California’s Energy Crisis

Larry Everest

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.


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.”

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.

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

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

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.

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

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

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.


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.

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

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.


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.’”

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.

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
. Thanks to the staff of Revolution Books Berkeley for help
with this article.