California's Energy Crisis: Structural adjustment - American style

By Larry Everest - Z Magazine, April 2001

California is in the midst of a major energy crisis, and many other states are feeling—or will soon feel—the pain. The crisis, which has been building for a year, escalated sharply in mid-January. From then until mid-February, much of California was in a near-continuous “stage 3” power alert—meaning supplies of electricity were barely enough to cover demand. To prevent a power grid meltdown, electricity was cut off to different areas at different times in a series of “rolling blackouts,” leaving hundreds of thousands of people and many businesses without power for hours at a time.

The electricity crunch has temporarily eased, but more power shocks loom on the horizon. Two of California's big electric utility corporations—Pacific Gas & Electric (PG&E) and Southern California Edison—say that skyrocketing wholesale prices for natural gas and electricity (gas is 3 to 4 times as expensive as a year ago and electricity 5 to 10 times) have left them over $12 billion in debt and on the brink of bankruptcy. The State of California has stepped in, buying power on the open market and trying to work out some restructuring plan. California may end up buying the power transmission grid—a multi-billion utility bailout footed by taxpayers.

The 300 to 400 percent increase in the price of natural gas, more heavily used during winter, has meant that many are getting utility bills two, even three, times higher than a year ago. Some small —and not so small—businesses are facing bankruptcy from power cut-offs and rising energy costs. One cheese company reported that its utility bills are now 475 percent higher than a year ago. With talk of even bigger utility rate increases in the future, millions of working people are wondering how they're going to put food on the table, pay rent, and still keep the lights on.

Meanwhile, the Bush administration is using the crisis as an excuse to assault environmental regulations and open Alaska's wilderness to oil drilling—even though neither environmental regulations nor tight oil supplies have had anything to do with California's current crisis. (Less than 1 percent of California's electricity is generated by oil.)

Roots of California's Electric Shock

One trigger for the crisis was California's 1998 decision to deregulate its wholesale energy market. All the major players—government officials, Democratic and Republican politicians, California's utility companies, and the out-of-state energy corporations—were in on the design of the program. These pillars of the capitalist system promised that profit-driven market competition would bring Californians more power and lower energy bills.

Now, as the energy shock rolls through the state leaving shortages and soaring prices in its wake, these same officials, corporate honchos, and media commentators are busy trying to explain the crisis and assign blame—to everyone but themselves and the system they're part of.

A number of different elements—few new power plants, rising natural gas prices, energy industry consolidation, and covert market manipulation—have come together to create California's power squeeze. All are firmly rooted in the ruthless competition between rival financial conglomerates for maximum returns and market domination that exemplify the workings of the global capitalist/imperialist system today. The government—at the federal and state levels—has served as facilitator.

Deregulation and Privatization

Take the decision to deregulate California's power industry. Working people certainly didn't demand deregulation. Nor was it fundamentally the product of bungling politicians or greedy businesspeople—although both were in the mix. California's decision was the product of the same drive to cut costs, compete more efficiently, and maximize returns that have forced governments and industries all over the world to deregulate and privatize—many in the Third World under International Monetary Fund-dictated “structural adjustment” programs. These days the system's mantra is that calculations of profitability must determine ever-wider spheres of human activity and that all barriers to capital must be broken down.

Since the 1930s, California, like most states, had regulated its power industry. The big utility corporations, which owned both power generating facilities and transmission lines, were given a monopoly in their designated territory. California's Public Utilities Commission (CPUC) oversaw their operations, set rates to consumers, and guaranteed the utilities a “fair profit.”

Regulation served the system's needs well enough for 40 plus years. But by the late 1970s pressures were building for deregulation as one answer to the persistent economic “stagflation” gripping the U.S., Europe, and Japan. Within 15 years, the airline, cable TV, and telecommunications industries were all deregulated as well as much of the U.S. energy market. In 1978, during that previous “energy crisis,” Congress passed the Public Utility Regulatory Policies Act (PURPA), forcing utilities to begin buying power from independent power producers while still maintaining their own power plants. In the mid-1980s, natural gas prices, previously regulated by the Federal Energy Regulatory Commission (FERC), were deregulated under the Natural Gas Policy Act and the FERC's Order 436.

