industry, from the government that has abdicated its responsibilities to the energy users, to the industry itself. The report also includes a list of recommendations to improve the reliability of the system.

PEST maintains the government investigation covered up the real reason for the blackout and warns that the system will face more outages if the industry does not confront the challenges that a market-based approach created: a shortage of qualified utility workers, maintenance budgets set dangerously low and a government-sanctioned environment that values profit-taking over service. The cost to consumers, Casazza estimates, is $30 billion a year.

"Our electric system is not that of a Third World country, but it could become so if market enhancement and market structure remain the dominant driving force," the PEST report says. "The authors of the Department of Energy blackout report, however, continue to worship at the altar of market forces. One only need look as far as California to have doubts about the ability of government and industry to set up and run an open and transparent market for electricity."

Even a libertarian Washington think tank believes that deregulation has been botched. In a policy analysis by the Washington, D.C.-based Cato Institute titled "Rethinking Electricity Restructuring," the authors recommend "total abandonment" of restructuring in its current form but a truer embrace of markets. Failing that, they offer a second-best alternative for "those states that have already embraced restructuring to return to an updated version of the old, vertically integrated, regulated status quo." The analysis is telling as much for its conclusions as its source. The Cato Institute champions limited government and free markets, two ideals utility deregulations proponents touted as beneficial both to consumers and electricity providers.

A group of large industrial users in Ohio, Pennsylvania, Connecticut and West Virginia have banded together to challenge the Federal Energy and Regulatory Commission for deeming the electricity prices deregulated providers charge the users "just and reasonable." And another complaint against FERC, the agency that oversees the industry, calls into question FERCs longtime insistence that market rates are just and reasonable.

"California proved to us that unregulated market rates are not just and reasonable because electricity providers manipulated the market," said IBEW Utility Department Director Jim Hunter. "Everyone including the utilities is now realizing that deregulation is a failure and that independent power providerswho only exist because of deregulationare the only ones who say we should move forward with it."

California Dreamin

The deeply flawed deregulation law in California required utilities to sell their generation plants, then buy electricity back from merchant generators at astoundingly high prices. Californias market manipulations by the likes of Enron and others are a well-documented failure that cost residents $70 billion. But four years later, Gov. Schwarzenegger is debuting a new variation on the old theme. His business-supported plan calls for a free-market, partially deregulated approach they say would spur private investment, lower prices and increase supplies. Critics are skeptical of Schwarzeneggers proposal to eliminate a rate cap that shields about 60 percent of the states smallest residential customers from the price hikes.

California IBEW members, unified under a 10-year-old group called the California Coalition of Utility Employees (CCUE), are watching closely. "Weve already been there. Its appalling they would even go down that path again after what happened a few years ago," said Diamond Bar Local 47 Business Manager Patrick Lavin, an International Executive Council member. "They damn near bankrupted the state."

Since the governor has twice vetoed legislation that would outlaw deregulation, CCUE and others have mounted an effort to take the issue to the people, in true California fashionas a ballot initiative. "We are gearing up for a big fight coming up here," Lavin said. "He may be the most popular governor we have ever had but he wont be very long if he continues to pursue deregulation."

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(This is the first of a two-part series on deregulation.  In April, we will investigate the utility industry's worker shortage.)

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