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WHY THE LIGHTS WENT OUT IN THE NORTHEAST

Editor's Note:

Although the full story is not yet known, deregulation, greedy
energy traders, and corrupt politicians are largely responsible for the
recent blackout as well as the 2000-2001 rolling blackouts in California
costing millions of citizens serious disruptions and rates that soared
as much as 300%.

Sacramento and San Francisco, with publicly controlled utilities,
maintained power at reasonable prices throughout the energy crisis
(these utilities are also shifting towards green energy sources).

Ohio-based FirstEnergy, the 4th largest investor-owned utility in the
nation, (probably) deserves much of the blame for the recent blackout.
In recent years FirstEnergy has had numerous operational, financial, and
safety problems including its Davis-Besse nuclear power plant near
Toledo that early in the year came within inches of a radiation leakage due to
poor maintenance (according to news reports).

Below are two reports.  The first contains highlights from "An Industry
Trapped by a Theory" in the NY Times (8/16/03, A25).

Robert Kuttner is co-editor of The American Prospect and author of
Everything for Sale: The Virtues and Limits of Markets.

The second report is by Greg Palast, prize-winning investigative
journalist and bestselling author of The Best Democracy Money Can Buy (which
documents how the Bush family stole the Florida election in 2000), and co-author
of Democracy and Regulation, a guide to electricity deregulation published
by the United Nations. The British Tribune Magazine has called Palast "the greatest
investigative reporter of our time."

An Industry Trapped by a Theory

Much of the Southeast has retained traditional regulation and cheap,
reliable electricity.  Unfortunately, the states that experienced
massive blackouts are hostage to a delusional view of economics that allowed
much of the Northeast to go dark without an enemy lifting a finger.

Electricity can't be stored in large quantities, and the system needs a
lot of spare generating and transmission capacity for periods of peak demand
like hot days in August.

The power system also requires a great deal of planning and
coordination, and it needs incentives for somebody to maintain and upgrade
transmission lines (which were overloaded and broke down near Cleveland.

Deregulation has failed on all these grounds.  Yet it has few critics.
Ten years ago, most public utilities were regulated monopolies.  They were
guaranteed a fair rate of return, based on their capital investment and
costs.  Thus the government compensated them for building spare
generating capacity and maintaining transmission lines.

Deregulation hasn't worked for four basic reasons:  (1) companies that
produce it enjoy a good deal of power to manipulate prices (the Enron
scandal in California was only the most extreme example).

Second, the idea of creating large national markets to buy and sell
electricity makes more sense as economic theory than as physics, because
it consumes power to transmit power.  "It's only efficient to transmit
electricity for a few hundred miles at most," says Dr. Richard Rosen, a
physicist at the Tellus Institute, a non-profit research group.

Third, under deregulation the local utilities no longer have an economic
incentive to invest in keeping up transmission lines.
Antiquated power lines are operating too close to their capacity. The
more power that is shipped long distances in the new deregulated markets, the
more power these lines must carry.

Four, under deregulation nobody plays the crucial planning role.

The Tale of New York
By Greg Palast

I can tell you all about the ne're-do-wells that put out our lights in
New York.  I came up against these characters - the Niagara Mohawk Power
Company -- some years back.

You see, before I was a journalist, I worked for a living, as an
investigator of corporate racketeers.  In the 1980s, "NiMo" built a
nuclear plant, Nine-Mile Point, a brutally costly piece of hot junk for which
NiMo and its partner companies charged billions to New York State's
electricity ratepayers.

To pull off this grand theft by kilowatt, the NiMo-led consortium
fabricated cost and schedule reports, then performed a Harry Potter job
on the account books.  In 1988, I showed a jury a memo from an executive
from one partner, Long Island Lighting, giving a lesson to a NiMo honcho on
how to lie to government regulators.
The jury ordered LILCO to pay $4.3 billion and, ultimately, put them out
of business.

And that's why, if you're in the Northeast, you're reading this by

candlelight tonight.

Here's what happened.

After LILCO was hammered by the law, after government regulators slammed
Niagara Mohawk and dozens of other book-cooking, document-doctoring utility
companies all over America with fines and penalties totaling in the tens
of billions of dollars, the industry leaders got together to swear never to
break the regulations again.

Their plan was not to follow the rules, but to ELIMINATE the rules.

They called it 'deregulation.'

It was like a committee of bank robbers figuring out how to make
safecracking legal.
But they dare not launch the scheme in the USA.  Rather, in 1990, one
devious little bunch of operators out of Texas, Houston Natura lGas,
operating under the alias "Enron," talked an over-the-edge free-market
fanatic, Britain's Prime Minister Margaret Thatcher, into licensing the
first completely deregulated power plant in the hemisphere.

And so began an economic disease called "regulatory reform" that spread
faster than SARS.  Notably, Enron rewarded Thatcher's Energy Minister,
one Lord Wakeham, with a bushel of dollar bills for 'consulting' services
and a seat on Enron's board of directors.