By the early 1990s, the collapse of the Soviet Union spurred still sharper global economic competition—and more demands for deregulation and privatization. The U.S. economy was in a recession, and in California the cost of power for corporate and business users was about 45 percent higher than the nationwide average. Businesses were threatening to leave the state, and out-of-state energy conglomerates were demanding to be let into California's market. California businesses were under enormous pressure to cut energy costs in order to remain competitive in today's cutthroat global marketplace.

In 1998, after years of planning and discussion, California began to deregulate. The big California-based utilities sold their gas-fueled power generating plants to “independent” power companies. These independents were then to sell power back to California's utilities at open market prices and the utilities would in turn deliver it to customers. Prices charged by the utilities to customers remained regulated by the CPUC. (California's 1998 electricity deregulation did not apply to natural gas, which is largely supplied by producers outside the state. California's utility corporations import natural gas and then deliver it to customers, passing along the cost—and any cost increases.)

Why Weren't Power Plants Built?

Deregulation was supposedly going to make things better for everybody. Unregulated power companies would operate more efficiently, the story went, and with more efficiency leading to higher profits, and higher profits encouraging new power plant construction. New plants would mean more power and lower prices.

This deregulation fairy tale has turned into a nightmare of less power and much higher prices. One reason is that no new plants were built in California during the 1990s. The New York Times editorialized (1/27/01), “Just a few years ago, the state's economy was booming and there was a modest surplus in electricity....Virtually no one in the state foresaw the spectacular economic growth that occurred in the late 1990's, bringing with it an insatiable thirst for more power. Few sensed the urgency of building new power plants.”

Basically true, but why? Because the anarchy of production reigns ever more supreme. Capitalism's booms and busts on the one hand, and individual competition for maximum market share (without regard to overall needs or supplies) on the other make rational social planning impossible—even for the most basic necessities.

Another reason California's utilities and other energy corporations didn't build new plants was their fear that rates of return wouldn't be high enough. The director of the University of California Energy Institute told the New York Times: “The real reason investors didn't build plants in the 1990's is that for a long time, no one knew what the rules were going to be.” Speaking of the non-regulated energy corporations, the Times commented, “These companies build power plants only where it is most profitable—and not necessarily where they are most needed” (1/23/01).

The same forces of unpredictable markets and profit-driven decision making were at work in 1995 when Southern California Edison and other firms combined to kill a plan to grant contracts for 1.4 million megawatts of power to smaller energy producers—producers who generated electricity mainly from clean, renewable sources like wind, geothermal, and solar power. Edison argued they could buy power more cheaply from other sources and that they wouldn't need new power plants until 2005.

Meanwhile, California's power companies have been playing a financial shell game in order to invest billions in more profitable unregulated power plants and transmission facilities outside the state. California's regulated utility, PG&E Company—skewered for poisoning a town in the Academy Award-nominated movie Erin Brockovich—is owned by PG&E Corporation, a holding company. PG&E Corp., often through its other subsidiaries, spent $1.6 billion to acquire power plants in New England, a half billion for a power plant in Killingly, Connecticut, and is planning to buy power capacity in Mississippi, Philadelphia, and Indianapolis. It is estimated that PG&E Corp. has invested at least $13.9 billion in these and other power ventures across the country.

Now, as PG&E Company in California claims it's bankrupt, its parent has posted record 2000 profits of $753 million, a 40 percent increase from 1999—much of that no doubt derived from operations of its California subsidiary. Over the last 5 years, PG&E Company has transferred over $4.7 billion to PG&E Corp.

In a secret meeting on January 12 with PG&E Corp., the Federal Energy Regulatory Commission gave it the right to be exempt from any claims against California's PG&E Company. So the parent's $21 billion in revenues, $34 billion in assets, and hundreds of millions in profits won't be touched to pay for its subsidiary's debts. The State of California is now negotiating with the utilities over precisely how much of their debt they'll be responsible for and how much the parent corporations will or won't contribute, but most of that burden will no doubt be shoved onto the people.

The Natural Gas Market

Another storyline in California's energy crisis is soaring prices for natural gas— which provides a quarter of overall U.S. energy needs and is used to generate half of California's electricity (and is the most expensive component of electricity generation). Natural gas prices have gone up nationwide by three to four times over the past year. In California there have been extended periods when they've been 20 times higher than a year ago. The natural gas market has been deregulated for 15 years. So why aren't supplies abundant and prices low?

