No. 778
—Tom Bearden.
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A systemic power failure yesterday in northeastern America resulted in the largest blackout in history, affecting some 50 million people in major US and Canadian cities, including New York, Cleveland, Detroit, Toronto and Ottawa. US officials rapidly ruled out a terrorist attack. But they are still seeking to identify what triggered a cascade of power plant shutdowns that created havoc throughout the region as transport systems, services and businesses closed down.
In New York City, one of the worst affected areas, thousands of people were trapped in elevators or subway trains when the power system failed at around 4 p.m. Uncertain as to what was taking place, workers flooded out of offices and buildings. Traffic clogged the streets as traffic lights failed. With the subways out of action and many buses not operating, streams of people began walking home in sweltering heatwave conditions. Mobile phone systems failed due to overloading, creating long lines as people queued to use pay phones.
All flights to and from New York’s three airports were grounded, along with those at eight other airports in the US and Canada. With the state having lost 80 percent of its power supplies, New York Governor George Pataki declared a state of emergency. A state of emergency was also declared in neighbouring New Jersey where outages created similar chaos in the north.
A blackout in Canada’s largest city Toronto shut down subways and streetcars. Traffic snarls rapidly developed as traffic lights failed. Police were attempting to direct traffic at several major intersections but in a number of cases volunteers stepped in to try to get vehicles moving. With the Pearson international airport closed, thousands of stranded passengers were attempting to find transport to get home. It’s “total chaos,” one passenger told the media. Officials urged residents to conserve water, because the city’s supply depends on the power system and only had a 24-hour reserve. Ottawa and a string of other Canadian cities and towns were also hit by outages.
In the US Midwest, Detroit, Cleveland and other cities were struck by lengthy power blackouts. Hospitals and other emergency services were able to function with limited backup supplies, but, as one hospital in Cleveland reported, many patients were forced to endure heatwave temperatures. “Everyone is very hot because the airconditioning is off,” one nurse told the press. “Our labouring mums are suffering.” More limited power outages were also registered in the US states of Connecticut, Massachusetts, Maryland, Vermont and Pennsylvania, where the northeastern corner was severely hit.
The human costs of the massive power failure are still being tallied. But the suffering and anxiety faced by millions of ordinary working people stands in stark contrast to the preoccupations of the political elite. After ruling out the possibility of a terrorist attack, New York City Mayor Michael Bloomberg blandly advised those left without transport and caught in traffic to stay calm and go home, open windows and drink plenty of liquids. He was greeted with loud boos from a crowd of pedestrians when he ventured onto the streets, accompanied by security and the media to close off the Brooklyn Bridge.
Ensconced in a hotel in San Diego, President Bush maintained a complete silence for hours before issuing a perfunctory statement, declaring that federal officials were working alongside state and local emergency services to cope with the problems. Claiming that emergency services were “better organised” since September 11, he remarked that it “has been remarkable to watch on TV” how calmly people reacted. Only some time later did Bush feel the need to respond to the implications of this catastrophic infrastructure failure, saying that perhaps the power grid would need to be “modernised”. His staff indicated that the president did not intend to cut short his fund-raising trip to California.
The immediate cause of the blackout has yet to be identified. But officials in Canada and the US have been quick to point the finger at others. A spokesperson for New York Governor Pataki declared that the reason for the outage was “a possible transmission problem from Canada to the US”. Canadian officials, on the other hand, thought that a lightning strike on a power plant in the Niagara region--on the US side of the border--had been responsible. In the Niagara area, power station operators denied there had been any problems.
In New York City, Mayor Bloomberg also blamed a power failure in the Niagara Mohawk area--outside his immediate area of responsibility. “It was probably a natural occurrence which disrupted the power system up there and it apparently for reasons we don’t know cascaded down through New York state over into Connecticut, as far south as New Jersey and as far west as Ohio,” he said. He dismissed persistent rumours that a fire in a Manhattan power station had caused the blackout, saying that the smoke had been the result of a controlled shutdown of the plant.
Regardless of what triggered the disastrous blackout, its underlying causes are well known and have been warned about for years. Privatisation, mergers, costcutting and restructuring have resulted in a lack of investment in new plant and maintenance. As a consequence, the various power grids across the US have become increasingly unstable, particularly at times of high demand such as during heat waves. Any fault in one plant or at one point in the transmission system creates a cascading effect as one station after another shuts down automatically to avoid dangerous overloading.
That is precisely what happened in the latest blackout. Citing Genscape, a company that monitors electricity transmissions, CNN reported that, beginning at 4.10 p.m., 21 power plants across the north east, including 10 large nuclear plants, shut down over a three-minute period. The process was similar to the cascading shutdown that led to major blackouts across the same region in 1965, when 30 million people in seven states and two Canadian provinces were left without power.
