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A socialist newsweekly published in the interests of working people
Vol. 65/No.3January 22, 2001

Cause of energy crisis: monopolies' profit drive
Workers and farmers face soaring prices, layoffs
(lead article)
SAN FRANCISCO--The growing energy crisis in California has been marked by soaring prices for electricity and natural gas, almost daily power emergencies, several plant shutdowns and layoffs due to the jump in energy rates, the threat of insolvency facing the major utility companies, and repercussions affecting the Northwest and other parts of the country.

On January 5 the California Public Utility Commission (PUC) unanimously approved a 10 percent increase in residential electricity rates for at least the next 90 days, as an "interim" solution to back the state's two biggest privately owned utilities, Pacific Gas and Electric (PG&E) and Southern California Edison.

Wholesale electricity prices in California now average $330 per megawatt hour--11 times higher than a year ago.

Both utilities have said they are unable to pay power-generating companies for the skyrocketing wholesale prices of electricity without passing on the additional cost to customers. Under the state's utility "deregulation" legislation passed in 1996, electric rates are supposed to be frozen until next year.

PG&E and SoCal Edison say they may face bankruptcy, a prospect that worries banks that have lent money to the utilities, the power-generating companies, and other businesses that would be affected. The two utilities have a combined debt of about $11 billion, accrued from this past summer's spike in the cost of electricity generation.

Standard and Poor's recently downgraded the corporate bonds of both PG&E and Edison to one step above junk status, and the companies' stocks have plummeted to new lows.

In his annual speech to the state legislature January 8, Gov. Gray Davis called for the creation of a public agency to build power plants and raised the possibility of the state government taking over the plants of wholesalers in order to control prices.

Throughout the United States, working people are facing a colder than usual winter and record-high energy bills. A year ago the nationwide average price of a gallon of heating oil was $1.12. By the end of December 2000 it was $1.56. The price of natural gas, which was $2 per 1,000 cubic feet a year ago, has now mushroomed to between $9 and $20. The federal Department of Energy is forecasting even higher prices as the winter wears on.

In California, with the newly approved increases, the average household utility bills will reportedly be about $60 a month. But some working people already pay $100, $150, or even more.  
Government programs underfunded
A survey of the 62,000 households in Iowa receiving government energy assistance showed that 20 percent of recipients are postponing medical care to pay their utility bills, and another 12 percent are cutting back on food. Nearly 2,000 say they are forced to shut off their hot water to save money.

Meanwhile, federal government programs to aid families who can't afford to pay high energy bills are not being funded. President William Clinton recently bragged about his release of $155 million in emergency funds to the Low Income Home Energy Assistance Program, but the program's budget is still half a billion dollars less than it was 14 years ago. Only an estimated 15 to 20 percent of the 27 million eligible households will receive any assistance from this program.

State programs are also underfunded. For example, Community Enhancement Services, which aids low-income households in the Los Angeles area with high heating bills, only helps about 4,500 households--out of 20,000 applications this winter.

Those who cannot afford to pay the exploding increase in energy rates are told not to expect aid from the government but to depend on charity. PG&E is encouraging its customers to contribute to a charity called REACH, a one-time assistance program run by the Salvation Army. Last year PG&E customers donated $2 million to this program; PG&E's matching contribution was just $1.25 million.

The energy crisis has been at the center of public debate here over the past month. Many working people have expressed skepticism and hatred toward the energy trusts and their ruthless drive for profits. Benito Marquez, a construction worker in Hayward, told this reporter, "I hate working Saturdays, but I need the money for when PG&E's ransom note comes in January."

"I don't believe their story they're losing money," Cassandra Mason of Huntington Beach told a Los Angeles Times reporter. "They're just looking for a way to raise rates. I think we already pay too much." Mason, a housewife whose monthly power bill is $100, "places the blame for the crisis squarely at the feet of Southern California Edison and other utilities," the paper reported.

In the northern California city of Anderson, south of Redding, 200 angry people crowded a town hall meeting on the energy crisis sponsored by a state assemblyman who organized a panel of politicians and "consultants" to address the audience. "They're gouging us!" one man said of the utilities, prompting cheers. "They're pulling the wool over our eyes," said Sonja Perez as she left the meeting. "There's not one person on the panel that represents the rate-payer or the consumer."

The first sign of the crisis came last June in San Diego, the first region where the cap on electricity rates was lifted. Energy bills ballooned, by 300 per cent in some cases.

