No one disputes that a mismatch between supply and demand underlies the California energy crisis. But consumer advocates point out that the data show California's energy demand to be growing slowly, not surging as many news reports suggest. And, they say, the electricity shortage reflects not any real limits on supply, but the market manipulations of the independent generators.

A comprehensive San Francisco Chronicle study in March showed that California's energy demand is in fact rising slowly . "The industry has painted the summer of 2000 as the equivalent of a 100-year storm in meteorology — an event so powerful and unexpected that the existing infrastructure was devastated by its force," the Chronicle reported. "The statistics show that 2000, taken in total, was nothing of the sort." Overall electricity usage in California rose approximately 2 percent a year in the 1990s.

Most importantly, peak use —the demand level that actually stresses the system — was lower at the end of 2000 than in the previous year. While peak demand was high in May 2000, in four out of the last six months of 2000 — July, August, October and December — peak demand was lower than in 1999, according to an analysis of statistics from California’s Independent System Operator (CAISO) by Public Citizen's Critical Mass Energy and Environment Project.

California's available capacity and electricity on contract vastly exceeds its peak demand. In total, California has 55,500 megawatts of power generating capacity and 4,500 megawatts of power on long-term out-of-state contracts — approximately 15,000 megawatts more than peak demand, Public Citizen reports, citing statistics from CAISO.

The problem California is facing isn't supply, say the consumer/green groups, it is that the power supply companies, now a separate industry segment from the utilities, simply refuse to make the supply available. The independent power generators' alleged market manipulation is now the source of numerous lawsuits and investigations.

— Robert Weissman

Power Plays: Where did the California Utilities money go?

When California lawmakers voted unanimously to deregulate the state’s electricity market in 1996, California’s three biggest utilities — PG&E, SoCalEdison, and San Diego Gas & Electric (SDGE) — owned most of the state’s power generating plants, as well as most of the state’s distribution grid and power lines. The companies operated as regional monopoly utilities, with strict regulatory oversight over retail electricity rates.

Once deregulation began, however, the companies rapidly began to restructure. First, they “unbundled” their assets — selling off some of their power generating plants while keeping their distribution grid and power lines and other assets such as nuclear and hydro power generation facilities.

The money from the power plant sales and high utility charges was siphoned off to the utilities’ parent companies (e.g., PG&E restructured in 1997, creating a separate holding company called PG&E Corporation), which then passed the money on to other unregulated subsidiaries, which acquired new generating facilities in other states and (in the case of Edison International and SDGE) other countries. The parent companies built a diverse array of new assets and services, including natural gas pipelines, storage and processing plants.

Since the summer of 2000 price spikes, PG&E and SoCalEdison have claimed they are going broke by having to pay the difference between high electricity prices charged by wholesale power suppliers in the newly deregulated market and lower fixed retail rates that the utilities themselves originally negotiated with state regulators.

Claiming they needed relief or else they would be forced to declare bankruptcy, the utilities convinced the state to begin spending $50 million of taxpayer monies per day to purchase wholesale electricity on their behalf. The state began buying super-high-priced electricity on the wholesale market, including on the spot markets where prices were orders of magnitude higher than just a couple years before, and conveying the electricity to the utilities. By May, California taxpayers had spent more than $6 billion, with no end in sight. As the state’s budget surplus quickly eroded, Governor Davis proposed floating $13.4 billion in bonds to cover the cost (the bonds are to be paid off over 15 years by ratepayers via higher electricity rates).

Meanwhile, federal regulators (FERC) agreed in January to allow the companies to organize their corporate structure so as to preemptively shield their assets during bankruptcy proceedings.

Less than two months later, on April 6, PG&E — the utility, not the holding company — filed for bankruptcy, leaving consumers and taxpayers in even more of a bind.

