Proposition 9: A Greenlight for Sustainable Energy in California

September 1998

The outcome of the battle raging in California between corporate concerns and public interest advocates over the bailout of the state's nuclear utilities will have far-reaching impacts on both consumers and the environment. The full environmental cost of providing California's investor-owned utilities with a $28.5 billion dollar bailout for their uneconomic investments, as mandated by California's deregulation law, will have longlasting effects on our natural resources and the democratic process.

The good news is that it is not too late to stop this egregious nuclear bailout. In November, voters will have the opportunity to say no to the portion of AB 1890, California's deregulation law, that provides for a bailout of the state's nuclear power plants. Proposition 9 does not affect funding for renewable energy, energy efficiency or low-income programs. It does repeal approximately 40 percent of the total bailout - the money that subsidizes nuclear power, opening the way for a renewed commitment to sustainable energy. Well-known advocates like Ralph Nader and David Brower are supporting passage of Proposition 9 and your support is needed as well.

The importance of this issue does not end in California. Because both federal and state policymakers are waiting to see if Proposition 9 passes, the effects of the debate will ripple across the nation. The utilities, now called Energy Service Providers in California, are using all of their political muscle, as well as fear tactics, to defeat Proposition 9. It is absolutely critical that the environmental community understand how large the stakes are in this debate. Voting to stop the bailout is not only good public policy for consumers, who are being ripped off once again by greedy utilities, it is good environmental policy. Proposition 9 is the most viable and effective means of reopening the debate concerning the environmental effects of deregulation and is the first step in rethinking how utility deregulation will ultimately affect environmental quality.

"Free Capital" for Investing in Dirty Power

The relationship between the bailout of Pacific Gas and Electric (PG&E), Southern California Edison (SCE) and San Diego Gas and Electric (SDG&E) and the threat to the environment is manyfold. Bailouts set the stage for a handful of incumbent utilities and their subsidiaries to dominate the electric industry, preventing competition and impacting environmental quality through bad investment decisions at home and abroad. Bailouts provide utilities with money that can be used to fund mergers and buy-outs and the development of new power projects. As a San Diego Gas and Electric Company vice president said, the bailout will provide "free capital" for the California utilities. The money is already being used by the utilities to increase their enormous market power. As these utilities become larger and their business deals become transnational, they will be less and less accountable for their bad environmental practices.

Market power is one of the least understood and underemphasized issues raised by deregulation. It refers to the ability of a single company (or small group of companies) to influence price, product quality or product quantity in ways that inhibit competition. Besides the impacts on consumers, which include price gouging, cost-shifting to residential customers and red-lining low-income communities, market power also may translate into delayed innovation in sustainable energy technologies. Bailouts increase the problem of market power by providing utilities with huge war chests of cash - money readily available to purchase competitors, buy dams and dirty coal plants, subsidize the operation of nuclear plants, build polluting power plants in developing countries and increase market domination generally.

It's clear that California's utilities are thriving financially as a result of the recent bailout of their bad investments. For example, Edison International (EIX), the parent holding company of Southern California Edison, reported increased earnings in 1998, primarily due to improved performance at SCE. In EIX Power Advantages: The Power Investment, the company reported that their cash flow will be "significantly enhanced" by the accelerated recovery of generation assets (i.e. through the "CTC" bailout charge) and the rate reduction bonds used to refinance SCE debt, both paid for by consumers. This "enhanced" economic position has already begun to translate into questionable investments at home and abroad.

Dirty Power Plants Overseas

The financial boost to Edison International not only helps SCE, it has provided financial support for SCE's sister companies like Edison Mission Energy (EME), the subsidiary responsible for Edison International's global power production. The projects owned and under construction by EME include conventional fossil fuel plants, pump storage systems and hydroelectric dams. Clearly, the company is not using its resources to promote the commercialization of renewable energy projects around the world. Even in countries like Thailand, the Philippines and Australia - excellent candidates for smaller renewable energy projects - EME is making a large financial commitment to huge, polluting electric plants and sprawling networks of transmission lines. Among the projects under construction are the 734-megawatt coal-fired Kui Buri project in Thailand, the ISAB Energy oil-fired power plant in Italy and the 1,230 megawatt coal-fired Paiton project in Indonesia. EME has signed a power purchase agreement for the 304-megawatt oil-fired San Pascual project in the Philippines and owns Loy Yang B, a 1000-megawatt coal-fired project in Australia.

Questionable Investments at Home

Meanwhile, PG&E subsidiaries are actively purchasing domestic power plants outside of California, investments that are sure to be spurred by the recent infusion of "free capital" financed by consumers. In August 1997, PG&E's subsidiary, U.S. Generating Company (USGEN) won a $1.6 billion bid to purchase 18 power plants, originally owned by New England Power Company and divested as a result of deregulation. Three of the plants purchased by USGEN are coal-fired plants. The other 15 are hydroelectric dams on the Connecticut River - recently designated as an "American Heritage River." As a result of the deal, the water draining from two-fifths of Vermont's watershed and one-third of New Hampshire's is slated as "free fuel' for a corporation with little or nothing at stake in the environmental or economic welfare of either state.

