"I have seen the future, and it doesn't work." Adlai Stevenson, on visiting California
'Brownouts' in the golden west, power cuts in Silicon Valley and, in the longer term, threats by big chunks of high tech business to relocate out of California, the most advanced industrial state on earth. What the hell is going on? Deregulation of the electricity industry, that's what They've decided to introduce market forces into the energy sector, and the result is they're creating havoc.
Energy, let's face it, is boring. Except when all of a sudden you plug in and nothing happens - then it's panic stations. We all take it for granted, but it's a basic requirement of our lives. How did the old system work before they brought in market forces? Well, at least it worked. Gas, and later electricity, were first provided for mass consumption by the local council. At this time local authorities were run by business people for business people ( workers had not yet won the vote). Now these local capitalists were not wild-eyed ideologues of the free market. It is not well understood that capitalists are suspicious of and dislike market forces. These practical people knew that capitalism in their area needed mass generation of power. And they knew that capitalism couldn't provide it. So Tories like Joseph Chamberlain in Birmingham embarked on a programme of what was called 'gas and water socialism'.
Chaos
Imagine different companies competing to provide a basic resource like gas or electricity to households and firms. They would all be trying to run different cables or pipelines to different households in the streets. The roads would be up all the time. It would be chaos. Even if they overcame the logistical problems, it would cost an arm and a leg to heat and light each household through small-bore pipe and cable.
This is why capitalism was unable to advance this basic service in any country in the world in the nineteenth century. It makes sense to have one mains cable or pipeline running down the street, and all the houses being fed off it. But a single capitalist supplier of water, gas or electricity would have all the rest of us by the short and curlies, once we were wired up to their system. That's why Tories like Chamberlain made sure such facilities were publicly owned. They didn't want the rest of the local business community to be ripped off. In classic fashion the local state was doing what the capitalists couldn't - in their own interests. It is true that most of these 'public utilities were privately owned in the USA. But local government didn't allow them to act as an unaccountable monopoly and charge what they liked. Their activities and profits were carefully regulated. Remember those Utilities on the 'Monopoly' board? They're a safe investment, but you'll never make enough to win the game by snapping them up.
It's true we now have the appearance of competition in Britain. You can buy electricity from gas companies and gas from electricity companies. And if you play the field, it can work out a bit cheaper. But a moment's thought will establish that it's the same gas molecules flowing through the pipe, whoever you write the cheque out to. So what's happening.
'Competition' just lets new firms trying to break in offer discounts to grab market share from the established players. How are they able to make such sacrifices? Because the whole industry has been awash with monopoly profits since privatisation. They just give us a tiny bit of our money back to win our custom.
In the old days the system did have some 'socialist' features - and it worked. At any time some areas will have spare capacity in energy while others are working flat out to meet demand. So the generators shared capacity through the national grid. In this country the grid was introduced in the late 1920s and early 1930s, and led to huge economies throughout the system. Energy consumption is pretty predictable and therefore plannable. The experts do know exactly how many people will put the kettle on for a brew after the F.A. Cup whistle blows for half time.
The end of the great post-War boom of 1948-73 meant that workers and capitalists could no longer cosily co-exist, each with rising living standards within an expanding economy. Something had to give. There was a ruling class offensive against the working class spearheaded internationally by Reagan and Thatcher. Corresponding to this, there was an ideological offensive using neoliberal economic theories and programmes. Privatisation and deregulation were much in the air. This is the programme that has brought California to its knees. Deregulation of energy was tried first in Britain, not for 'efficiency' reasons but to smash the power of the miners. The 'problem' with energy generation and distribution was there was no market. The original nutty professor of Thatcherism, Littlechild, set out to create one. We needed supply and we needed demand. Generators of electricity were to sell to distribution companies. Instead of a co-operative grid across the network to deal with sudden peaks in demand, we'd have a pool , a spot market where energy could be bought and sold. (Workers and 'customers' of the health service will recognise the dreaded purchaser-provider split - the attempt to inject market forces where none can or should exist.)
