STOP THE BAILOUT !

Don’t Charge Consumersfor Utilities’ Past Mistakes

August 1997

Electricity deregulation is one of the mosthotly debated issues currently before federal and stategovernments. Some electric utilities are threatening to derailthis nationwide reform effort if policy makers do not bail outtheir inefficient, uneconomic past investments which they maylose money on in the future. Utilities claim these so-called"stranded costs" could total anywhere from $200 to $300billion, maybe even more. Worse yet, using a deceptive schemeknown as "securitization," utilities plan to forceAmerican ratepayers to shell out these billions up front, beforepotential losses even occur, prior to allowing customerchoice plans to move forward. Using a combination of twistedlegal reasoning and heavy-handed lobbying, utilities have alreadyconvinced some state legislators that they are"entitled" to such multi-billion dollar bailouts.Electricity customers across America may not believe it, butderegulation may end up costing them more than they thought theymight save if this unjustifiable bailout continues. Therefore,state and federal legislators should prevent a utility industrybailout for the following reasons:

1) A stranded cost bailout would represent the most egregious example of "corporate welfare" in history. A utility bailout would constitute one of the largest transfers of wealth in history. And, amazingly, this wealth transfer would be going from the pocket books of average Americans to the bank accounts of wealthy utility companies who have already benefited from years of excessive rates and generous, guaranteed profits on the backs of their captive ratepayers.

2) Other industries did not receive a bailout for their losses after deregulation; neither should electric utilities. The term "stranded costs" is of recent invention, coined by electricity industry officials in an attempt to shelter themselves from the onset of competition. The term has never been heard in previous deregulatory deliberations, including the recent debate over telecommunications reform. Firms in the telecom, trucking, railroad, and aviation business did not have their losses bailed-out after going through deregulation. Why should electric utilities?

3) A bailout will destroy competition in its cradle. A bailout will subsidize or reward inefficient utilities at the expense of lower cost, more efficient rivals. Industry innovation and entrepreneurialism will suffer; with fewer firms facing off against inefficient, subsidized incumbents, the incentive to offer innovative options, such as renewable energy, decreases. Worse yet, if massive, inefficient utilities are granted a multi-billion dollar bailout, they will buy-up their more efficient and well-managed smaller rivals who do not receive such ratepayer-funded largesse.

4) A bailout would inhibit employment gains and economic growth. If consumers are required to spend billions to bailout utilities, they will have less income to invest in other sectors of the economy and create new job opportunities. In fact, an economic analysis of Massachusetts’ proposed $12.5 billion bailout of their utilities revealed that over 25,000 potential new jobs would be lost every year for five years if captive ratepayers were forced to pay off inefficient utility investments. These job losses would be magnified greatly if utilities are granted such bailouts nationwide.

5) A bailout would hurt the environment. Giving inefficient utilities hundreds of billions of dollars will allow them to subsidize the operation of older, polluting power plants that might otherwise be shut down. Many of these old power plants emit more pollution and nuclear wastes than new power plants, threatening the environment. Why should consumers bail out less efficient power plants that may endanger the environment?

6) There is no "regulatory contract" that obliges the government or consumers to bail out the industry. The mythical notion that a "regulatory contract" was agreed to by utilities, regulators, and consumers allows utilities to advocate a bailout on "fairness" grounds. Yet, utilities have no "right" to hold customers hostage to a monopolistic system that they were never given an option of being a part of. And there is nothing fair about asking hospitals, schools, governments, and millions of individual Americans to pay for services they never asked for or no longer demand.

7) A bailout would set a bad precedent for the future. Granting electric utilities hundreds of billions in loss recovery as they move into a competitive environment would set a disastrous and disruptive precedent for the future. If every industry or organization that is even tangentially regulated by the government is allowed to claim compensation once deregulation occurs, it could result in a monetary catastrophe in the future.

The diverse, non-partisan group of individualsand organizations listed below believe that bailing out theelectric industry as America moves into a competitive era wouldbe a grave mistake. Legislators and regulators should closelyexamine the self-interested claims of utility industry officialswho argue that captive, powerless customers should be required topay off the utilities’ past mistakes. It just wouldn’tbe fair.

Signed,