But the roots of this turmoil go back several years. Energy deregulation was instituted in this state in April 1998. The deregulation law eliminated utility price controls that had been in place since 1912. It also made customers pay off the bad debts of PG&E, Edison, and San Diego Gas & Electric--around $17 billion.

In return, customers were offered an immediate rate reduction of 10 percent, a cap on electricity rates until early 2002 (natural gas rates are not regulated), and the promise of competition by utility companies and lower energy rates.  
Monopoly control of energy
What actually occurred was quite different. First, virtually no competition has emerged among or against the state's biggest utilities. Secondly, the rate cap, which kept customer costs at 1995 levels for six years, actually meant bigger profits for PG&E because of a decline in the price of natural gas at that time. The Foundation for Taxpayer and Consumer Rights has estimated that since 1998 "PG&E alone has raked in $8.3 billion--far more than it has paid recently in higher energy prices."

The periodic "shortages" of energy have been the result of decisions made by the giant energy trusts, which monopolize the mining, drilling, processing, generating, and distributing of fossil fuels around the world. The oil monopolies have the ability to restrict supplies and hoard inventory in order to raise prices.

As the demand for natural gas increased in the fall of 2000, the prices were jacked up. According to Financial Times Energy, a trade publication, the price of one British Thermal Unit (BTU) of natural gas in California in December 1999 was $2.30. By early December 2000, it had soared to $53 per BTU; in recent weeks it has hovered between $15 and $20. A BTU is the amount of gas required to raise the temperature of one pound of water by one degree.

Since gas is used to power the generators producing electricity, the cost of electricity, which stood at 3 cents per kilowatt-hour in early 2000, rose to 18 cents last August, and is more than 25 cents today.

Additionally, several power plants in the state have been kept off-line for maintenance. As the daily demand for electricity rises in the late afternoon when people return home from work, additional reserves of power suddenly become available--at a higher cost.

State officials say they believe the power companies are "gaming the market"--deliberately holding back electricity until prices surge. But, unless collusion between power generators can be proved, this practice is completely legal.

Despite growing demand, the energy companies have refused to invest in new refineries, power plants, or pipelines over the past decade. Rather than expand productive capacity and hire more workers--and seeking to avoid spending money on environmental regulations--the energy industry has downsized to maximize their short-term profits. No new power plants have been built in California in 10 years, and the state doesn't have enough pipelines large enough to pump in natural gas from other states.

In a January 3 New York Times opinion piece titled "The New Reality is Old Economy Shortages," columnist Paul Krugman wrote, "California's power crisis is first and foremost a crisis of underinvestment--a booming state economy undone because nobody built the power plants and gas pipelines it needed. And at least part of the reason for that underinvestment was the excessive enthusiasm of the financial markets for all things tech." Krugman concludes his piece by saying, "You don't have to be a raving populist...or a conspiracy theorist to wonder whether there are some perverse incentives when an industry dominated by a few large players finds it hugely profitable not to invest."  
Power alerts, threat of rolling blackouts
Throughout December, state officials declared almost daily power emergencies, including its first-ever "Stage 3 alert," when power reserves dropped to almost nothing. PG&E and Edison threatened to carry out rolling blackouts in the state if their demand for a 30 percent rate hike went unmet. On December 20, state officials invoked an emergency federal order requiring out-of-state power producers to sell surplus electricity to California.

In December the Federal Energy Regulatory Commission (FERC) rejected the idea of putting a cap on what power generators could charge utilities for electricity, asserting its confidence in the electricity market's ability to "self-correct" any imbalances.

At the end of last month, Southern California Edison, backed by the California governor, filed a lawsuit demanding that federal authorities act to prevent the skyrocketing wholesale electricity rates from pushing the utilities into bankruptcy. FERC chairman James Hoecker said that if PG&E and Edison adopted more cost-cutting measures, his agency might consider providing some relief.

The impact of this crisis on working people is more than sky-high energy bills. The owners of building materials, steel, aluminum, paper, and textile plants as well as dairies and other businesses that rely on natural gas to fire boilers, furnaces, dryers, and kilns have shut down and laid off workers to avoid paying higher energy bills.

L.A. Dye and Print Works in Los Angeles closed one of its dye houses and laid off 40 workers; the jobs of the other 660 workers are also in jeopardy. Shasta Paper Company in Redding, California, the last full-operation paper mill, laid off all but 16 of 460 workers on December 1.