The pool was an instant disaster in Britain, but that didn't stop the idea of energy deregulation spreading like a virus worldwide. Since energy is very difficult to store, sudden surges in demand produce price 'spikes' on the pool as all the distributors outbid each other for the same electricity. In California since deregulation prices have temporarily soared from the standard $30 per megawatt hour to over $1,000. As the reader will realise, deregulation has proved very expensive for consumers in California, and someone has made a great deal of money at their expense. Voters in the golden state were persuaded that voting for deregulation would get them 20% smaller bills as a result of 'efficiency savings' . In fact bills have gone up by 379% since 1996!
Part of the problem is that the two main distributing utilities, Southern California Edison and Pacific Gas and Electric, undertook to cap their retail prices in 1996. They used their entrepreneurial genius, not given to the rest of us, to foresee that oil prices could only go down in the future. So the recent crude price rises really put the squeeze on them. They were paying more wholesale but couldn't pass it on retail. Well, tough. They've built up debts of $12 billion as a result. Of course they're crying for public money to be thrown at them. Big business always discovers the virtues of 'socialism' (of socialising losses) when they're in the mire. Their behaviour is just like Railtrack in Britain. They're blackmailing the Governor by threatening to default on debts of $596 million. Clearly this would bring the whole State to a halt.
Let's put the spotlight on the wholesalers. These are either firms owning generating plants or speculators who buy electricity out of state and sell it on to the California utilities. They have got money coming out of their ears at he moment. To take a typical example, Dynegy California's fourth quarter earnings doubled to $105.9 million. Under capitalism a crisis for the many is an opportunity for some. Presumably they regard these windfall profits as a reward for entrepreneurship and risk- taking. The same generating companies were bleating for handouts in 1996 to cope with their 'stranded assets'. This elegant phrase covers the fact they had many totally stupid investment decisions such as building nuclear power plants. Another case of profit as a reward for individual initiative and socialising the losses when they get it wrong. The Economist comments that 'California agreed to value those stranded assets more than other states'. This seems a polite way of saying that the State of California, and all its citizens, was ripped off by the generating companies.
The irony of introducing the profit motive into energy generation is that it can destroy the livelihoods of other would-be profit makers. Deregulation in Britain opened the eyes of stateside utilities to the mouth-watering prospects before them. Southern California Edison is a subsidiary of the mighty Southern company. As Littlechild got going over here, Southern executives realised they could get twice as much for selling a unit of energy in the UK as in Georgia. So they took over the South Western Electricity Board. An orgy of cross-holdings followed. Southern Energy also owns Hyder in Wales. AES Corp owns the Drax power station . Dynegy tried to merge with Powergen. And TXU owns Eastern Electricity. The trouble with American utility companies is that they're overpaid and over here! (Footnote: If you understand that joke, you're showing your age.)
Let's focus a little more closely on two companies active in California - Enron and TXU. Both are based in Texas. Alert readers will realise that this is the home state of President Bush. Both firms backed Bush with serious money. Enron's Kenneth Lay top-scored with $555,275 to the campaign fund and $310,000 over the previous two years. TXU's Earl Nye stumped up $50,000. These sums are usually described as donations. Lay and Nye no doubt regard them as investments. And very good investments they were. Guess what? - Lay and Nye have both got jobs in the energy division of the Bush administration. They are arguing that what America needs is much more energy deregulation, and presumably Enron and TXU stand ready to give America what it wants. This is the corrupt symbiosis of American politics.
Governor Davis of California calls the electricity suppliers 'pirates and plunderers'. It's hard to disagree. He's declared a state of emergency. He's desperately trying to sign long term contracts with generating companies to keep the State up and running. He swears, "Never again can we allow out-of-state profiteers to hold California hostage." Actually his rhetoric is a little off-beam. The problem with Lay and Nye is not that they wear ten gallon hats. It is that they are representatives of the capitalist system.
The crisis is not hitting the whole of California. Los Angeles is immune. Why? Because L.A. continues to have a publicly owned publicly controlled generating system, that's why. The new head of the Californian Public Utilities Commission is proud not to be an economist. He says, "It is orthodox economics that got us in this mess in the first place." He's half right. Neoliberal economics is the ideology of rampant capitalism. It's capitalism that's got California in this pickle. Next time somebody tells you about the magic of the marketplace, remind them about California. To paraphrase Milton Friedman, it shows there's no such thing as a free market.