Electrical Power Industry Deregulation Opens Door for Scammers?

You may have noticed recent news items about proposals to deregulate the electrical power industry. You may have received solicitations to sign on with some start-up utility you never heard of, promising 10% to 40% reductions in your electrical bill. The model for this deregulation---if it comes to pass---is the long-distance telephone industry.

How might something like this be technically feasible? In North America, the majority of electrical utility companies no longer serve simple local jurisdictions. Except for extremely remote communities, electrical power grids are interconnected and synchronized so that their 60Hz power sources work in unison. The network can be envisioned as an energized web whose nodes---i.e., power stations---keep it energized.

In theory as well as in practice, Cincinnati can buy power from Ottawa if need be. A couple of years ago, nine western states lost power for several days after some high-voltage lines went down in Oregon.

The continental power grid's interconnectedness has given rise to the notion that electrical energy isn't created and distributed like hard goods, but is instead a resource like water, land, or air. If one accepts this analogy---as, apparently, Washington, DC and several state capitols have---then electrical energy can be divided, subdivided, and reconfigured like the blocks of airspace on a pilot's flight map. It can be leased and subleased, bought and resold like segments of long-distance time, provided that sufficient lucre greases the proper palms. A new "utility provider" can pop up out of nowhere by buying in.

These new companies aren't utilities in the traditional sense of maintaining a standing army of engineers and technicians whose eternal vigilance keeps the lights on in your neighborhood. They are commodities brokers, with armies of salespople; they stand to make a large fortune in a high-volume, low-margin business. They will pay a discounted fee to the real producers of the energy (i.e., those who own and operate power stations) for the right to resell it to you---a guaranteed and very dependable revenue stream. Everyone needs electricity.

Opportunities in the new utility business have already attracted a number of hucksters. In a front-page story in the March 10 San Francisco Chronicle, titled "L.A. Con Artist Behind Alleged Electricity Scam," reporter Kenneth Howe details ongoing investigations into the activities of Larry Steven Huff and his Valencia, California-based FutureNet, Inc., a multilevel marketing company specializing in electrical energy. FutureNet is a pyramid scheme, according to a suit filed against the company by the Federal Trade Commission.

Multilevel marketing companies and their illegitimate counterparts, pyramid schemes, depend on recruiting ever-larger numbers of salespeople, or "distributors," as they are known in the trade. Some such companies, like Amway, offer legitimate products. Others, however, are fly-by-night operations that quickly make huge sums for a handful of people at the top and then, just as quickly, fade away.

The typical multilevel marketing recruit is gullible, financially desperate, pays a fee to participate, and drops out after a few months. Pyramid schemes and most multilevel marketing ventures eventually run out of recruits.

In addition to the probe by the FTC, FutureNet is under investigation by the California Public Utilities Commission. According to Howe, the company has taken in fees ranging from $100 to $700 from each of 30,000 active distributors, 20,000 of whom reside in California. A federal judge in Los Angeles has issued a temporary restraining order against FutureNet and has frozen its assets, estimated at $20 million. So far, no consumers have been swindled.

FutureNet is the second electrical resaler to be investigated in relation to California's forthcoming deregulation. Pennsylvania's Boston-Finney company had its California registration rejected after allegations were made that it was operating a pyramid scheme in its home state.

In his report, Howe chronicles Larry Huff's involvement with pyramid schemes as far back as 1973: everything from cosmetics to herbal remedies to youth-restoring cultured yogurt. According to the US Securities and Exchange Commission, Huff was a participant in one of the biggest frauds of all time---Holiday Magic, a cosmetics marketing enterprise that took $250 million from thousands of small-time investors.

The 56-year-old Huff spent two years in Lompoc prison after being convicted of swindling 27,000 people in another pyramid scheme. Participants in his Cultured Farms operation in the 1980s paid $3500 each for the right to grow a secret rejuvenating ingredient whose ancestry could allegedly be traced back to Cleopatra. He was also a big player in Herbalife, which was investigated as a pyramid scheme by the US Food and Drug Administration and by a Senate subcommittee.

California's electrical utility market is estimated at $23 billion annually. It will officially open to competition March 31. FutureNet, incidentally, also sells WebTV.