A number of energy experts have been warning about the instability of the American power grids. Bill Browning from the Rocky Mountain Institute, a thinktank in Colorado, told CBC News Online: “Everyone is pulling power and there’s lots of big stations on the grid. All you need is one tenuous problem and it cascades throughout.” Another energy analyst Gerry Angiovine pointed out: “It’s pretty close to peak demand. If you suddenly get one or two of the big suppliers going down… you may have a situation where you’ve got more being drawn than the system can supply.”
Browning went on to explain: “At one time, the grid system seemed logical. If you have to do maintenance on one plant, then the grid connects everyone so the power keeps up. But that is also a fragility in the system. The system, as we have designed it, is brittle. The only way we can make it resilient is to [have] a mixture so that if a portion of it goes down we can have islands of power still operating.”
What is rational as far as providing a stable electricity supply, however, cuts directly across the interests of corporations that have sought to make big profits by buying and restructuring power plants or, as in the case of Enron, through outright speculation. Costcutting at individual power stations, the failure to build new ones to meet growing demand and the lack of planning and coordination have produced a system that has become distinctly more than brittle.
One of the possible triggers for yesterday’s blackout--the Niagara Mohawk power grid--was the subject of a merger between Niagara Mohawk Holdings and the British-based National Grid Group in 2000. The new company indicated at the time that it planned to achieve annual cost savings of around $90 million across its operations in New England and New York through the destruction of hundreds of jobs. The following year, power rates for corporate users were slashed while those to small businesses and residential customers increased.
Two years ago an article appeared in the Buffalo News warning of the dangers of deregulation. “Instead of the [New York] state having a surplus of power that would last until at least 2005, supplies are getting uncomfortably tight today, especially downstate, and power consumption is expected to keep growing by 1.2 percent to 1.4 percent a year. At the same time, private companies haven’t built any new power plants yet, even though the agency that manages the state’s power grid says New York needs to increase its generating capacity by about 25 percent over the next four years to avoid electricity shortages and higher prices.”
Whether or not the Niagara Mohawk power grid was the immediate
cause for yesterday’s massive blackout, the above warning points to the underlying
problems that made such a breakdown somewhere in the system inevitable.
http://www.wsws.org/articles/2003/aug2003/elec-a15.shtml
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After weeks of threatened power outages, California was hit by rolling electricity blackouts Wednesday afternoon affecting 500,000 people in San Francisco, Sacramento and San Jose as well as other sections of Silicon Valley. Traffic lights, ATMs, classrooms and entire neighborhoods lost power for 60 to 90 minutes amid warnings electricity supplies would be dangerously low throughout the afternoon and into the evening. The rotating blackouts, the first ordered by California authorities since World War II, were expected to continue throughout the evening, affecting up to 2 million households.
Five hundred megawatts of power from Canada had been obtained to stop the rolling blackouts until Wednesday. The state had averted blackouts on Tuesday thanks to the shutdown of massive water pumps that send water to Southern California, temporarily making 600 megawatts available.
Energy Secretary Bill Richardson extended an emergency order requiring power suppliers to sell electricity to California until midnight Tuesday. In a sign of the attitude the incoming administration would take on the issue, however, a spokesmen for President-elect George W. Bush said the crisis was not a federal, but a California problem.
Jim Detmers, managing director of the Independent System Operator—the state agency in charge of maintaining the power grid—said several power plants that had been expected to return to full operation Wednesday after repairs did not. He also said out-of-state suppliers were not selling electricity to the state because California's two largest utilities were on the verge of bankruptcy.
Last Friday, Pacific Gas & Electric (PG&E) announced a restructuring plan to shelter segments of the company from creditors, and on Tuesday Southern California Edison defaulted on nearly $600 million in payments due to power suppliers and bondholders, including $250 million in interest due on its outstanding bonds. The latter action prompted Standard & Poor's to reduce the credit ratings for both companies to junk-bond status.
The energy crisis is the product of the state's decision to deregulate energy utilities three years ago. California utilities sold off a substantial portion of their power-making capacity to out-of-state suppliers, who in turn sold energy back to the state. Contrary to the claims that the “free market” would lower energy costs and improve service, the opposite has taken place.
There is widespread evidence that suppliers—whose profits and share values in some cases have doubled and tripled since last year—colluded to restrict supply and bid up prices. The energy squeeze has also been a boondoggle for electricity traders who purchase power at lower rates by long-term contracts and resell it to realize a massive markup.