But was the company really bankrupt? While the utility was losing $300 million a month in wholesale power purchase costs, its parent company was pulling down a healthy profit. At the end of 2000, the PG&E Corporation (the parent company) reported $30 billion in assets and $20 billion in revenues for the year. It had an ownership interest in 30 independent operating plants in 10 states, including a number under development. In October 2000, it spent nearly $8 billion to acquire 44 new turbines.

Moreover, between 1997 and 1999, PG&E transferred $4 billion to its parent corporation. In the first nine months of 2000, PG&E transferred an additional $632 million. An audit sponsored by the California Public Utility Commission (CPUC) concluded that “historically, cash has flowed in only one direction, from PG&E to PG&E Corp. and then to the unregulated affiliates.” Similarly, SoCalEdison transferred $4.8 billion to its parent corporation (Edison International) between 1995 and 2000.

CPUC’s audit also found that PG&E Corporation (the parent) is expected to receive an additional federal tax refund of up to $1 billion “largely due to losses sustained by PG&E.”

The San Francisco-based Utility Reform Network explains in its report “Cooking the Books” that the utilities’ position was “akin to a situation in which one pocket is empty and another is full of cash. A reasonable person would check both pockets before assuming that they are penniless.”

PG&E’s Jon Tremayne responds that deregulation was set up “to pay the utility investors back money that they invested in power plants that they were now forced under law to sell. So the shareholders essentially recovered their investments and reinvested it. This was done under the direction of the Public Utilities Commisssion, in synch with the state law.”

With support from the FERC, PG&E maintains that its California subsidiary is completely separate from the parent holding company, despite the fact that the two companies have virtually identical boards and file a joint annual report with the Securities and Exchange Commission.

The company may not be entirely in the clear. PG&E admitted in April in a quarterly filing with the U.S. Securities and Exchange Commission that, depending on the terms and conditions of the company’s reorganization plan adopted by the company’s Bankruptcy Court, creditors of the bankrupt PG&E utility unit may be able to grab some assets from PG&E National Energy Group, a subsidiary the parent had intended to insulate through its restructuring plan.
— Charlie Cray

Recent Purchases or Commitments
of PG&E Corporation
(parent of PG&E Company)
and Edison International
(Parent of SoCal Edison)

Hurwitz’s Power Grab

Charles Hurwitz, the man who critics say has made a fortune by pillaging old growth redwoods, busting unions, and engaging in shadowy stock market and savings and loan deals [See “Ravaging the Redwoods: Charles Hurwitz, Michael Milken and the Costs of Greed,” Multinational Monitor, September 1994], can add another title to his infamous resume: power robber baron.

Hurwitz's Maxxam company controls Kaiser Aluminum, which has limited production at two smelters in Washington state since January 1999. Initially, Kaiser shut down its Washington aluminum smelters as part of the company's nationwide lockout of workers who belong to the United Steelworkers of America. The lockout ended last September, shortly after the federal government threatened to charge Kaiser with violating labor laws.

Then, Kaiser used a novel approach to turn a profit: it started selling the smelters' contracted allotments of electricity back to the Bonneville Power Administration (BPA), the agency that produced the power in the first place.

Under Kaiser's existing contract with the BPA, it purchased power at a rate of $22.50 per megawatt-hour. Kaiser resold the power to BPA for more than 20 times that amount. In late 2000, the spot market price for electricity in the western United States soared to as much as $750 per megawatt-hour.

Kaiser registered $135 million in power sales from October to December 2000.

At year's end, even with its entire U.S. production operations idle, the company's executives funneled some of this easy money into their own wallets. CEO Raymond Milchovich was paid a bonus of $978,000, on top of an annual salary of $630,000. Other executives received bonuses of $250,000 or more.

Aluminum companies have long benefited from generous relationships with the federal BPA, which operates 29 dams in the Columbia and Snake River basins. Smelters aggregate around sources of cheap energy because 45 percent of the cost of aluminum smelting is electricity.

