The California Energy Crisis
California and the American northwest are facing a severe energy crisis, as evidenced in the price of electricity and to a lesser degree,in the price of oil. Inflationary price hikes in utility prices (Gas and Electricity) have cost the state of California billions of dollars. While the problem in California is severe, the states of Washington and Oregon also have to deal with significant price inflation problems, namely the newly deregulated utility market, where wholesale prices are bid up and up by brokers to whatever the market can bear. This has caused prices for electricity that were once at $30 per megawatt hour in 1999 to run as high as $1200 or even $3000 dollars per megawatt hour. The inability of the States utilities to pass on these costs to the consumer have led to the declared financial insolvency of Southern California Edison(SCE) and Pacific Gas and Electric (PG&E). These two utilities, according to widely published reports, are already technically, though not legally bankrupt. However, if the legal proceedings of bankruptcy are allowed to run their course, a national economic crisis of historic proportions will ensue. Indeed, total national utilities debt in the US is in the neighborhood of 400 billion dollars and climbing. One of the causes (though certainly not the only) of this state affairs is that the price of natural gas, which is also used to generate electricity, has gone up in price from $2.75 in 1999 to over $10 per 1000 cubic ft..
Here is a chart of Natural Gas Prices, as measured in Million Btus up until 1999:
Here is a chart of Gas Prices in California from November 2000 Until April 2001
Yet cries of financial insolvency by the utilities do not seem to mesh with reality. According to The Utility Reform Network (TURN), these claims are greatly exaggerated. An excerpt from TURNs Cooking The Books follows:
The utilities claims of financial hardship do not square with the fact that revenues from other sources have increased dramatically at the same time as higher power purchase costs were incurred. TURN examined reports submitted by PG&E and SCE to the California Public Utilities Commission (CPUC) from 1997 through August of 2000 documenting their collection of stranded costs and their unpaid power purchase obligations. The findings are as follows:
Since 1997, consumers paid PG&E and SCE over $17.6 billion to be applied towards the collection of stranded costs. PG&E collected more than $8.3 billion while SCE received over $9.3 billion.
The stranded cost collections of both utilities in 2000 exceeded their under-collections for power purchases. PG&E collected over $2.25 billion between January and August while incurring uncollected energy costs of $2.18 billion. SCE received $2.53billionduring the same time period compared to $1.97 billion in uncollected procurement expenses.
Generation owned or contracted by PG&E and SCE produce substantial profits when energy prices are high. Between May and August of 2000, these generators netted almost $1.4 billion for SCE and $1.3 billion for PG&E. Since this money is credited to stranded costs, the average monthly collection of stranded costs was acceleratedby79% for PG&E and by 56% for SCE.
Since none of the net revenues derived from generation are used to offset the power purchase under-collections, losses claimed by PG&E and SCE are hugely overstated.
Corporate profits from the regulated utility during the rate freeze have been substantial Since1997, reported profits have exceeded $1.8 billion for SCE and $2.6billionfor PG&E.
As a result of overly generous cost estimates, both utilities made significant profits from the operation of their nuclear power plants. PG&E made $417 million in unreported profits from Diablo Canyon between 1997-99 and SCE realized $276 million from San Onofre and Palo Verde during 1998-99.
The issuance of $$5.5 billion in rate reduction bonds in 1997 allowed PG&E and SCE to repurchase substantial sums of their own stock and invest in unregulated generation assets in other parts of the country. None of the benefits from these investments are flowed through to consumers.
Based on these findings, TURN concludes that claims of possible technical insolvency are grossly inflated because they fail to consider the revenues associated with stranded cost collections and particularly those produced by utility generation during the first eight months of 2000.
In fact, these revenues exceed the amount of uncollected costs incurred for power purchases by each utility.
From Cooking The Books,by TUR N (http://wwww.TURN.org)
What is to Be Done?
California voters attempted to stop taxpayer bailouts in 1998 with proposition 9, an initiative to see to it that taxpayers would not foot the bill for the utilities inability (or perhaps unwillingness) to secure fair value electricity. Hence, taxpayers were beginning to see that deregulation in California simply meant, socializing the risk (making taxpayers liable for debts) and privatizing the profits (only the insiders get to make money). This is not market based competition, which is what deregulation meant in the minds of most taxpayers. Risk is endemic to any business venture, remove the risk and you remove the accountability and discipline that market forces bring. Legislators and voters should have seen through the blatant attempt to extract wealth from Californians in the original deregulation bill in 1996. This bill also called for a 20 billion dollar bailout for the utility companies for their stranded costs. These are costs associated with building Nuclear Power plants and allowed the utilities to recover the reasonable costs associated with building these plants. They are called stranded because the utilities believed that with the advance of competition from out of state entities, these plants were no longer needed and thus the investment was stranded by the new market realities.
