Where’s The Competition? How California’s Leaders Helped Create the Energy Crisis
Thursday, January 25, 2001
We all know that when California’s Legislature passed the ill-conceived energy deregulation bill in 1996, the stated goal was to reduce electricity prices over time by increasing competition among suppliers.
Obviously, it didn’t turn out that way.
So far, most observers have been casting blame for the current predicament on the provisions of the law that allowed the utilities to selectively divest themselves of power plants without any assurance they could buy power back from those plants at reasonable prices.
But there was another, lesser-known part of the legislation that had at least an equally adverse impact. The final bill also included a provision that created a special new tax levied on any business that wanted to generate their own power.
The politicians hoped to disguise the new tax by not calling it a tax. Instead, they opted for a more benign-sounding Orwellian phrase, calling it a Competitive Transition Charge, or CTC.
The CTC was imposed on any business in the state that took itself off the power grid after 1995 by buying its own power-generating equipment. At the time, that mostly meant natural gas-powered co-generation units that can supply a single building, business or small community with electricity and heat. But it also applied to any other power-generating equipment.
“The CTC is not a tax,” one legislative staffer told me with a perfectly straight face at the time. “It’s a fee to create competition.”
The rationale for the CTC was that the monopoly utilities had built power plants with the expectation of paying them off over many years with the help of a locked-in customer base. But when customers, particularly big customers, wanted to flee to other providers or use their own generators, the utilities convinced the Legislature something had to be done to make sure they would be able to pay off the power-plant building expenses they had already incurred.
The final legislation, which included the CTC, also allowed the largest consumers of electricity to negotiate preferred rates with the utilities while consumers and small businesses were supposed to get frozen rates at first and then scheduled mandatory rate decreases.
In truth, the CTC may be the biggest single blunder in the entire deregulation process because of the way it forestalled decentralized competition during a period when centralized power generators were allowed to jack up prices.
The CTC is also the policy that most needs fixing if we are to ever regain dependable and affordable supplies of electricity.
The 1996 bill, you may recall, was hammered out mostly at the behest of the California Large Energy Consumers Association. That group included many of the biggest power hogs in the state, such as oil refineries, large corporations and major agribusiness operations.
Several other groups also supported the bill but they were window-dressing, for the most part. In reality, it was the state’s biggest power users who actually drafted the new law, along with the assistance of our far-too-compliant state legislators.
The bill’s many backers, which included leaders from both major political parties, claimed that the legislation would increase supplies of electricity and reduce prices by making it legal for different energy suppliers to send their power over the state’s common utility transmission lines, which previously had been used only by the monopoly utilities themselves. That was supposed to create more competition and made the CTC more palatable, at least to some.
But the competition envisioned at the time never happened. People disagree over why, but it appears the very largest energy producers had little interest in competing with each other. Collusion, after all, has served them far better over the years.
Entirely predictably, however, the CTC ended up hurting small businesses and consumers alike by preventing the companies that sell decentralized, alternative power-generating equipment from competing more effectively on price, which they were just beginning to do.
California’s smaller business, those not large enough to negotiate preferred rates with the utilities, got screwed because they were not allowed to generate their own power at the lowest possible prices. Consumers, in turn, got screwed when many of those smaller businesses opted against generating their own power and instead stayed on the grid. That meant less power for the rest of us. And we all know where that has led.
In fact, the energy deregulation bill was a misnomer from day one. It would have been much more aptly titled “The Big Business Protection Bill.”
The average consumer, of course, never saw much in the way of the scheduled rate decreases that, thanks to the crisis created by the very same legislation, are now in the process of being repealed by state regulators. Big businesses, on the other hand, were smart enough to make sure they got their price break right up front.
“The big dogs are eating first,” was how William Spratley, who publishes a newsletter that tracks energy deregulation, put it at the time.
Spratley got it exactly right.
Most of the state’s leading political figures voted for the CTC. They said it was needed to reimburse the utilities for their so-called “stranded assets,” another Orwellian term that was cooked up to describe power-generating facilities, most notably nuclear power plants, that the utilities falsely claimed would be uncompetitive after the energy market was deregulated.
That’s how we ended up with the users of alternative, non-grid-dependent energy-generating equipment, which we most needed to encourage, paying artificially higher prices.
It might be funny if it weren’t so infuriating. After all, the CTC always sounded like something right out of Homer Simpson’s playbook.
It did a lot of damage.
First, it made it impossible for those selling high-performance natural gas-powered electricity-generating turbines to offer products that produced electricity at prices that were more competitive with power bought off the centralized grid.
It was a move that the Godfather’s Don Corleone would have understood, forcing businesses that supplied their own power to pay off the thuggish utilities for the privilege of being self-sufficient.
But the harm didn’t stop there.
By making electricity produced by alternative, off-the-grid energy technologies artificially uncompetitive, the legislation also made California a bad place for companies producing that equipment to put down roots and grow.
California could have had a thriving, non-centralized energy-producing industry by now. Instead, our state government nearly killed it in its crib.
Gee, I wonder if campaign contributions played any role in that?
Although the CTC was designed to phase out after only 30 months, they turned out to be a critical 30 months, as recent events have demonstrated.
Governor Davis and the current state Legislature are to be commended for moving quickly to intervene in what has now become a full-blown energy crisis.
But what I’ve seen so far leaves me worried that our state’s leaders still don’t understand the role California’s government played in bringing this calamity upon us or what the state must now do to achieve more than a short-term, costly fix to the problem.
To date, the proposed solutions have centered on putting the state in the power business, or using state funds to pay off the price-hiking power suppliers who are threatening to cut off supplies.
Those steps might be necessary. But by themselves, they are not enough.
We also need a reverse CTC.
For starters, the producers of alternative energy technologies should get back every single dime, plus interest, taken from them through the CTC. Personally, I’d like to see them reimbursed by the state’s largest consumers of electricity since they were the ones who walked off with all the goodies from the 1996 deregulation con job.
But if that’s not politically possible, it would still make sense to find a way to reimburse producers and users of alternative non-grid energy technologies for the money they lost to the CTC out of the state’s general fund. After all, when a business or community takes itself off the power grid, it frees up more electricity for the rest of us. We should be paying these companies, not taxing them, when they become energy independent.
I’d even argue we take it one step further. Given the current crisis, I think the state should give all businesses additional incentives, through generous tax credits or rebates, if they agree to use alternative energy technologies to voluntarily take themselves off the power grid.
Unlike the counter-productive approach of 1996, this proposal would assure California’s role at the center of the new energy economy. It would also encourage new investments in our state’s still-budding crop of alternative energy producers, everyone from the makers of co-generation equipment to the newer, emerging fuel cell alternatives. As the use of those new technologies becomes more widespread, their costs will go down even further.
That’s the opportunity we lost when the so-called deregulation bill passed in 1996. It’s an opportunity we can’t afford to lose again.
The only thing that can make energy deregulation work, indeed the entire rationale for deregulation, is competition.
The legislation signed into law in 1996 made it certain that true competition would not take place for years.
It was a fraud then. And until it gets fixed, it’s still a fraud.