The English experiment proved the viability of Enron's new industrial
formula: that the enthusiasm of politicians for deregulation was in
direct proportion to the payola provided by power companies.

The power elite first moved on England because they knew Americans
wouldn't swallow the deregulation snake oil easily.  The USA had gotten used to
cheap power available at the flick of switch. This was the legacy of
Franklin Roosevelt who, in 1933, caged the man he thought to be the last
of the power pirates, Samuel Insull.

Wall Street wheeler-dealer Insull created the Power Trust, and six
decades before Ken Lay, faked account books and ripped off consumers.  To
frustrate Insull and his ilk, FDR gave us the Federal Power Commission and the
Public Utilities Holding Company Act, which told electricity, companies where
to stand and salute.

Detailed regulations limited charges to real expenditures plus a
government-set profit. The laws banned power "trading" and required
companies to keep the lights on under threat of arrest - no blackout
blackmail to hike rates.

Regulators told utilities exactly how much they had to spend to insure
the system stayed in repair and the lights stayed on.  Most important, FDR
banned political contributions from utility companies - no 'soft' money,
no 'hard' money, no money PERIOD.

But then came George Bush the First.  In 1992, just prior to his
departure from the White House, President Bush Senior gave the power industry one
long deep-through-the-teeth kiss good-bye: federal deregulation of
electricity.

It was a legacy he wanted to leave for his son, the gratitude of power
companies which ponied up $16 million for the Republican campaign of
2000, seven times the sum they gave Democrats.

But Poppy Bush's gift of deregulating of wholesale prices set by the
feds only got the power pirates halfway to the plunder of Joe Ratepayer.  For
the big payday they needed deregulation at the state level.  There were
only two states, California and Texas, big enough and Republican enough
to put the electricity market con into operation.

California fell first.  The power companies spent $39 million to defeat
a 1998 referendum pushed by Ralph Nader which would have blocked the
de-reg scam.  Another $37 million was spent on lobbying and lubricating the
campaign coffers of the state's politicians to write a lie into law: in
the deregulation act's preamble, the Legislature promised that deregulation
would reduce electricity bills by 20%.
In fact, in the first California city to go "lawless," San Diego, the
20% savings became a 300% jump in surcharges.

Enron circled California and licked its lips.  As the number one
contributor to the George W. Bush campaigns, it was confident about the
future.  With just a half dozen other companies it controlled at times
100% of the available power capacity needed to keep the Golden State lit.
Their motto, "your money or your lights."

Enron and its comrades played the system like a broken ATM machine,
yanking out the bills.  For example, in the shamelessly fixed "auctions" for
electricity held by the state, Enron bid, in one instance, to supply 500
megawatts of electricity over a 15 megawatt line.  That's like pouring a
gallon of gasoline into a thimble - the lines would burn up if they
attempted it.

Faced with blackout because of Enron's destructive bid, the state was
willing to pay anything to keep the lights on. And the state did.  (And
now they're having a recall election.)

According to Dr. Anjali Sheffrin, economist with the California state
Independent System Operator which directs power deliveries, between May

and November 2000, three power giants physically or "economically" withheld
power from the state and concocted enough false bids to cost the
California customers over $6.2 billion in excess charges.

It took until December 20, 2000, with the lights going out on the
Golden Gate, for President Bill Clinton, once a deregulation booster, to
find his lost Democratic soul and impose price caps in California and
ban Enron from the market.

But the light-bulb buccaneers didn't have to wait long to put their
hooks back into the treasure chest.  Within 72 hours of moving into the White
House, while he was still sweeping out the inaugural champagne bottles,
George Bush the Second reversed Clinton's executive order and put the
power pirates back in business in California.

Meanwhile, the deregulation bug made it to New York where Republican
Governor George Pataki and his industry-picked utility commissioners
ripped the lid off electric bills and relieved my old friends at Niagara Mohawk
of the expensive obligation to properly fund the maintenance of the grid
system.

Is the recent blackout a surprise? Heck, no, not to us in the field
who've watched Bush's buddies flick the switches across the globe.

In Brazil, Houston Industries seized ownership of Rio de Janeiro's
electric company.  The Texans (aided by their French partners) fired workers,
raised prices, cut maintenance expenditures and, CLICK! the juice went out so
often the locals now call it, "Rio Dark."

Californians have found the solution to the deregulation disaster:
re-call the only governor in the nation with the cojones to stand up to the
electricity price fixers. And unlike Arnold Schwarzenegger,

Gov. Gray Davis stood alone against the bad guys without using a body
double.  Davis called Reliant Corp of Houston a pack of "pirates" -and
now he'll walk the plank for daring to stand up to the Texas marauders.

So where's the President?

Just before he landed on the deck of the Abe Lincoln, the White House
was so concerned about our brave troops facing the foe that they used the
cover of war for a new push in Congress for yet more electricity deregulation.
This has a certain logic: there's no sense defeating Iraq if a hostile
regime remains in California.

Sitting in the dark, as my laptop battery runs low, I don't know if the
truth about deregulation will ever see the light - until we change the
dim bulb in the White House.

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