The Real answer in the short term is to re-regulate the market and get the brokers and middlemen out of the picture. Additionally, California needs to have a common sense conservation policy that penalizes high consumption in residences and most businesses. Those businesses that require by their very nature, (i.e. heavy industry) high power usage should not be penalized as severely.
Deregulation has been blamed for this state of affairs and is certainly part of the problem. However, it was the way in which deregulation has been implemented in California that is giving real and competitive deregulation a bad name. What is called deregulation in California is little more that a scheme to manipulate energy prices to the profit of the middlemen and energy providers.
This Houston Texas based firm was one of Bush's leading campaign contributors, it is also one the leading players in the energy futures business. This market allows middle men to bid up the price moving costs further and further away from cost of production to the sky high prices we see today. Net profits of Enron have increased over 570% in 2000 over its profits for 1999.
Another Houston based energy firm that has James A. Baker III's one of its directors. For those of you who do not remember, he was the Secretary of State in George Bush Senior's. administration. To show the incestuous relationship that some of these firms have with each other, Baker was also a consultant with Enron, as were a few other Bush (Jr. and Sr.) administration officials.
Dynegy is yet another Houston based energy corporation. However, this one is also a joint owner of the electricity transmission capacity in California. It posted a 221% profit fourth quarter profit (2000) over its 3rd quarter revenues.
These and other players are making a killing on high rates that the utility companies must pay. Public Citizen (http://www.citizen.org) has stated that it is the lack of competition in the wholesale market, where the prices are actually driven up, that is part and parcel of the problem in California. Enron, which acts as a kind of energy broker and investment bank, has led the way. Now Wall Street is involved in extremely profitable energy futures as well as energy related derivatives. These profits are helping to offset the huge losses that many major investment banks are now experiencing with the bursting of the dot-com bubble.
Yet the Power suppliers in California have also done well according to research done By Executive Intelligence Review (EIR):
*Profits in millions of dollars
As the chart shows there are many INSIDE the State that are making money on this crisis, it is not only out of state entities causing this economic problem. It's a problem that is not going to go away anytime soon, as far too much money is being made in this so-called crisis from the states utility customers.
Here is chart of the net increase of profits of US energy companies
This profiteering has led the city of San Francisco to file a lawsuit in California Superior Court for unfair, unlawful and deceptive trading practices. Named in the suit are:
· PG&E Energy Trading Holding Corp.
· Reliant Energy Services
· Sempra Energy Trading Corp. (Owns San Diego Gas & Electric)
· Duke Energy Trading and Marketing
· NRG Energy, Inc,
· Morgan Stanley Capital Group
Just as important as this profiteering isis the fact that several California banks also have lent large sums of money to SCE and PG&E. It has been revealed that Bank of America (3 rd Largest US Bank) extended an 850 million dollar credit line to PG&E last year and JP Morgan extended 1 Billion dollars of Credit to Edison last year as well. According to many media reports, Bank of America (B of A) suffered large derivatives losses in early January and were taken seriously enough that trading was suspended for the banks shares in London. One large British bank, while admitting exposure to Californias Utility sector refused to state how large its exposure(to PG&E ) was, while attempting to reassure its customers. There is a long list of financial institutions from Asia to Europe that have extended credit to the now troubled utilities in California. This also includes TIAA-CREF, a pension fund that manages retirements for many of the nations educators.
A declaration of bankruptcy by these utilities would be a financial disaster for the State and the nation. This is a serious problem that must be solved in short order. A banking crisis is not out of the question should these loans not be repaid. So this is a serious crisis that it will eventually affect the entire nation, as cross defaults are a real and potentially devastating possibility.
The trend towards higher energy costs is an alarming one and is also evident in the cost of oil as here too, the prices have skyrocketed. It is the I-word  that no one wants to use. It is showing up all over the economy except in the governments hallucinogenic CPI figures. Which show small growth in the rate of inflation. This has been happening all across the energy sector yet the governments figures refuse to correctly include into the inflation numbers. It's a trend that will continue as the Federal Reserve continues to monetize (print money) our economy to keep America from its long overdue recession and keep key financial center banks from crippling losses suffered from the bursting of the NASDAQ bubble.
This Energy crisis is a real one. It is not however,so much a supply and demand problem as one of poor public policy and naked opportunism the energy sector. As long as the people of California refuse to recognize the inherent dangers of allowing this to continue and refuse to hold their legislators accountable at the polls and perhaps even in the Courts,the greater the danger to their livelihoods and economic future.