The Irascible Professor^SM

We thought, because we had power, we had wisdom. ... ...Steven Vincent Benét...

Commentary of the Day - January 19, 2001:  Power to the People!

As things have gone from bad to worse in California's power crunch, we at Krispy Kreme U. have been sitting here in the cold and dark wondering what ever happened to the "golden" state.  Lately, we have begun to look like some kind of a third-world country.

It seems that the bumpkins in the state legislature up in Sacramento led by our former governor "Sneaky Pete" Wilson were taken in by the siren song of deregulation, and in their infinite wisdom they decided to deregulate the investor-owned electric utility companies here in California.  Little did they cogitate on the effects of prior deregulation schemes.  (The savings and loan debacle and airline deregulation come to mind.)  But, buying into the argument that deregulation would lead to lower electricity bills for the average consumer, they passed a scheme that has nearly brought the economy of the state to its knees.

Under this loony plan the three major private electric utilities were required to divest themselves of their electric generating plants over a period of a few years.  The idea was that the utility companies would no longer control both the generation and delivery of electric energy.  Instead, they would simply be responsible for the delivery of electricity produced by independent owners of generating capacity.  Supposedly, competition between these independent suppliers would lead to electricity being available at lower rates to both large and small consumers.

The geniuses in the state legislature overlooked one small issue.  Namely, under divestiture the power plants would end up in the hands of companies based outside California, who could then sell their power to the highest bidder anywhere in the land.  At the same time, the three California power delivery companies were limited in what they could charge customers for electricity for varying periods of time, and they were limited in their ability to enter into long-term agreements to buy energy.  This past summer San Diego Gas & Electric was allowed to pass through its actual cost for energy to its customers, and bills for many consumers skyrocketed.  Pacific Gas & Electric and Southern California Edison still are constrained in what they can charge consumers for the power they deliver.

As the cost of electric power in the spot market has jumped owing to a lack of generating capacity in the West, both P.G. & E. and S.C.E. have been bleeding cash at astronomical rates.  As their debt loads rise into the billions of dollars, both companies teeter on the edge of bankruptcy while many suppliers of electricity withhold their available excess power from the California grid.  In northern and central California rolling blackouts have been in effect for the past 48 hours.  Here in southern California we have been on the brink, but thanks to the willingness of the publicly owned Los Angeles Department of Water and Power to sell their excess generating capacity the lights have remained on - barely - for Southern California Edison customers.

What's all this have to do with education?  Well, first of all it's a great education in basic economics.  The free market works well when there is real competition, but some business - like the electric power business - are natural monopolies.  The market isn't free for them.  There was a reason why these utilities were regulated in the first place.  Duh!

Second, it shows how gullible education management is.  Many colleges and universities in California signed up with P.G. & E. and S.C.E. for extra low electric rates under contracts that allowed the utilities to drop them from the grid (or charge them exorbitant rates) at times when power is in short supply.  Locally, some campuses of the California State University system have had to cancel classes and close down completely as a result of the power crisis.  Here at Krispy Kreme U. faculty and staff have been sent home early every day this week, so that the campus can reduce its electric energy consumption.  It seems that when the universities and colleges entered into these contracts they were looking backward at the reliability of a regulated utility environment, and not forward to the "brave new world" of deregulation.

Here in Orange County, which seems to have a unique ability to find less than stellar investment vehicles for its public funds, we have learned that the County Treasurer's Office in a brilliant move recently bought $40-million worth of Southern California Edison Co. notes for the county's school district investment pool.  So much for lessons from Orange County's recent bankruptcy.

The final lesson to be learned is that well-run and well-regulated public electric utilities have weathered this storm in a much better fashion than their private counterparts.  Let's hope that the Governor and the state legislature will repair this unworkable deregulation scheme.

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©2001 Dr. Mark H. Shapiro - All rights reserved.