The scattered plant shutdowns are taking place not only in California but in Northwestern states (see article on page 6 on Washington State).

Dairies in California are expecting to add 15 cents a gallon for milk next month to offset heating costs. The Western Growers Association, a group of 3,500 farmers in California and Arizona, are cutting back planting broccoli, lettuce, and strawberries.

While capitalist farmers will pass on the costs to consumers, small farmers will be devastated by the huge increase in their energy costs.

In the name of "cost-cutting," PG&E and Edison will reduce or eliminate the annual performance bonuses paid to workers at the utilities--as much as four weeks' worth of pay. Edison has announced it will eliminate 400 contractor jobs and lay off an additional 1,450 workers.

Meanwhile, the energy corporations have made record profits. Eight companies that sell electricity to California utilities reported third-quarter profit increases from 23 percent to 153 percent. California-based Calpine Corp., a major developer and operator of gas-operated power plants, increased third-quarter revenues 168 percent over the same time period in 1999, and raised profit estimates for the fourth-quarter of 2000 and the year 2001, sending its shares up 8 percent.

Other energy wholesalers that raked in juicy profits include Williams Companies, Dynegy, Southern Co., Duke Energy, and Enron. Duke Energy spokesman Richard Fernandez defended his company's profits as the result of "basic supply and demand."

PG&E utility's parent corporation, PG&E Corp., also posted record profits--$248 million for the third-quarter, up 26 percent from the previous year. PG&E Corp. has three other operating segments besides the utility. These are power generation facilities; natural gas pipelines, storage facilities, and processing plants; and the purchase and sale of energy commodities.  
Governor calls for 'equality of sacrifice'
In his January 8 address, Governor Davis called the deregulation of California's power system "a dangerous and colossal failure." He pledged to set aside $1 billion in the state budget to stabilize the supply and price of electricity and provide new power generation. Davis proposed the creation of a public agency to build power plants, but offered few details about such a plan. He also raised the prospect of the state government taking over the plants of wholesalers in order to control prices. The governor's main concern in these proposals is restoring financial solvency to the utilities.

A major theme of Davis and other capitalist politicians is that "consumers" must share responsibility with the energy corporations. "Everyone has to play their part," Davis said on a PBS Nightly Business Report. Urging equality of sacrifice, he also opined that the utilities "are more victim than culprit in this situation." The conclusion, reinforced in countless articles in the big-business media, is that working people must "do their part" by cutting back on the use of electricity as well as accept the price hikes.

Davis and California legislators flew to Washington for talks with federal officials January 9. After the meeting they suggested that one move may be an effort to make the power generating and marketing companies give the two major California utilities a short-term break on their debts.

Another proposal, raised by some members of the state Public Utilities Commission and others, is for the state to issue long-term bonds to help bail out the utilities. This would be funded by a surcharge on customers' bills.

In response to the unfolding energy catastrophe, President-elect George W. Bush said January 9 that his administration will open the Arctic National Wildlife Refuge in Alaska to oil and natural gas drilling, despite opposition by environmentalists.

A number of capitalist politicians and consumer advocates are raising various proposals to protect "rate payers" from energy price "gouging," that is, making what they term "excessive" profits. Some have called for re-regulating the utilities, that is, returning to a version of the previous setup.

State Treasurer Phil Anglides proposed at a recent news conference creating a state energy authority that could seize existing power plants through eminent domain, supposedly modeling itself after the Tennessee Valley Authority. Such a measure, if adopted, would be designed to socialize the losses of the owners of the utilities, and would leave open the possibility of returning the companies to private hands once they could be made suitably profitable again.  
Banks drawn into crisis
The energy crisis is having increasing ramifications, including on a host of U.S. and foreign banks that have extended millions of dollars of credit to the California utilities. The two banks with the biggest "exposure" are reportedly Bank of America Corp. and J.P. Morgan Chase, which have more than $500 million in outstanding loans to both utilities. The trading stocks of both of these huge banks have also recently dropped because of the energy debacle.

Bourgeois economists have expressed worries about the snowball effect of the situation in California on the faltering U.S. economy and beyond. Morgan Stanley Dean Witter issued a report called, "California Unplugged--A drag on global growth?" In it, Morgan Stanley economist Joseph Quinlan warned, "Negatives tend to snowball, so what is happening in California has the potential to exacerbate the weakness we already are seeing in the U.S. economy." California has the world's sixth-largest economy.

Bob Keller works at a meat processing plant in the San Francisco Bay area.

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