Ironically, PG&E itself owns dams in California which are up for relicensing and soon for sale. The hydro reform group Friends of the River has already expressed concerned about PG&E's lack of cooperation on environmental issues during the relicensing process for a PG&E dam on the North Fork Feather River.

The California relicensing process raises justifiable concerns about the company's future operation of its new dams on the East Coast where the economic pressure to keep down costs is tremendous. The situation is not unique to the PG&E subsidiaries. As more utilities divest their generation capacity, new out-of-state owners located in distant cities are likely to be much less accountable and much less responsive to local concerns.

SCE is also acquiring more generation capacity on the East Coast. Earlier this month, EIX announced that its unregulated subsidiary, EME, will purchase a grandfathered, high-polluting, coal-fired plant east of Pittsburgh for $1.8 billion. The Homer City plant is a low-cost producer selling electricity into two huge eastern power pools, the New York Power Pool and the Pennsylvania-New Jersey-Maryland Power Pool. According to Edison, the power plant has a book value of $450 million, meaning that Edison is paying 4 times the book value of the plant to gain access to these lucrative markets.

The fact that EME is willing to put this type of money on the line means that it believes that coal will be more competitive than gas in the Northeast, leading to increased production - and pollution - from these dirty plants.

The Homer City plant, in particular, was featured prominently in U.S. PIRG's recent report, "Lethal Loophole," that identifies power plants producing emissions above what would be emitted by new power plants that comply with the Clean Air Act. Based on 1997 data, the Homer City power plant ranks #8 in the nation for excess SO2 emissions, producing 130,280 tons more SO2 than a new power plant would produce. The plant ranks #33 in the nation for total CO2 emissions, contributing 13,745,174 tons of the pollutant primarily responsible for global warming to our atmosphere.

As a result of its purchase of the Homer City plant, Edison Mission Energy is now the proud owner of one of the dirtiest power plants in the nation - a plant that should be shut down in the near future. Instead of closing the plant, EME plans to improve it, making it too expensive to shut down. According to Edison, it will install selective catalytic reduction on the plant's three units to bring it up to new source standards for NOX and will install a scrubber on one unit to lower emissions of sulfur dioxide. But, at the same time, the company plans to use cheaper coal containing more sulfur, eliminating any substantial benefit to the environment. The proposed technologies will do nothing to lower CO2 pollution and could even increase it through efficiency losses caused by the new scrubber. Edison's plant improvements will add to the life to the Homer City plant while doing nothing to reduce emissions causing climate change. Given the infusion of new capital into Edison as a result of deregulation, the company's ready transition in to coal-fired plants should trouble any environmentalist committed to closing coal plants and moving toward a renewable energy future.

Monopoly Power Increases Ability to Influence Environmental Policy

Besides providing California's incumbent utilities with "free capital" to invest in dirty power plants, the bailout enables the companies to increase their monopoly power by merging with competitors. Electric utility analysts predict that after deregulation, we will be left with fewer than a dozen big corporations that control electricity. This does not bode well for consumers or the environment. Large corporate interests already dominate political decision making through the use of campaign contributions that amount to nothing more than legal bribery. Companies like EIX and PG&E use contributions to influence policy on a range of issues, including deregulation, dam relicensing, nuclear waste disposal, endangered species and the rollback of environmental regulation.

Unfortunately, California's utilities freely use their political influence to weaken environmental laws. SCE generates approximately 11 percent of its energy for the California market at large coal-fired power plants in Shiprock, New Mexico, and Laughlin, Nevada, and actively fight environmental regulations that threaten this generation capacity. SCE owns 55 percent of the Mojave Power Plant a 1600-megawatt coal-fired plant in Nevada with no pollution control equipment! Emissions from the Mojave plant greatly impair visibility in the area around the Grand Canyon and its 273-mile slurry pipeline wastes a billion gallons of precious water. So while SCE's sister company Edison Source is busy marketing EarthSource, a renewable energy product available to residential and small businesses, SCE is selling power into California from one of the dirtiest and least efficient coal plants in the country.

SCE's bad environmental track record at its San Onofre nuclear power plant is also well-documented. The company spent two years and large sums of money fighting the California Coastal Commission's mitigation plan for protecting coastal areas near the plant. Even after six billion fish larvae were destroyed at the plant and funding was collected from ratepayers for mitigation, SCE tried to pocket the money rather than protect the fragile coastal ecosystem. More recently, SCE worked furiously behind the scenes to kill an extension of federal tax credits for wind power projects.

