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Power to the People: Behind California's Deregulation Experiment; Utilities Hope to Raise Electric Rates By Up to 30 Percent

Aired January 3, 2001 - 1:24 p.m. ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

LOU WATERS, CNN ANCHOR: Twenty-five million people in California. We've been hearing about this story for quite some time. Most folks could find out soon if they'll have to pay higher electric bills. State regulators are deciding on rate increases of up to 30 percent.

More about that in a minute. First, CNN's Charles Feldman takes a closer look at California's experiment in deregulation and what may or may not have gone wrong.

(BEGIN VIDEOTAPE)

CHARLES FELDMAN, CNN CORRESPONDENT (voice-over): Flip a switch, the electricity flows. That's how it's supposed to work. But a deregulated energy market in California now threatens that assumption.

GOV. GRAY DAVIS (D), CALIFORNIA: We're in deregulation, at best, prematurely.

(on camera): Who's to blame for what, so that the public understands exactly what the situation is.

DAVIS: All right, here's -- I think the people that insisted that we get in deregulation in 1995 and 1996 made a huge miscalculation. They did not anticipate the recovery that California experienced and the particular needs of the tech-based economy here in California. Secondly, there was no effort to build more plants to meet that demand.

FELDMAN (voice-over): In a nutshell, here's what deregulation did: It forced California's investor-owned utilities to sell much of their power-generating plants. And now they must buy back that power at market prices, prices that are, well, electrifying. And here's the catch: Deregulation prevented most utilities from passing rising costs on to their consumers until at least 2002.

(on camera): When talking about this dilemma, people keep using the phrase "an energy crises" or "an energy shortage." Is it really about a shortage of energy?

JOHN BRYSON, EDISON INTERNATIONAL: A very small part of this total crisis is associated with a shortage of electricity. The problem is primarily a problem between high, wholesale costs of electricity that we have to buy in California to keep the lights on and low regulated retail rates.

FELDMAN: When people talk about an "energy shortage," is that an inaccurate description?

HARVEY ROSENFIELD, CONSUMER ADVOCATE: Yes. There is no "energy shortage." There is a --there are -- there is an energy cartel of companies that is manipulating the supply at any given moment in order to artificially induce massive price increase and get high profits from them.

FELDMAN (voice-over): The power industry in California is now the target of no fewer than six investigations by state and federal agencies.

GARY ACKERMAN, WESTERN POWER TRADING FORUM: Charles, we've been investigated up and down and sideways and every which way possible. And you know what? After all these months, over six or seven months, nobody has found one shred of evidence to suggest that there's any price manipulation, any gaming, any collusion or any wrongdoing on the part of the generators here in the state of California or in the Western region.

FELDMAN: But at least two powerful California politicians are calling for a criminal investigation by the Justice Department.

JOHN BURTON, CALIFORNIA STATE SENATE: The people of this state are getting taken to the cleaners and billions of dollars is going to the outside-of-state generators.

FELDMAN: So it has come to this in California: Investor-owned utilities claim if they keep shelling out more and more money to buy electric power and can't pass that cost on to consumers, they will go belly-up. The crisis, real or manufactured, is pitting utilities against generators, consumers against utilities, and politicians trying to come up with something, anything, that will make everyone happy -- solutions ranging from early rate increases to federal regulation of electric wholesale prices to the negotiation of long- term contracts between utilities and power generators so that prices are not set on the volatile spot market.

And watching all of this? 25 other states moving toward energy deregulation that are actually looking toward California as a role model.

Charles Feldman, CNN, Los Angeles.

(END VIDEOTAPE)

NATALIE ALLEN, CNN ANCHOR: Going to talk more about this now. State regulators have been holding public hearings on the power companies' request for a rate hike.

CNN San Francisco bureau chief Greg Lefevre is standing by with more about it -- Greg. GREG LEFEVRE, CNN SAN FRANCISCO BUREAU CHIEF: Natalie, the California Public Utilities Commission planned two days of hearings. They've now stretched to four emergency hearings, hearing from the utilities who say they're going broke, as Charles reported a moment ago, and from consumers who say they will go broke if they have to pay the rates.

The California Public Utilities commission will, in about a half an hour or so, release a preliminary suggestion that it wants to raise electric rates here in Northern California and in Southern California, perhaps by somewhere between 15 and 20 percent, it has been reported. That, of course, is too much for consumers. But for utilities, it's too little and perhaps too late.

What this means to consumers is, for example, Pacific Gas & Electric customers here in the San Francisco area, their home rates will go from $54 a month to about $65 a month. I don't know where they get that average figure, because my bill is well over $100 already and there's just two of us in the house. The companies, though, they, perhaps, get a chance to live on, as you will.

When California's electric rates were deregulated in 1996, the energy companies, the electric companies, went out on the free market to buy that electricity. Pacific Gas & Electric, for example, pays 15 cents to 40 cents per kilowatt hour. It's only allowed to sell that for about five cents. Forty cents, five cents, you get the difference. And PG&E people say they're going to go broke to the tune of something like $9 billion statewide.

The announcement of the new rate increase expected in about a half an hour.

Natalie, back to you in Atlanta.

ALLEN: Greg, thanks.

Tune in tomorrow as well for the final decision on this rate hack -- rate hike, and more on California's power crunch. Our coverage begins at 7:00 in the morning, and we'll update the story, of course, throughout the day.

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