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Energy Crisis Bares Libertarian Myth of Deregulation

  • The Libertarian belief in the benefits of deregulation that borders on the religious has been exposed as a myth in California's first free market experiment in the energy industry.
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By Christopher Bollyn

The California utility disaster offers an object lesson in the consequences of "libertarian deregulation," which opposes any government regulation of business. If the trend to deregulate utilities is not reversed the consequences will be catastrophic for America.

While the traditional Christian beliefs of President George W. Bush's nominee for attorney general, John Ashcroft, have drawn a great deal of media attention, a more threatening dogma to which the new administration is wholeheartedly devoted is accepted without question by the mainstream media: the libertarian doctrine of deregulation.

The baneful effects of the libertarians' bad religion have devastated California utilities and looted the state's economy of billions of dollars. Many of the energy suppliers behind the on-going utility crisis in the Golden State are senior sponsors and advisors of the new administration.

The new president is an acolyte in the church of laissez faire economic theology, but he is well supported and coached by the high priests of free market orthodoxy.

Top executives of several of the energy-generating companies, including Enron, Dynegy and Duke Power, participated in closed-door negotiations to resolve the California utility crisis in which they were expected to strongly defend their pricing practices and reject charges of price gouging.

One participant in the intense negotiations is natural gas executive Kenneth Lay, a long-time friend, donor and adviser to Bush.

Lay, a possible Bush nominee for energy secretary, is chairman of the Houston-based natural gas pipeline company Enron Corp., the energy company that has been Bush's biggest financial backer throughout his political career. Lay was part of a large group of outside advisers involved in shaping Bush's energy policy and is serving on an energy policy advisory committee that Bush assembled for the transition.

California Gov. Gray Davis (D) called the energy suppliers "pirates, marauders, gougers and greedy profiteers," according to The Los Angeles Times.

The governor's harsh criticism raises a valid question: Have the electricity suppliers who own California's power plants colluded to increase profits in the state's deregulated market?

The generators, almost all of which are headquartered in the South and South west, say they have adhered strictly to the law and have not manipulated the market, either individually or in concert.

"Those charges have clouded the issue for the better part of the year 2000; they continue to cloud the issue," said Richard N. Wheatley, director of communications for Houston-based Reliant Energy. "It's the buyers who drive up the price.... It's like a buying frenzy."

Government and private researchers, however, have concluded that California's deregulated energy market has been manipulated to keep energy prices substantially higher than the cost of production to increase corporate profits.

Researchers with the Federal Energy Regulatory Commission found that "the market was artificially distorted" by the power suppliers who decreased the power supply in order to maximize profits when demand increased.

Wholesale power sold on California's spot market briefly soared above $1,000 per megawatt hour but has come down to around $320 per megawatt hour -- still expensive compared to $34 per megawatt hour one year ago.

One of the reasons for soaring prices is the critical shortage of power plants in California while the state's energy needs are growing.

Under the 1996 state law that deregulated the sale of electricity in California, the utilities were encouraged to sell off their power plants and begin buying electricity on the "free market" -- including from the companies that now own their old plants.

However, when California desperately needed power last summer, federal investigators found generators exporting power by selling electricity to marketers elsewhere in the country. Those buyers could then sell it back to California when the prices climbed due to dwindling supply.

In fact, more power was exported to other states from generation plants in California last year than in 1999.

Power plant operators usually shut down many of the generators for maintenance between January and April so they can run full throttle during the hot summer months. This upkeep is especially important in California, where 82 percent of the generators are more than 30 years old. But last year, for reasons federal officials have yet to determine, preventive maintenance plunged nearly 40 percent.


Many researchers cite a sharp increase in unscheduled plant shutdowns and unusual production cutbacks that dried up California's energy supply and helped push prices skyward -- as much as fivefold, draining cash from the state's big utility companies.

As the demand for power increased due to the need for air conditioning during the heat of summer, plants unexpectedly began shutting down. Lost wattage virtually quintupled in August compared to the year before.

Researchers for the Federal Energy Regulatory Commission said in a Novem ber report that the cuts could have been caused by equipment breakdowns in aging facilities, but they hinted that the shutdowns were calculated to reduce the supply of power available in order to drive the prices higher. The federal re searchers noted that when prices climbed to more lucrative levels, the outages suddenly ended and the plants sprang back to life.

Last week, the major California utility companies announced job cuts.

Pacific Gas & Electric (PG&E) officials said they would have to immediately cut 325 jobs, and possibly 675 employees over the next few months, to save money.

Southern California Edison (SCE) announced even bigger cutbacks. On Jan. 5, SCE said it planned to lay off 1,850 employees -- or 13 percent of its workforce.


Bush, a devout free-trader who campaigned on the promise of expanding NAFTA from Alaska to Argentina, made good on his promise by nominating Robert B. Zoellick to be U.S. trade representative.

Zoellick "is a free-trader on a mission," according to The Washington Post, who had "a direct hand in negotiating free-trade agreements with Canada and Mexico and clearing the final negotiating hurtle to the creation of the World Trade Organization. Now he wants to negotiate free trade with Europe and the rest of Latin and South America."

Zoellick might have a hard time convincing Californians that "free trade" in the energy markets has made them stronger or is any improvement over regulation.