These are just a few examples of how one company that touts its environmental excellence actually behaves when there is a profit to be made. These companies cannot be allowed to increase their already mighty political power. Their campaign contributions make an enormous difference in the outcome of public policy debates, as evidenced by the passage of AB 1890. The unwarranted increase in financial and political power represented by the nuclear bailout should not pass unchallenged.

Nuclear Power's Ugly History in California

The core of AB 1890 was the politically expedient decision agreed upon by the major energy interests in the state to force residential and small business ratepayers to subsidize the continuing costs of uneconomic nuclear and other power plants that have raised the price of electricity in California to 50 percent above the national average. The cost of the bailout appears on consumers' utility bills as a "competitive transition charge (CTC)." The utility companies claim it is fair to force their customers to bear these costs. They insist that the California Public Utilities Commission (CPUC) forced them to build the plants, and that it is therefore unfair to hold them and their shareholders accountable for their mistakes.

However, this "they made me do it" defense does not match reality. In the case of nuclear power plants in particular, their construction was strenuously opposed by environmental, clean energy and community organizations when they were proposed. Utility company and nuclear power executives fought for the plants and brushed aside the legitimate concerns and objections raised by scientists, economists and citizens. They forced the nuclear facilities down the throats of consumers and environmentalists. In the case of Diablo Canyon, CPUC never approved construction costs as reasonable or prudent. Instead, a settlement allowed the utility to recover costs by inflating the cost per kilowatt hour of Diablo power. As predicted, the plants ultimately incurred massive cost overruns. Nuclear energy was promised to be "too cheap to meter." But as California's experiment in nuclear power continues to unfold, Californians are being asked to pay a total price tag for Diablo Canyon of approximately $25 bllion and another $25 billion for San Onofre. These total lifetime costs include construction, operation, and management (salaries, fuel, taxes, administrative, etc.) for the entire life of each reactor. Indeed, in the mid 1980s, the public advocacy arm of the PUC unsuccessfully recommended that 80 percent of the cost of Diablo Canyon construction ($4.4 billion) should not be passed through to ratepayers. Yet under AB 1890 and related PUC decisions, investor-owned utilities actually accelerated their full recovery for nuclear development and maintenance.

The nuclear bailout is not only unfair, it will prove to be a devastating blow to the environment. By forcing ratepayers to pay off the utility companies' most expensive mistakes, the bailout renders conservation and other renewable resources uncompetitive. With no renewable energy programs in place, manufacturers and other industrial users are encouraged to rely on cheaper electricity - in effect subsidized by smaller ratepayers. And, in the words of EIX, the "significantly enhanced" cash flow provided by deregulation has allowed the utilities to begin a new chapter of bad investments in dirty power here and overseas.

Proposition 9: A Crossroads for Sustainable Energy in California

It is ironic that California, with its rich history of commitment to sustainable energy policy, continues to be the battleground for the struggle over the fate of the electric power industry. Proposition 9 addresses the most serious immediate problem created by California's deregulation law - the egregious nuclear bailout - but it is important to understand the other anti-environmental public policies reflected in the current legislation. Public Citizen firmly believes that Proposition 9 is the first step ingetting California back on the road to a sustainable energy future and will create the vital political base needed to correct the many other flaws in California's deregulation scheme. One of the most objectionable aspects of the political process that resuilted in the passage of AB 1890 was the complete lack of public discussion and consideration of environmental values. Proposition 9 is the most viable and effective means of reopening the debate concerning the environmental effects of deregulation and readdressing the serious environmental consequences it engenders.

To understand how Proposition 9 opens the way for a renewed commitment to renewable energy, environmentalists must understand why deregulation of California's electric industry represented yet another step backward for sustainable energy policy. In the 1970s and 1980s, California was the national leader in developing public policies to promote the growth of sustainable energy technologies. Between 1983 and 1990, renewable energy grew to 15 percent of California's electric supply, totaling 5,000 megawatts. If the movement towards utility deregulation had not taken place, the CPUC's mandated set-aside for renewable energy would have brought on-line an additional 500 MW of renewable energy, boosting California's existing wind energy capacity by 60 percent. Instead, since 1994, renewables have dropped from providing 12 percent of California's power to under 11 percent in 1997.

California's deregulation law worsens the situation by not providing sufficient funding to maintain even current levels of renewable generation capacity. Against the outrageous subsidy of the utility companies' nuclear mistakes, the Legislature placed a fig leaf: an insignificant and temporary charge on utility bills which purports to encourage renewable energy. Under the law, the CPUC is responsible for administering a $500 million fund collected from ratepayers (as a "public purpose" charge on the bill) between 1998 and March 2002. The money is to be distributed to renewable energy producers for new construction, and upgrades. One hundred million dollars of the total is available as a "customer incentive plan" which purports to encourage marketing of "green power" by paying commissions to producers.

