The Firms That are Pulling The Plug on California Learnt Their Trade From Margaret Thatcher
President George W. Bush has announced that on 7 February, come hell or high water, he will end Bill Clinton’s order directing emergency electricity supplies to California.
As the lights on the Golden Gate bridge blink off, the state’s politicians are in full panic that this spells bankruptcy for two giant regional electricity companies, Southern California Edison and Pacific Gas & Electric. Not me. I can’t think of anything which would more joyously combine historic justice and good public policy than their corporate death.
To understand why, we need to identify the true villains of the California electricity disaster: the British.
The story begins in August 1989 in Atlanta, Georgia, with poor Jake Horton, senior vice-president for Gulf Power, a subsidiary of Southern Company, an unremarkable regional electricity firm dying of a thousand financial wounds. Since the turn of the century, American states have kept tight lids on utility monopolies’ profits. In the Eighties, consumer groups demanded, rightly, that power companies, including Southern, eat their losses on foolish nuclear investments. The cash-short company had resorted to such unfortunate tactics as keeping hidden sets of account books tracking non-existent light poles.
Horton, told he would be fired, was on the point of testifying to a grand jury about improper payments he made to politicians on the com pany’s behalf. (The company later pleaded guilty to this felony.) He demanded and received use of the corporate jet to confront Southern’s directors. Ten minutes after take-off, the jet blew up.
Poor Jake. ‘He saw no other way out,’ laments former Southern chairman A.W. ‘Bill’ Dahlberg. But for Southern itself, Dahlberg, who took over at Southern after Horton’s death, conceived of an unorthodox way out of its troubles.
The plan: the troubled local company would take over the entire planet’s electricity system and, at the same time, completely eliminate from the face of the earth those utility regulations which had crushed his company’s fortunes.
California blackouts are just a hiccup on the road to the astonishing success of this extraordinary programme. While America’s papers are filled with tales of the woes of the two California companies bleeding from $12 billion in payments for electricity supplies, virtually nothing is said of the companies receiving their blood.
The biggest sellers and traders in the new California and Western market are Enron of Houston, Reliant of Houston and Southern. The success of Southern’s plan for world power conquest (or, if you prefer, ‘vision for globalisation of energy supplies’) hinged on Britain. As Keynes noted, the mad rants of men in authority have their origins in the jottings of some forgotten professor of economics.
So in case you’ve forgotten, the professor in question here is Dr Stephen Littlechild. In the Seventies, Littlechild cooked up a scheme to replace British government ownership of utilities with something almost every economist before him said simply violated all accepted theorems: a free market in electricity.
The fact that a truly free market didn’t exist and can’t possibly work did not stop Margaret Thatcher from adopting it. In 1990, Littlechild’s market, the England-Wales Power Pool, went into business. On paper, it was an academic beauty to behold. In this auction house for kilowatt-hours, private power-plant owners would ruthlessly bid against each other to cut electricity prices for British consumers.
I can’t say for certain whether the market scheme failed in minutes or days, but the pool quickly became a playground for what the industry calls ‘gaming’ – collusion, price gouging and all means of fleecing captive electricity consumers. Ten years of hapless fixes by Littlechild and his successor have failed to stem the tide of rip-offs at the heart of this unfixable system.
At the same time, ‘deregulated’ regional electric companies expertly vacuumed the pockets of captive customers. From their besieged Atlanta headquarters, Southern’s executives learned they could charge in England double the price permitted in Georgia. The moment the Government permitted it, Southern bought SWEB, the old South Western Electricity Board. This was the first purchase ever by a US power company outside the States. The cash rolled in and American operators soon grabbed the majority of the British electricity sector.
Although Thatcher’s private power market scheme was a poor idea that proved worse in practice, the International Monetary Fund and World Bank adopted it as a requirement of every single structural assistance programme worldwide. The World Bank’s former chief economist, Joe Stiglitz, told me how IMF and Bank teams would fly into Russia and Asia, preach the wonders of privatising electricity markets, ‘and you could see the wheels turning in the local officials’ minds’. Here was a means for their corruption ‘rents’ to multiply a thousand-fold.
Power systems were privatised from Brazil to Pakistan and the baksheesh flowed. Or so say Pakistan’s anti-corruption prosecutors although the World Bank dismissed the allegations. US power buccaneers, led by Southern and Texas companies Enron, Reliant and TXU, grabbed plants and wires on every continent save Antarctica.
But not in the US, not at first. It stubbornly exempted itself from neoliberal ‘reform’, and this rankled the new international players. So the industry’s lobbyists brought Thatcher’s professors and their wheezing power market contraptions to California.
In 1996, the state’s legislature, inebriated by long draughts of utility political donations (entirely legal), tossed out a regulatory system which had provided reasonably cheap, clean, reliable energy to the state. Despite the British disaster, the sun-addled legislators wrote into the law itself the lobbyists’ slick line that a ‘deregulated’ market would cut consumer prices by 20 per cent.
My parents sent me their light bill from San Diego. Instead of 20 per cent savings, last year their energy charges rose 379 per cent. But before the bills hit, the new planetary power merchants, using a combination of money muscle and America’s penchant to follow California, suckered 23 other states into adopting deregulation plans. SCE and PG&E, California’s two big regional distributors, wrote a UK-style ‘price freeze’ into the law which permitted them to stuff their accounts with $20bn in extra revenues as oil prices fell. Now that the oil market has reversed, the stacking, cramming and scheduling games the traders learned in the UK have literally come home to roost. These two companies are sinking under the $12bn in debt for the power from Southern and the other deregulated sellers.
So I dressed for their bankruptcy burial in a dark suit and a big grin. (Fifteen years ago, working with government, I had enormous fun pushing a multi-billion dollar New Hampshire utility into bankruptcy. There, by the way, the lights are still shining bright).
Unfortunately, California’s governor, Gray Davis, pounded by the utilities’ lobby machine and bogus power outage scares, appears to be losing his courage. He’s now considering how the state can borrow money to bail out the companies and bill it to consumers. And that reveals the real wisdom of the deregulated marketplace: the brilliant method by which profits are privatised and losses socialised.
Gregory Palast’s other investigative reports can be found at www.gregpalast.com where you can also subscribe to Palast’s column.
Gregory Palast’s column “Inside Corporate America” appears fortnightly in the
Observer’s Business section. Nominated Business Writer of the Year (UK Press
Association – 2000), Investigative Story of the Year (Industrial. Society – 1999), Financial Times David Thomas Prize (1998).