Who Gets Rich When the Lights Go Out in California?

Revolutionary Worker #1096, March 25, 2001, posted at http://rwor.org

California has been gripped by a major power crisis that has been building for over a year. In the state famous for capitalist high tech, there were times in the beginning of this year when people didn't know when the power would flick off without warning--cutting off the lights, crashing computers or freezing elevators for hours. There were factory layoffs, and emergencies in dairy farms where the milking machines and refrigeration stopped. Because the supply of electricity has barely covered demand--the electricity was cut off to different areas at different times in a series of "rolling blackouts."

The RW article, "Who Turned Out the Lights in California?" by Larry Everest (RW #1089, Feb. 4, 2001) refreshingly zeroed in on what was essentially driving the energy crisis in California: the "ruthless anarchic competition" between multi-billion dollar financial groups to maximize profits, cut down rivals, and move into and gain a stranglehold on California's huge energy market.

In the last month, the California state government has taken several steps to deal with the immediate crisis and has floated plans on how it intends to proceed with containing and managing the crisis on a long-term basis. For example, the state is trying to speed up the construction of new power plants (at the expense of the environment), has begun to directly take over the purchasing of electric power from the utilities, has begun to enter into long-term contracts for the purchase of electric power supply, and appears to be moving toward purchase of the utilities' high-voltage electric transmission lines. Notably, none of the measures taken to date have done anything to resolve the crisis, or any of its fundamental problems. In fact, in just the past few weeks, the state of California has already purchased billions of dollars of electricity (merely replacing the utilities as the buyer of high-priced electricity), and it now appears that high electric utility bills will either be paid through taxes or directly in utility rates.

If anything, the state's measures appear to be geared primarily toward allowing recovery of the major utility corporations from the verge of bankruptcy, pushing the costs and risks of the crisis primarily onto the masses, and assuring the energy corporations that the state is not going to take any actions which would basically upset their opportunities for profit and control of the state's energy market.

For their part, President Bush and federal government regulators have also made it very clear that the "free market" is here to stay, and Californians better get used to it. Virtually every analyst is warning of an extremely difficult energy situation in the period ahead, with one characterizing the expected situation this summer as "a train wreck waiting to happen."

The California energy crisis crystallizes a number of economic trends operating in the imperialist energy market lately under what is commonly referred to as "globalization." First, "deregulation and privatization" are occurring across the U.S. and internationally, giving capitalist "market forces" unbridled freedom to operate. Second, huge energy corporations are gaining ever greater domination and control of markets through mergers, acquisitions, expansions into new markets, and crushing of rivals. Third, while not necessarily a long-term trend, energy prices are soaring, as are the profits of energy corporations.

The "deregulation and privatization" of various energy-related prices and services (which were formerly regulated, state-owned, or state-subsidized) is giving free rein to profit-driven "market forces" and "competition." The Revolutionary Communist Party's analysis of the current world political economy indicates that "privatization and restructuring of state activity" are worldwide phenomena. The Party's "Notes on Political Economy" discusses this, and provides good, overall background on why this is happening. (See especially pages 34 through 36 of these "Notes.")

How are "deregulation" and "privatization" playing out in the "electric restructuring" in California? From roughly the 1930s to the 1980s, electric utilities had essentially been allowed by federal and state governments to operate as monopolies in certain geographical "service territories." For example, in California, Pacific Gas and Electric Company was given the service territory in northern California, Southern California Edison was given the territory in most of southern California, and San Diego Gas and Electric Company was given the territory in the San Diego area.

The utilities owned and operated all of the power plants, the high-voltage transmission lines, the substations, and the electric distribution system, right down to the electric meter.1 The electric utility would read your meter, do all the billing, maintain the electrical system, and be responsible for restoring power in the event of a storm. You sent your payments to one company, the utility. The electric rates the utilities were allowed to charge were regulated, that is, they were controlled and monitored by the state public utility commissions, and these rates were tied to the actual costs of operating the company. The utilities were given a "reasonable" stable return to ensure that cash could readily be raised from investors and creditors.

With deregulation and privatization, this whole system has been gradually breaking down over the past 20 years or so. In the U.S., the process of energy deregulation and privatization of energy-related services and prices has occurred in many states. As far back as 1978, during the so-called energy crisis when Carter was president, the U.S. Congress passed the Public Utility Regulatory Policies Act, forcing utilities to begin buying power from independent power producers, in addition to maintaining their own power plants.

The price of natural gas used to be regulated by the Federal Energy Regulatory Commission (FERC)2 until the mid-1980s. Since then, following the issuance of the Natural Gas Policy Act, and "Order 436" by the FERC, the price of natural gas has been deregulated, and entirely subject to market forces. In 1996, the FERC issued Order 888, requiring utilities to open their electric transmission lines to competitors. As of the end of 2000, about half the states in the U.S. had passed electric restructuring legislation, or have had regulatory orders issued to that effect, and more than 20% of U.S. electricity was generated by producers other than traditional utilities.

