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A socialist newsweekly published in the interests of working people
Vol. 65/No.4January 29, 2001

Workers, farmers face brunt of energy crisis
Blackouts hit California as companies defend 'business secrecy'
(lead article)
SAN FRANCISCO--In response to electricity shortages, Pacific Gas and Electric Co. (PG&E) cut off power to hundreds of thousands of households and businesses in California January 17 after state regulatory officials ordered the first rolling blackouts. The cuts left much of the northern half of the state in the dark, including parts of San Francisco, Oakland, Santa Cruz, San Jose, Sacramento, and other parts of Silicon Valley. Neighborhoods were blacked out one by one for an hour or more each. Homes, schools, factories, office buildings, TV stations, and street lights were left without power.

The rotating blackouts were ordered after California officials declared a "stage 3" energy emergency, meaning that power reserves were below 1.5 per cent of available capacity. It was the third such alert in less than a week, as officials scrambled hour by hour to obtain additional supplies of electricity.

The state's two major utilities, PG&E in the north and Southern California Edison in the south, are facing bankruptcy due to the skyrocketing prices of energy they purchase from power wholesalers. The companies have built up a combined debt of at least $11 billion, which continues to grow despite a 10 percent residential rate hike approved by the California Public Utility Commission January 5. Wholesale electricity prices have soared from 3.5 cents a kilowatt in 1999 to about 30 cents, sometimes higher.

The day before the blackouts in northern California, SoCal Edison announced it had temporarily suspended payment of almost $600 million due its creditors, including some of its power suppliers, saying it was about to run out of cash.

A major power supplier, Dynegy Inc., has threatened to force the utility into bankruptcy if it did not make payments due this week. Similarly, several natural gas suppliers have threatened to stop shipments to PG&E unless it can pay in advance.

The companies that sell power to California claim they are charging high prices on the spot market--the market for power that will be used in less than 24 hours--because of electricity shortages in that state and because of fears that the utilities might collapse without paying their debts.

On January 11, PG&E chief executive officer Gordon Smith outlined a plan to slash 1,000 jobs and cut back services in order to save the company $180 million. This is in addition to $120 million in previous cuts. In an internal memo to its workforce, Smith announced that PG&E will lay off "contractors and hiring hall employees"--full-time workers who receive no company benefits. About 325 workers were laid off immediately, and the remaining 675 will be let go over in the coming months.

In addition the PG&E chief warned that "some customer services will necessarily degrade," including a suspension in replacing power poles and transmission lines, a reduction in the number of employees fielding calls from customers who call about billing or service problems, and an extension of the average wait for new businesses to get power to 24 weeks.

Meanwhile, higher energy rates are already leading businesses to pass on higher costs to their customers. The Jack in the Box burger chain has already raised prices, and big egg and dairy producers are expected to follow soon.

California orange growers are worried that blackouts will lead to their delicate crops being ruined. They rely on electricity to power fans and water pumps that warm groves when it freezes. For many small farmers, the brutally high utility rates and the threat of further blackouts jeopardize their very livelihood.  
Profits shielded by business secrecy
While the demand for energy has risen in California in recent years, the utilities have refused to invest in new power plants, refineries, or pipelines over the past decade, deciding instead to downsize to maximize short-term profits. In addition, several power plants in the state have been kept off-line for maintenance. The "deregulation" legislation adopted in 1996 has not led to the promised competition between utilities--which are monopolies--or to what was supposed to be lower rates resulting from such competition.

With public anger over the energy disaster growing, media attention has focused on the process of how energy is bought and sold in secrecy, with energy companies raking in billions and various schemes used to jack up prices.

An article in the January 7 issue of the San Francisco Chronicle, titled "Energy brokered in secret--Stymied: No public scrutiny of bid process," provides a few facts about how this works.

California's Independent System Operator (ISO) and the Power Exchange (PX) are the two boards that oversee the buying of power in the state. Critics point out, however, that the members of the "public" boards are mostly representatives of the power industry.

These two bodies match the buyers of power--the utilities--with energy wholesalers for electricity that is needed on an hourly basis. They then hold auctions to determine the selling price of power by secret bidding. This auction system, set up under the 1996 deregulation law, uses a mechanism called the market clearing price, which "allows every seller to enjoy the same price as the highest bidder," the Chronicle article explains.

The companies "call the secrecy pacts legal, fair, well-established as a practice in federal trade-secrets law and, most important, essential for the protection of proprietary information," the Chronicle reported."

Last fall the state Public Utilities Commission (PUC) issued a subpoena for bidding information from the electricity suppliers, including balance sheets, profit-and-loss statements, organization charts, bidding histories, and records of generator operations. After the energy companies refused to turn over this information, the PUC appealed to the Federal Energy Regulatory Commission (FERC) to have the subpoenas enforced. The FERC has not yet acted on this request. The Chronicle stated, "Only a handful of regulators today can say whether the energy wholesalers are engaged in brazenly illegal price-fixing, merely unethical market manipulation, or just good business."

Another practice of the power companies is called "bumping." Conventional power plants use fossil fuel--natural gas, oil, or coal--to heat water and create steam, which in turn powers a turbine. The turbine is hooked up to a generator, which produces electricity. California state regulators are now investigating whether power producers have been shutting down their power stations and simply selling the natural gas outright instead of using it to create electricity. In this way the company gets top price for the natural gas, plus an increase in power prices for electricity because of the contrived shortage.

Under California law, bumping is not illegal. A spokesman for California-based Calpine Co. admitted that bumping was done "where it would be uneconomical to run because the price of gas was so high."

John Sharp of the Natural Gas Supply Association in Washington D.C., stated, "Selling gas in the secondary market is clearly legitimate. They're [energy generators] doing exactly what they should be doing. They're selling to whoever is paying the most for it." Sharp added, "Because people derive profits doesn't mean they did something wrong.... I don't think these guys are the bad guys."

California governor Gray Davis has sought to deflect criticism of the role of the state government in working closely with the power companies to maximize their profits. He has attempted to blame companies based in other states for the crisis. "Never again can we allow out-of-state profiteers to hold Californians hostage," he declared in a recent speech.

This ignores the fact that energy wholesaler Calpine Corp., which is based in San Jose, had an earnings increase for the third quarter of last year of 150 percent from one year earlier. Calpine operates power plants in northern California.

Additionally, one-third of the electricity sold in California is from companies that were controlled by the two parent companies of PG&E and Edison before deregulation. PG&E Corp. and Edison International made $3 billion from the sale of these power plants, and have made an additional $3 billion selling power from plants they were allowed to keep.  
Gov't seeks to keep utilities solvent
Capitalist politicians are now working out plans, promoted by Governor Davis, for the state of California to become the main buyer of electricity, which it would turn over to the utilities for distribution. They claim the state can negotiate better prices than the utilities, whose credit ratings have plunged. The aim of this plan is to keep the utilities solvent--the government's main priority--while long-term energy contracts are arranged.

There has been some discussion among big-business politicians of weakening some of the state's environmental regulations, which the energy bosses blame for the lack of investment in energy infrastructure here.

Seeking to take the attention off the energy giants' responsibility for the crisis, Davis has announced an "education" program to campaign for people to cut back energy use.

The federal government, in the meantime, is trying to wash its hands of the crisis erupting in California. White House spokesman Jake Siewert declared January 16 that it was up to the state government, local utilities, and power suppliers to find a solution. "The federal government has a limited role," he stated.

Bob Keller works at a meat-processing plant in the East Bay.
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