As with power plant construction in California, a number of factors are involved: drilling and exploration hasn't kept up with growing demand; natural gas inventories are low; and rising electricity demand puts pressure on gas supplies because more and more electricity is generated by natural gas-fired power plants.

Energy analysts Daniel Yergin and Tom Robinson write, “The oil and gas price collapse of 1998-99 forced energy companies to slash their budgets for developing new reserves of both oil and gas. That led to a decline in gas production capacity in the United States of about 6 percent since 1997.” Now that demand suddenly spurts up again, there's not enough capacity to meet it. Funny, we don't hear mainstream pundits or industry frontpeople denouncing the energy companies for failing to anticipate the ups and downs of the natural gas market.

These market forces are also leading to over-reliance on natural gas for electricity generation: 90 percent of all new power plants plan to run on natural gas. This will lead to even more pressure on supplies and prices, more environmental degradation, and less reliance on clean, alternative energy sources.

Freeing up and deregulating markets supposedly means more businesses, providing more choices for consumers. While deregulation and privatization can trigger industry shakeouts, global competition today demands bigger and bigger concentrations of capital, resources, and power. You can make a billion dollars one year and be swallowed up by an even bigger shark the next. Deregulation has accelerated such centralization and consolidation—within and across markets and industries.

Over the last 20 years, the U.S. has experienced the greatest merger wave of the 20th century. During the Reagan-Bush years, some 45,000 merger deals were struck valued at $2.2 trillion. During the Clinton-Gore years the total shot up to 72,000 corporate mergers valued at $6.7 trillion. The world energy market is dominated by fewer and fewer huge conglomerates, which are growing via mergers, acquisitions, and expansions into new markets.

The natural gas trade journal Gas Daily reports that mergers “have benefited growth rates in dramatic fashion for pipeline-based companies.” It also notes that the number of deals in the past 18 months involving natural gas pipelines was “staggering.” As of August 2000, “Twelve interstate pipelines—about a third of all major interstate pipelines—have been purchased or are on schedule to be acquired by the end of 2000.” Gas Daily noted that following one planned merger “twelve companies will account for more than 85 percent of interstate natural gas activity.” In the electric industry, some 59 mergers took place in the U.S. between 1995 and 2000.

Enron, the largest contributor to George W. Bush's presidential campaign and a major player in California's energy market, has become the world's largest energy trader and is quickly expanding its reach via Enron OnLine. Last year its revenues topped $200 billion. Other energy giants are reportedly unnerved by Enron's growing market control and fear that Enron On-Line is essentially becoming the natural gas market.

Monopolies Power Play

The concentration of market power in the hands of a few massive energy conglomerates is another big part of California's energy crisis. This concentration put the big conglomerates in position to take advantage of California's deregulation by holding back supplies of electricity and natural gas in order to create artificial shortages and drive prices through the roof.

These conglomerates, such as Enron Corporation, Duke Energy of Charlotte, North Carolina, Dynergy and Reliant Energy of Houston generate 20 percent of the electricity in the U.S., and 40 percent of the electricity in California. El Paso Natural Gas supplies much of the natural gas to California and controls 20 percent of pipeline capacity across the U.S.

For the past year there have been unusual shortages of electricity in California. As a result, wholesale prices paid by California utilities have skyrocketed from an average of 2.5 cents to as much as 30 cents per kilowatt-hour. In December, electricity prices spiked for a time at $1,500 per megawatt, compared with $26 per megawatt last April. These electricity shortages haven't been caused because California is an “energy glutton” as industry apologists contend. Department of Energy figures show that California ranks 47th (of 50 states) in per capita energy use, and 49th in per capita electricity consumption. Instead, the shortages have been caused by an unusually high number of plant shutdowns, taking electricity capacity off line during times of peak need. The power companies claim this is just routine maintenance, but studies have shown that the most likely scenario is deliberate withholding of power to drive up the prices.

In “Price Spike Tsunami—How Market Power Soaked California” (Public Utilities Fortnightly, 1/1/2000), author Robert McCullough argues that while demand for energy has risen in California, it was not extraordinarily high and there were adequate resources in the West and within California to meet this demand.