When the latest moves toward "electric deregulation" (or "electric restructuring" as it is sometimes called) were set up in California in 1996, it was portrayed as the "free market solution" to the high electric rates in California, replacing an outdated, inefficient, "command-and-control" regulatory system. According to this capitalist economic theory, "free market competition" would more efficiently allocate resources, would encourage the building of efficient power plants, and would lower electric rates.

Under the restructuring plan, the California utilities would sell their gas-fired power plants to private companies. These unregulated electric generators (the huge energy corporations) would bid prices for their electric supply into the "Power Exchange" (PX), supposedly establishing a "competitive" market for electricity.3 Although these sellers of electricity could bid as high as they wanted to on the "free market" (i.e. the price of electricity was "deregulated"), free market competition would supposedly force these sellers to lower the price of their electricity in order to be sold. Newer, more efficient power plants would be built by private, unregulated companies, adding yet more downward pressure on prices. The utilities would still deliver the electricity to ratepayers over their distribution system, but ratepayers, both big and small, would be able to freely choose who they wanted to buy their power from, including from so-called "green" electricity providers (i.e. generators who used renewable resources). Or, you could continue to buy electricity from the utilities at the PX price.

Of course, as Larry Everest pointed out in his RW article, things have not turned out as promised by the advocates of the "free market" and electric restructuring. In fact, electric restructuring in California has been a complete disaster, except for the energy corporations who have reaped "awesome" profits.

Electric prices have soared4, rolling blackouts have occurred and threaten to happen in a major way this summer. Very few small customers have chosen an alternative electricity provider. Some green electric providers are reportedly going under (unable to compete with the big energy corporations). And the utilities are on the verge of a couple of the largest bankruptcies in U.S. history.

The process of deregulation has given big energy corporations new opportunities for even greater control over, and for profits in, the production and distribution of energy commodities which are essential to the lives of the masses and the functioning of the economy--commodities which can't be simply refused when the price becomes too high.

The deregulation trend can also be seen in numerous other industries (for example in the airline industry, cable television, and telecommunications) and countries. Deregulation and privatization are common features of "structural adjustment programs" (SAPs)5 imposed on third world countries by the International Monetary Fund (IMF).6

Once deregulation or privatization occurs under an SAP, the prices of basic commodities, which the masses rely on for survival, dramatically increase. (In many Third World countries, utilities were nationalized industries, and are now being transformed into private enterprises, i.e. they are being "privatized.") For example, RW readers may recall that, in Peru, when the tyrant Fujimori took over, he instituted what became known as "Fujishock," an IMF-imposed SAP, which immediately caused the prices of basic foods and commodities to skyrocket. The price of rent, fuel, and electricity went up by over 400% in a matter of weeks. The price of bread went up by over 1000%.

In his book, Phony Communism is Dead, Long Live Real Communism, Bob Avakian discussed Lenin's analysis of imperialism, saying: "Lenin showed how imperialism was distinguished by the growth and dominance of monopoly capital, as opposed to smaller units of capital. Monopoly capital does not necessarily mean literally the domination of one single unit of capital over an entire industry (nor still less, over the whole economy) but the domination by a few very large and dominant units of capital over whole industries, over whole branches of the economy."7 This perfectly describes what is happening in the energy industry. The U.S. and world energy market is increasingly controlled and dominated by fewer and fewer huge corporations--through "mergers and acquisitions," expansions into new markets and new sectors of the energy market, and the crushing of competitors.

"Merger mania," "market consolidation," and acquisitions comprise a broad economic trend in recent years. The RCP's "Notes on Political Economy" also comments on this trend: "After a decade of downsizing, large U.S. banks and corporations have been merging at a pace and on a scale not seen since the industrial consolidations of the early 20th century. This is one way in which imperialist capital is seeking to take advantage of new global opportunities and to position itself for new global competition challenges."

From about 1980 through 1992, some 45,000 merger deals were struck, and in the last eight years another 72,000 corporate mergers have occurred, valued at $6.7 trillion.

The dominant U.S. energy firms are among the very firms gouging Californians. One of the key stories told by those pushing "electric restructuring" was that "competition" in the electric generation market would naturally lower the price of electricity. However, as with the gas and oil markets, the electricity market in California has come to be dominated by a few large energy corporations, euphemistically called "market consolidation" in the trade journals. In the words of one analyst, "These [power plants] were snapped up by a few large, primarily Texas-based corporations. When no other players entered the market, the forced divestiture [i.e. sale] effectively turned a regulated monopoly into an unregulated cartel."

