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It s Greed, Stupid!

Jan. 30, 2001

It s Greed, Stupid!
Debunking the 10 Myths of Utility Deregulation

WASHINGTON, D.C. Proponents of deregulation have developed a repertoire of excuses for why electricity deregulation is failing miserably. Rather than admitting that a speculative market for a life-sustaining commodity such as electricity does not work, they have cultivated such myths as, “California just didn t deregulate enough.”

In fact, if the retail price for electricity was completely deregulated as the industry suggests, the average consumer s electric bill would be $600, rather than the approximately $55 charged before deregulation, according to Public Citizen s calculations.

This is just one of ten myths debunked by a Public Citizen report released today. The report examines in detail arguments that deregulation proponents are making and explains why these contentions are false.

“Already, consumers and small businesses have been hijacked because California s deregulation law, which has allowed so-called free market forces to reign in California s electricity market, has allowed power suppliers to rake in billions in excess profits,” Public Citizen President Joan Claybrook said.

By both exerting market power and manipulating the next day s spot market for electricity, these suppliers keep electricity supplies low and prices high, for instance by employing unscheduled power plant closings. They have created a crisis in California that may drive the state into a recession and has done nothing to ensure that consumers have affordable, reliable electricity.

In keeping with their long-range business plans to dramatically expand sales, power suppliers blame the current problems on too few power plants. Their solution is to repeal power plant and transmission line siting laws and to suspend environmental regulations that protect people s health, so that they can engage in a building frenzy.

“If the power suppliers selling electricity in California have their way and retail prices for this important commodity are left to the vagaries of the market, the average consumer could be paying 12 times more for electricity than they were before deregulation,” said Wenonah Hauter, director of Public Citizen s Critical Mass Energy and Environment Program.

The myths include:

  • Prices are high because California s strict environmental standards have slowed power plant construction. In fact, there is currently more than enough capacity to meet maximum demands. Power demand during four of the past six months in California was lower than during the same period in 1999. However, power producers under deregulation have strong incentives not to run plants at full capacity or to shut them down altogether to manipulate prices. Even so, since April 1999, the state s Energy Commission has approved nine major new power plant projects, six of which are under construction.
  • The purpose of deregulation was to lower costs for consumers. To the contrary, deregulation has resulted in higher prices for consumers. Even if long-term contracts are entered into with suppliers, as is being discussed by state officials, consumers will still be paying an average of three times more for the price of electricity than they would have under sensible regulation.
  • Deregulation is good for the environment. Market forces driving deregulation will only encourage cost-cutting measures that will result in more pollution. In fact, deregulation creates incentives to produce power from the cheapest source dirty coal plants. Suppliers want to continue operating these older plants as long as possible, because it costs less than building new, more efficient plants. (The new plants being proposed would run in addition to existing plants.) Deregulation thus provides no incentive for conservation, which produces no profits for power producers.
  • California s energy crisis is best resolved through state, not federal, actions. Under the deregulation law, California s utilities sold most of their fossil fuel power plants to out-of-state power wholesalers who are profiting at the expense of consumers. To remedy this situation requires federal action. The best short-term solution for the crisis would be for the federal government to impose cost-based rates on these power suppliers, who now are charging utilities outrageous prices and far more than utilities are permitted to charge consumers. The federal government is the sole entity with the power to do this. This action would give California time to thoughtfully restructure its electric industry.
  • California s utilities are close to bankruptcy and need to be bailed out. In fact, the utilities parent companies have spent billions on buying other assets in recent months. They should be forced to sell off these assets before having the state and therefore, the taxpayers assume the burden and future risk for utility debts.
  • Electricity deregulation is working in other states. In other states that have deregulated, like Pennsylvania, the temporary protections that made deregulation legislation politically viable for passage are still in effect. Pennsylvania s utilities have a regulated rate for electricity that new suppliers must beat to be competitive. Over the next few years, as these protections are sunset, we will see many states follow in California s footsteps if deregulation is not canceled.


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