Power To The People

By Daniel Eisenberg

Lou Neve's family-run nursery in Petaluma, Calif., hasn't exactly been blooming lately. Thanks to soaring natural-gas prices, Neve was going to have to shell out more than $160,000 in December to keep his rose plants warm, at least five times as much as he spent a year ago; instead, he turned off his heaters and watched the temperature in his 360-sq.-ft. greenhouse drop as low as 40[degrees], which has left his roses in as sorry shape as his shrinking bottom line. Then late last week Neve, like so many Californians, got another nasty shock: to help prop up its two largest, ailing utilities, the state gave the go-ahead to raise electricity prices 7% to 15% for a period of 90 days. Neve estimates that only a quarter of his ailing crop will make the cut for Valentine's Day. And "if we don't get a warm spring," he adds, "Mother's Day will be shot too."

Electricity deregulation, of course, wasn't supposed to work this way. When the state's monopoly was broken up in 1998, Californians were told power would become more plentiful. Utilities would sell off their plants to private generators, like Dynegy and Duke Energy, and then act as middlemen, bidding on the open market for electricity and distributing it to their customers. But with the booming high-tech economy sucking up power, barely a week goes by without warnings of rolling blackouts or outages.

Competition was also going to make electricity cheaper, allowing consumers to shop around for the best deal from a range of suppliers. But all those new suppliers never showed up, and for the utilities, there's not a good deal to be found. The wholesale price that they pay has jumped tenfold. Pacific Gas and Electric and Southern California Edison, which aren't allowed to pass on the full market rate to customers until mid-2002, have had their stocks hammered and credit ratings slashed. Now they are $12 billion in the hole and on the verge of bankruptcy; late last week SCE laid off 13% of its work force. "Between three and seven weeks from now," says John Bryson, chairman of Edison International, SCE's parent company, "our cash will be insufficient to keep buying the power necessary to serve our customers."

Last week's emergency increase offers a brief respite, and this week, at the behest of President Clinton, state officials will journey to Washington to try to come up with a more long-term solution. But the rate hike, which was only a third of what the utilities had requested, will probably cost the state's businesses as much as $400 million, pushing up prices across the country for fruit, vegetables and cheese. And many angry consumer advocates, who think they haven't seen the end of the increases, promise nothing less than a rebellion. Charges David Morse, a manager at the state Office of Ratepayer Advocates: "It's like saying there's a blank check to cover the generators' demands."

California, though, isn't the only part of the country grumbling about an energy crunch. While the rest of the U.S. doesn't have to worry much about the lights going out, millions of homeowners across the country are watching their heating bills soar. With unusually cold weather and a shrinking inventory of natural gas, the wholesale price has quadrupled in the past year, saddling consumers with bills that are expected to rise 40% to 50% this year. In December alone, consumption of natural gas, which keeps more than half of all U.S. homes warm, rose 20% from the year before, according to Cambridge Energy Research Associates.

Unlike the electricity squeeze, the tight market for gas has less to do with misguided government than with classic boom-and-bust economics. In the late '90s, as the price of gas mirrored oil's downward spiral, few banks or drillers were willing to risk the capital to hunt for a practically worthless commodity. Now that the price has rebounded, the West Texas oil patch is hopping, with more rigs and prospectors hunting for gas than since the mid-'80s.

Still, all that action won't yield results in time to offset the winter chill. Bills are piling up so fast in Chicago that 3,000 residential customers a week are pleading with Peoples Energy for an assistance or installment plan. Some chemical manufacturers in the South have decided that it's more profitable to shut down temporarily and sell their contracted power back at a higher price than to use it themselves. (Which is exactly what aluminum makers in the Northwest are doing with their valuable electricity, much of which flows to California.) At a time when many fear the country is slipping into a recession, the natural-gas spike, according to Goldman Sachs, could cut economic growth by 1%.

And guess what? About half the power plants in California, and a quarter of them nationwide, are fueled by natural gas. A price increase in one commodity just triggers another elsewhere. Some natural-gas providers have even balked at selling to the cash-strapped utilities. Governor Gray Davis, who has been criticized for acting too slowly, admits that "deregulation is broken and needs to be fixed."

The question, of course, is how. Initially, California's hastily implemented deregulation wouldn't even permit utilities to hedge their bets with long-term fixed contracts--a key ingredient of successful deregulation efforts in states such as Pennsylvania and Maryland. The fear, ironically, was that they would lock in a high sale price today at the risk of missing out on a lower one tomorrow. Instead, they've had to pay top dollar on the daily spot market.

Consumers aren't helping much either. Shielded from the vagaries of the free market by an artificially low rate, they have had no financial incentive to conserve. "It would be unfortunate, but probably healthy, to have a few blackouts so people would appreciate that this is a real problem," says Peter Cartwright, chairman of Calpine, a California-based generator.

Many blame California's woes on the profit-mongering generators themselves, for colluding to drive up the price of electricity, a charge they vehemently deny. The Federal Government, which recently forced generators to keep selling power to the utilities despite their precarious balance sheet, could impose a wholesale-price cap. But that might discourage much-needed investment in new plants and transmission lines. California might allow the utilities to raise cash by issuing bonds that customers would pay for over time, or form its own power authority to build new plants.

Sadly, America's energy crises won't be resolved until more capacity becomes available. Even at their lowest point, natural-gas providers stopped drilling for only about a year. But over the past decade, no major electric plant has been built in California, owing in part to intense environmental and community opposition. So Californians of all stripes--regulators, politicians, utility and power executives alike--are feeling more than enough heat, and deservedly. If they can't sort out their deregulation mess, other programs across the U.S. could easily short-circuit.

--With reporting by Rachele Kanigel/Oakland, Jeffrey Ressner/Los Angeles and Leslie Whitaker/Chicago

With reporting by Rachele Kanigel/Oakland, Jeffrey Ressner/Los Angeles and Leslie Whitaker/Chicago