Many Pacific Northwest smelters have been closed since last summer, when their owners found it more profitable to sell power earmarked for their operations to the spot energy market. In June 2000, Alcoa announced that it was halting production at its Troutdale, Oregon smelter. In western Montana, Columbia Falls Aluminum closed its smelter and is reselling the power. Golden Northwest is selling power from its allocation for smelter operations in The Dalles, Oregon, and Kilimat County, Washington.

Some smelter owners recognized the windfall nature of these sales, and pledged to give something back to the workers, local communities and the BPA.
Columbia Falls decided to maintain its 600 workers' salaries and benefits through the year 2001.

Golden Northwest said that it would pass along 25 percent of its estimated $400 million in power sales to the BPA. The company designated another 25 to 50 percent of its electricity revenue for the development of alternative energy, including a wind power plant. It is also converting from the heavily polluting production of primary aluminum to a secondary plant that makes aluminum from scrap, not alumina.

Kaiser has made no such pledges to channel energy resale profits to the BPA, its laid-off workers or alternative power plants. The sales could earn Kaiser a half-billion dollars until the current contract expires in October.

"It's difficult to conceive of a circumstance that would prevent them from coming to terms with the region's other ratepayers and their employees, given the amount of windfall profit," BPA spokesperson Ed Mosey said in January.

"There's no way they should be profiteering from reselling federal power and then ask us to draw unemployment," says Steelworkers Local 329 steward Wayne Bentz. Over 900 workers are unemployed due to Kaiser's shutdown.

This winter, Kaiser Vice President Pete Forsyth said the company was keeping its profits to cushion the blow of the new electricity contract, which goes into effect later this year. Initially, BPA and Kaiser reached a deal in which the smelter's power purchase rate would rise by 20 percent. In April, however, BPA officials warned that, due to low water levels and high demand, the agency would not be able to supply enough energy to the region's smelters. BPA advised that the facilities should remain closed for another two years. Kaiser now acknowledges that it is looking to sell its Pacific Northwest smelters.

Like aluminum giants Alcoa and Alcan, Kaiser is slowly but surely moving out of the United States. As energy resources and environmental and labor regulations are tightening, primary aluminum production is shifting to the Third World. Powerful rivers in South America and Africa, coal mines in eastern India, and oil and gas fields of the Middle East are beginning to fuel the global aluminum market.

Ironically, U.S. governmental funding is helping to finance the shift. Kaiser's largest smelter, the 200,000 ton-per-year Valco operation in Ghana, owes its existence to a dam backed by the World Bank and the U.S. government's Overseas Private Investment Corporation (OPIC). The Akosombo dam, according to the International Rivers Network, "flooded more land than any other dam in the world — 8,500 square kilometers." Valco consumes most of Akosombo's power. Drought and rising demand have led international financial institutions to back new sources of power for Kaiser's Ghanaian smelter, including a new oil-fired power plant in Takorade.

Hurwitz has focused Kaiser's investments in overseas locations since 1988, when he bought out the corporation with the assistance of fugitive commodities trader Marc Rich. Rich earned the nickname "Aluminum Finger" for his investments in Russia, Iran, and Jamaica, and his stubborn battle against the Steelworkers union at a smelter in Ravenswood, West Virginia.

Under Hurwitz's control, Kaiser has invested in one of the world's largest smelters (Aluminium Bahrain), sold equipment to Russia's notoriously corrupt primary aluminum industry, and has contemplated or made bids to invest in smelters in Guinea, Azerbaijan and Ukraine.

Labor activists say that Kaiser's Pacific Northwest power grab represents a final swindling of the United States before Hurwitz waves goodbye. In April, the president of Steelworkers Local No. 329, Dan Russell, lamented, "I see guys every day that are resigned to the fact that Kaiser is done here. A good number of them are just getting on with their lives ... washing their hands of the whole thing."

— Jim Vallette

Jim Vallette is an investigative reporter based in Seawall, Maine. He is working on a report for the Institute of Policy Studies’ Sustainable Energy and Economy Network that examines the global structure and social and environmental impacts of the aluminum industry.

Giving it to California
Consumers:
A Review of the Double Rip-Off