A similar situation exists for energy efficiency programs. AB 1890 provides only half the money budgeted in 1994 for energy efficiency programs - and the funding lasts for only four years. After that, energy efficiency advocates will have to fight for renewal of the funding, perhaps on an annual basis. And, unfortunately, the utilities themselves are in charge of the efficiency funds, creating a situation where money may not be spent effectively. Even worse, AB 1890 created a situation where consumption is likely to increase as every incentive exists for retail suppliers of electricity to increase their profi ts through increased sales. This is very different from the old system where utilities were rewarded for saving energy.

Energy companies will also be free to encourage customers to use more energy by bringing back declining block rates. Large industrial customers will have access to cheaper electricity and they will have much less incentive to use energy efficiency measures. This means electricity consumption may go up, a situation made worse as AB 1890 has no provisions to deal with increasing pollution from increased electricity generation and consumption.

Green Marketing: Greenwashing Deregulation

AB 1890's reliance on "green marketing" to promote renewables is another "free market" fiction being used to disguise the anti-environmental impact of deregulation. Fully 33 percent of all residential consumers would have to purchase 100 percent of their electricity from renewable sources just to keep California's current renewable generation capacity operating. In reality, fewer than 0.7 percent have opted for green products containing anywhere from 50 to 100 percent renewables. Green marketers have acknowledged that it costs approximately $100 in marketing and advertising costs to recruit a new customer, adding 10 to 20 percent more per kilowatt-hour to the price of green products. Some members of the environmental community have promoted the idea that green marketing can turn the deteriorating situation for renewables around and, for that reason, AB 1890 is pro-environment. We strongly disagree. AB 1890's policies are a far cry from the policies needed to create a vigorous "green" marketplace. AB 1890 favors the incumbent utilities and skews the market toward them. By bailing out and subsidizing their uneconomic nuclear plants, it makes it difficult for any competitor, including green marketers, to flourish. Enron's recent announcement that they cannot compete because of the way deregulation is structured is a testimonial to the fact that competition for residential consumers under the new rules is impossible.

Even more problematic is the fact that green electricity products being marketed in California will not bring on-line incremental additions of renewable energy. Instead, the green products being offered are, by and large, existing utility-owned renewables already paid for by ratepayers. These are not new renewable projects that require additional support to survive. They are simply repackaged renewables sold at a premium-making renewable energy a "gourmet" option affordable only by the well-to-do.

Proposition 9: Democracy at Work

Proposition 9 reverses the most unfair aspects of AB 1890 by banning the bailout of nuclear plants and requiring the CPUC approve any further recovery for non-nuclear plants. The ballot initiative permits the utilities to fully recover the costs of qualifying facility contracts to purchase renewable resources. Proposition 9 does not adversely affect funding for renewable energy or energy efficiency programs or change any of the other provisions in the law. Most important, Proposition 9 is the only hope for reopening the debate in California concerning the environmental consequences of deregulation and opens the way for a renewed commitment to sustainable energy. Winning in November on this important issue will have a major impact on the outcome of the deregulation debate. It will send a message to lawmakers around the country that looking out for the interests of large energy companies who use campaign contributions to gain political clout over the interests of their constituents is a bad idea. It will provide us with the opportunity at the national level to point to California as an example of inside deals gone wrong. It will help us build momentum for our national campaign to protect consumers and the environment at the federal level.

The California-wide campaign for Proposition 9 by Californians against Utility Taxes (CUT) provides a way for the California public to become engaged in one of the most important issues of the decade. Proponents of California's utility bailout say the deal was the best they could achieve, but in a democracy it is the People who have the final say on public policy, not a few deal makers. The fact that the California legislature passed a bill with a large bailout for the nuclear utility industry should give it no special credibility with voters or the public interest community. Proposition 9 provides an opportunity to do better for the environment and consumers.

Of equal importance, the outcome of the ballot initiative in California will ripple across the country, impacting the debate at the federal level and in many states. Proposition 9 represents the democratic process at work: a citizen's uprising signaling that the public is waking up to the debate over utility deregulation and that lawmakers will be held accountable. The ballot initiative is a tremendous opportunity to change the terms of the debate and to win some real gains for the environment and consumers. It gives us the time and a platform at the national level to discuss the threat of rising air and toxic emissions from old, dirty, cheap power plants; the loss of universal, affordable service for low-income and rural consumers, and the marginalization of sustainable energy technologies.

If the California deregulation model is followed at the federal level, we will be left with a few very rich energy companies who can prevent competition through their unfettered market power. At Public Citizen, we do not want the single most polluting industry in our nation to be controlled by a few unregulated monopolies that can influence public policy through their campaign contributions. Please join us and environmental group across the nation in supporting Proposition 9.