Discussing the summer of 2000, when California also suffered rolling blackouts, he writes, “One can readily see how ordinary the summer was in terms of load, fuel prices, and hydro generation.” “The basic mechanics of California power markets resembles a Ouija board,” he writes, “a small number of players maneuvering prices in a fashion difficult even for close observers to understand.... The bottom line is straight forward—the California market was characterized by large enduring deviations from traditional utility practice. Generators did not generate. Peakers did not peak. Emergencies appeared to lack solid justification. All of the evidence is consistent with a major, sustained exercise of market power.”

Rigging the Natural Gas Market

There is also evidence that the big players who restricted supplies and drove prices from $3 per million BTUs a year ago to $60 per million BTUs this past December are manipulating the natural gas market (prices have since dropped to $12/mbtu).

The Los Angeles Times (2/4/01) reports that, “California officials are focusing on a 1996 meeting in a Phoenix hotel room where a group of high-ranking gas pipeline industry executives discussed ‘opportunities' arising from the Golden State's newly deregulated electricity market. By the time they left Room 431 of the Embassy Suites Hotel, 11 officials from El Paso Natural Gas Co., Southern California Gas and San Diego Gas & Electric had agreed to kill pipeline projects that would have brought more and cheaper gas into California.”

This collusion put El Paso Natural Gas in position to leverage the California market. El Paso sold 40 percent of its pipeline capacity to its trading subsidiary, El Paso Merchant Energy, through an apparently rigged bidding process. Merchant Energy then withheld supplies. “By hoarding pipeline space during critical periods [and not delivering gas],” the LA Times concludes, “El Paso Merchant Energy is pushing up spot prices.” Last year Merchant Energy's fourth quarter revenues quadrupled to $211 million from $45 million the year before. Some analysts estimate that marketers holding capacity on El Paso are clearing roughly $300 million per month due to these manipulations.

Soaring Profits and Market Control

Rising prices have meant skyrocketing profits for the energy monopolies. The CEO of Dynegy Corp., which owns power plants in California, said he had “never been so excited” about his company's recent returns, as the company reported a 210 percent increase in net income. The trade journal Gas Daily notes “The sharp increase in oil and gas commodity prices in 2000 led to a sharp uptick [in profits] in the exploration and production segment.” Natural Gas Intelligence writes, “The five largest U.S. energy companies reported blockbuster fourth quarter and year-end profits. . .charmed by soaring commodity prices in the oil and gas marketplace.” Enron reported a 34 percent jump in profits—to $347 million—for the last three months of last year.

But much more is going on here than a quick grab for profits. The actions of the giant energy corporations are part of a cut-throat battle between giant financial groups for dominance in the California and U.S. energy markets.

The battle plan may include weakening or even bankrupting California's utility corporations. Environmentalist Daniel Berman writes that Edison International's CEO John Bryson “has said that in 10 years there will be only 10 energy conglomerates left standing worldwide.” Berman thinks that California's current crisis is one battle in that economic war. (“The Confederate Cartel's War Against California,” San Francisco Bay Guardian, 1/5/01.)

There may be political undercurrents at work too, with Republicans (some from states like Texas that are home to big energy) and the right exploiting (if not fueling) the crisis in Democratic and liberal California. At the recent Conservative Political Action Conference in Washington, DC, a number of participants “expressed hope that California's electricity crisis will form a noose around the Democrats' neck...‘God has seen our predicament. We will soon see our restoration in Sacramento.'”

The powers-that-be are scrambling to contain this energy crisis, but the outcome is far from clear. State and federal government officials, and the big energy monopolies are meeting behind closed doors—scrambling to keep power flowing, and fighting over who's going to benefit and who's going to suffer. The system is already using the crisis to raise energy prices, push through more deregulation, and weaken environmental protections. No doubt more assaults are on the way.

California's inability to deliver power, a basic necessity of modern life, without gouging people shows that the means of production have outgrown the shell of private property. Why shouldn't society's resources, technology, and productive capacity be used rationally and collectively to benefit humanity—and not the other way around? The working class could definitely do better than this.

Larry Everest is a correspondent for the Revolutionary Worker and author of Behind the Poison Cloud: Union Carbide's Bhopal Massacre. Thanks to the staff of Revolution Books Berkeley for help with this article.

Disclaimer: The views expressed here are not the official position of the IWW (or even the IWW’s EUC) and do not necessarily represent the views of anyone but the author.