The Surging Price Of Power

Forget "Gladiator." in Hollywood last week, the smart money was riding on The Long Hot Summer. As the threat of blackouts once again became reality, stylists who'd gathered at the swanky L'Ermitage Hotel in Beverly Hills to primp celebrities for Sunday's festivities were suddenly faced with the unthinkable: what if we have to make up Catherine Zeta-Jones in the dark? "You have to have a hair strategy," said publicist Ted Kruckel, whose recommended contingency look was an "all towel-dry, very matte, very flat look, with a little conditioner at the ends. Best of all, you don't need a blow-dryer."

Hollywood's potential bad-hair day was just a precursor for what the rest of the nation will face in the months ahead: an energy "crisis" the likes of which Americans haven't seen since the Arab oil embargo more than a quarter century ago. In a dangerous confluence, the prices of key fuels are soaring nationwide. Power outages that have so far been limited to California could spread to Nevada, Arizona and eight other Western states. A sticky July plus higher natural-gas prices, and New Yorkers could see their electric bills shoot up 50 percent from last year. The Midwest, still smarting from $2-plus gasoline last summer, is bracing for a repeat this year. With the economy slowing, economists and government officials are concerned that rising energy costs could help tip the country into a recession.

How did it get so bad so fast? Blame the weather, which triggered events that ricocheted through the energy-supply chain. The string of unusually warm winters in the late 1990s, coupled with low oil prices, combined to depress the price of natural gas, discouraging wildcatters from drilling. Then, starting last December, a bitterly cold winter sent prices up because there wasn't enough supply to meet the demand. That rippled through the electricity industry, since many electric-generating plants are gas-fired. As the plants paid more for fuel, some utilities started charging more for electricity. At the same time droughts in the Pacific Northwest reduced plants' ability to use water to spin their turbines--further increasing their reliance on natural gas. Finally, gasoline prices went to the moon last year, thanks not only to OPEC but to new regulations requiring environmentally friendly blends in some U.S. cities. The results were punishing. On average, residential customers are paying 60 percent more for natural gas this year compared with a year ago, and commercial users are paying double last year's prices. A trip to the gas station now costs about 8 percent more than it did a year ago.

And then there's the California Nightmare. Its problems are largely man-made. More than any other state, experts say, California bungled its efforts to deregulate its electric utilities. Along with poor energy policy, California has a booming population that consumes ever more power. Thus the stage is set for scenes like last week's, where nearly 1 million customers were without electricity thanks to the rolling blackouts. "I see dozens of black-outs this summer," says Gary Ackerman, executive director of the Western Power Trading Forum, a group of independent power suppliers to the state's three major utilities. When California embraced deregulation in 1996, it looked like a good opportunity for the state's three big investor-owned utilities, Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric. No longer mainly generators of electricity, the utilities were free to play the wholesale electricity market to their advantage. Instead the market played them. Electricity demand in the state spiked along with the economy, especially in Silicon Valley, at the same time strict environmental laws and a not-in-my-backyard mentality discouraged the production of any big new power plants. Yet even as wholesale energy costs were rising, California's utilities were prevented by those very same deregulation laws from raising customer rates until 2002.

Free to charge utilities whatever the market would bear, power suppliers did just that. In some circles, that's called exercising market power. "Others call it 'price gouging'," says Edward Smeloff, executive director of Pace Law School's Energy Project in White Plains, N.Y. Last week, the California Independent System Operator, which oversees the state's electric-transmission grid, complained to the Federal Energy Regulatory Commission that suppliers had overcharged the state's utilities an estimated $6.2 billion since last May. Not so, say the suppliers. As deregulation spreads across the country, expect more spats like these. To date, 24 states have passed deregulation laws, and 10 of those are already open to competition. The rumblings about price gouging are reverberating up and down the Eastern Seaboard in states where deregulation has already arrived. Nevada Gov. Kenny Guinn has called for a halt to his state's deregulation plans until power supplies stabilize and utility bills stop climbing.

It's not just fear of opening the next gas and electric bill that has gripped Americans. In the Midwest, they are terrified of flashbacks: full-serve premium: $2.70, blared the sign at one Chicago gas station last summer. Could it happen again? Maybe not $2.70 a gallon, but $2 isn't out of the question. "We think we're going to see somewhat of a repeat of last year's gas-price situation," says Geoff Sundstrom, spokesman for the American Automobile Association's national office in Heathrow, Fla. Tighter environmental restrictions on the types of gasoline sold in some metropolitan areas are expected to contribute to higher gasoline prices in various cities this summer. That's bad news for Chicago cabby Sanjay Malhotra. "You have to drive another one or two hours every day to make up for what you lose in pay to gas prices," says Malhotra. "Last summer was terrible. You'd be paying $40 for a tank of gas when two years ago you used to pay $18." Malhotra, who spent the past decade learning how to speed his taxi with aplomb down Michigan Avenue, has even taken to driving more slowly--to save on fuel.

The new energy crisis is slowing down more than cabbies. In the Midwest, rising natural-gas costs have been especially devastating to fertilizer manufacturers, who rely heavily on the fossil fuel in the production of ammonia: Terra Industries in Sioux City, Iowa, had to suspend production for almost two months this winter, and company executives worry they could be forced to shut down altogether. Even the nation's money supply is being affected. Crane & Co., in Dalton, Mass., which has been making paper for U.S. currency since 1879, saw its electricity costs jump 25 percent at the beginning of the year and now forces some employees to work on weekends when electricity prices are cheaper. "Every day we have to watch what machine we turn on," says Stephen Sears, Crane's director of engineering and environmental services. "If somebody just turned a machine on at the wrong time it could cost us literally $30,000 in electrical costs." Meanwhile, things in California have grown so dim that several states are trying to lure away weary high-tech workers with promises of something more than inexpensive housing and traffic-free commutes. A billboard in Silicon Valley for the state of Minnesota greets drivers with the promise: we may have white outs, but we don't have black outs. Every crisis presents an opportunity.