While it's clear that this "competition" hasn't led to lower energy prices, it is also clear that this cut-throat competition is a serious concern among corporate CEOs worried about returns and spheres of market control, and it has led to even larger corporations with even greater spans of market control. Gas Daily, a trade journal in the natural gas industry, notes that "While there are a number of reasons for the consolidation trend, the biggest one is the intense competition for capital in the oil and gas industry." The same journal noted in a separate article that mergers and acquisitions were being driven by corporations seeking "to obtain the critical mass needed to survive in the increasingly competitive energy business."8

Mergers and acquisitions (M&A) among energy corporations have been a marked trend in the 1990s. For example, Gas Daily reports that the number of [M&A] 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." After the merger of two large companies planned at that time, "12 companies will account for more than 85% of interstate natural gas activity." In the electric industry, about 59 mergers took place in the U.S. from 1995 through the end of 2000.

This trend is happening not only among the unregulated energy corporations, but also among the traditional utilities themselves, and it is happening across all sectors of the energy industry. The Associated Press reports that "market consolidation " is also picking up in the electric utility industry, as traditional utilities "have to change to remain competitive." One analyst with J.D. Powers speculates that the number of major utility companies could shrink from 125 a few years ago to 50 over the next decade. He also says a similar "consolidation" could occur among the unregulated electric corporations.

Traditional utilities are also forming their own unregulated holding companies which then in turn spawn all kinds of other unregulated affiliates. The affiliates can then expand into new, unregulated energy markets, for example through buying power plants and selling the generated power, brokering electricity and gas sales, or acquiring natural gas pipeline capacity and using those assets to sell natural gas. For example, PG&E affiliates have been buying up power plants and acquiring natural gas pipelines in other states.

This trend is also resulting in a "convergence" of the energy industries, as many of the corporations involved in the electric, natural gas, and oil markets are crossing over to become involved in other industries. At the same time, events impacting one sector of the energy industry are having significant impacts on the other sectors. In the words of one financial analyst, "You need the assets to be a major player in the trading and marketing business. It reduces the risk of your trading operations and improves your credit standing. That's why you're likely to see big energy trading companies snap up both gas and electric assets in the months to come."

Enron Corporation, another of the corporations heavily involved in California, has now become the undisputed leader in energy sales, and is quickly expanding its Internet-based sales (via Enron OnLine) into other commodities as well. It achieved "only" a 34% increase in fourth quarter profits last year, but more importantly its revenues were in excess of $200 billion. This indicates that its market control is quickly eclipsing other energy marketers who've become increasingly unnerved about Enron's position. In the natural gas market, some fear that Enron OnLine is essentially becoming the gas market.

While high energy prices are creating particularly acute problems in California, high energy prices are occurring across the U.S., particularly for oil and natural gas, and this is helping energy corporations achieve record profits. The San Jose Mercury News acknowledged: "It's clear that energy companies made a killing not just in California but nationally and overseas as they expanded into newly deregulated markets." High prices and profits may not necessarily become a long-term trend, but it is a trend thoroughly enjoyed right now by big investors.

Natural gas provides about 25% of the energy used in the U.S. Natural gas prices have been going up across the U.S. (and Canada which sends a lot of gas to the U.S.) for over a year now--and have been reaching unprecedented levels. The wellhead price (i.e. the price a buyer would pay directly from a supplier's gas well, delivered into an interstate pipeline) has gone up by about three to four times over the past year or so. (And due to even more market manipulations on El Paso Natural Gas Pipeline by its own affiliate, El Paso Merchant, the price of gas at the California border has gone up by as much as 30 times on the spot market compared to prices a year ago. Some analysts are estimating that marketers holding capacity on El Paso are clearing roughly $300 million per month due to these manipulations.) In addition, crude oil was selling for $11 per barrel in 1998, and is now selling for about $30 per barrel. This is important not only because so many other products are dependent on oil, but also because oil is basically the fuel alternative for gas-fired power plants.

The revenues and profits being achieved by energy corporations on the backs of consumers have been "awesome" in the words of one financial analyst, and have been largely attributed to "soaring" energy prices. Remember this is seen as a good thing by big investors. Natural Gas Intelligence notes that "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."

Chevron, who wants to merge with Texaco in a mega-deal valued at $44 billion, saw its fourth quarter 2000 profits jump 88% on the basis of higher prices for crude oil and natural gas. A financial analyst, commenting on Chevron's plans to increase natural gas production, said, "They're not shy about it. Growth hinges on expansion, and that drives profits."

Meanwhile, utility bills have dramatically increased across the U.S., particularly natural gas bills, but this is of little concern to investors who applaud the energy corporations' "awesome" profits. It's something to think about while trying to decide whether to pay the electric bill or buy groceries: which class has the power.

This article is posted in English and Spanish on Revolutionary Worker Online
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