SO FAR, ELECTRIC UTILITY DEREGULATION HAS BROUGHT US POWER SHORTAGES AND EXORBITANT PRICE HIKES.
Electricity became more valuable than gold this summer--or at least more valuable than finished aluminum ingots. At the beginning of June, 270 workers at Ormet Corporation aluminum plant in Hannibal, Ohio, were laid off for the summer when the company concluded that it was more profitable to sell the electric power normally used in its smelting operations than to manufacture aluminum. And that was true even after the company paid its workers benefits and supplemented their unemployment checks so that they took home 70 percent of their base pay.
They were the lucky ones. A few weeks later, Kaiser Aluminum, Georgia-Pacific, and a handful of other companies in Montana and Washington that use large amounts of electric power suspended operations, some for a week and some indefinitely. They laid off more than 2,500 workers when the wholesale price of electricity in the region jumped from 4.5 cents per kilowatt-hour to 90 cents. Those companies did not supplement their workers' unemployment benefits, and in mid-August Kaiser announced it had made a $40-million pretax profit selling the electricity it would have used in production.
In the strange new world of deregulated electric power, where competition was supposed to bring better service and lower prices, what we have instead is a serious lack of generating and transmission capacity and widespread manipulation of the wholesale markets--which together are bringing us frequent shortages, threats of blackouts, and mind-boggling summer prices.
California has been hit especially hard. On June 14, the San Francisco Bay Area suffered rolling blackouts to prevent the crash of the state's transmission system after one of its components became overloaded during a heat wave. That week, which saw temperature records set in many cities in the area, wholesale "purchasers of California power spent more than $1.2 billion for electricity, 300 percent more than they paid for the same period in 1999 and one-eighth of their cost for power for all of 1999," according to a special report to Governor Gray Davis released in early August. People in San Diego, whose electric utility company was the first in California to be deregulated and who were thus the first to see fully deregulated prices show up on their household utility bills, are throwing tomatoes at utility workers and demanding action from the state legislature.
But it's not only California that's suffering power shortages and price hikes. So far, 25 states have deregulated, and the changes nationwide are affecting even those that haven't. Demand in California is sucking power out of the Northwest. New Yorkers complained bitterly about July bills 40 percent higher than last year. New England and the mid-Atlantic states have come close to blackouts several times this summer, and last summer there were half a dozen blackouts in New York City, Chicago, Long Island, and New Jersey, and throughout Louisiana, affecting more than one million customers.
A reliable electric supply system is the quintessential requirement for twenty-first-century life, and it used to be that we could take it for granted. Now, however, as a consequence of what one former regulator has called "mindless deregulation," the U.S. power system is in danger of falling apart.
Under deregulation, utility companies still sell electricity to customers, but most are no longer allowed to own certain power plants. Instead, new wholesale power trading markets have been set up where the utilities can buy electricity from competing suppliers. In theory this is supposed to have all the advantages of a free market. In practice see San Diego.
These are the key factors driving the new deregulated system toward a reliability crisis:
* There is a genuine shortage of generation and transmission facilities in most regions of the country because utilities cut way back on construction projects eight years ago, after Congress passed the Energy Policy Act, setting deregulation in motion. …