California's crisis came to a head last summer after San Diego Gas and Electric, having sold all of its power plants, passed along its wholesale costs to customers, driving up bills by 300 percent. Unable to do the same, Edison and PG&E have paid up to $1,400 a megawatt hour for electricity, while charging customers about $120. Although the companies made $6 billion from the sale of their plants and the sale of electricity into California's market from remaining facilities, company officials claim the deregulation plan requires that those profits be applied to paying off previously built facilities—and not to cover their present losses.
Last week, California Governor Gray Davis caved in to the power suppliers' extortion and proposed a plan under which the state government will purchase energy on behalf of the utilities under a long-term contract agreement. The proposal was approved by the State Assembly Tuesday night and sent to the Senate. This amounts to a state bailout of the beleaguered utilities, which may cost as much as $10 billion in public funds.
An agreement on prices and terms is yet to be arrived at, however. The governor and the legislature would like to pay no more than 5.5 cents per kilowatt-hour. The average retail price for electricity in the state is about 12 cents, the highest west of the Mississippi River, with the exception of Hawaii, and more than twice what consumers pay in Washington, Oregon and Idaho.
Earlier this month, in his annual State of the State speech, Davis made it clear that he would not allow the utilities to go bankrupt. In light of the widespread disgust with deregulation, the governor sought to distance himself from measures he supported, saying “electricity is not an exotic commodity like pork bellies, to be traded in the chaotic equivalent of a futures market,” but rather “a basic necessity of life.” He condemned what he called “a dysfunctional energy market, driven by out-of-state energy companies and brokers, that is threatening to disrupt people's lives and damage our economy.”
A series of marathon meetings throughout the week then took place between Davis, California politicians, utility and producer executives and cabinet-level government officials to arrive at the basis of a rescue package and long-term agreement. A key participant in the negotiations has been Ken Lay, chairman of Enron Corporation, a giant transnational energy company. Lay is President-elect Bush's personal representative in the negotiations.
The agreement would have to provide debt payment relief for the utilities and a multi-year contract between producers and the state at reasonable prices of 5.5-9.0 cents per kilowatt, down from the current 40-60 cent range, but substantially higher than last year's 3.5 cents. The generators are resisting the 5.5 cent rate, proposed by Davis, demanding prices in the 7 to 8 cent range instead. There are differences over the length of the contract, since the generators are eager to lock the state into high rates for a long time.
While there is increasing evidence that generators of electricity conspired to restrict supplies and keep prices high by closing down plants for frequent “unscheduled maintenance” procedures, there have been no serious moves to investigate the energy companies, let alone impose penalties or rebates on them.
The energy crisis is touching off widespread concern in the White House about a recession, as the impact of rising costs are felt throughout the state and, in particular, are viewed as a threat to the economic health of the state's technology center, Silicon Valley. There are reports of increasing concern among those high-tech corporations, with some considering leaving the state for North Carolina and Texas. The widespread use of routers by Internet companies makes a reliable and inexpensive source of energy very necessary. A three-hour blackout on June 14 cost Silicon Valley businesses over $100 million.
The California crisis looms over the financial health of the banking sector. On January 5, trading in shares of Bank of America was halted for half an hour on the New York Stock Exchange, as investors dumped massive amounts on rumors that the bank was in serious trouble from its credit line to Edison. Other banks that are being punished by Wall Street over their loans to the California utilities are J.P. Morgan Chase, Union Bank of California and Bank One. There are indications that the surprise half-point reduction in interest rates by the US Federal Reserve Board on January 3 was engineered to bail out the ailing financial sector.
The impact on Wall Street goes further. Shares of Edison International and Pacific Gas and Electric continue to plunge. Both utilities have laid off workers and are strapped for cash. Edison's decision not to make its interest payments and pay its suppliers on January 16 brings it closer to bankruptcy, and the state closer to a bailout using public funds.
http://www.wsws.org/articles/2001/jan2001/cali-j18.shtmlOn December 22 the California State Public Utilities Commission (PUC) announced it would raise electricity rates on January 4, in response to ultimatums from Edison, the giant electric utility that dominates Southern California.
Edison had threatened to begin rolling blackouts within days unless Governor Gray Davis “speedily” approved higher rates for its 11 million customers. The blackouts would sequentially cut electricity for hours to consumers and industry. Already, as a result of 34 “Stage 2” energy alerts this year, water-pumping stations, some industrial sites and many colleges and universities across the state have had their service interrupted.
Edison claims it is nearing bankruptcy and lacks the money to purchase electricity to re-sell to customers. Pacific Gas and Electric (PG&E), the utility that controls the Northern California market, is also losing millions of dollars every day. Together they have spent $8 billion since last summer purchasing high-cost electricity from a cartel of electricity brokers that are manipulating the supply of power and charging exorbitant rates. Both utilities claim that they are only recovering one fourth of the wholesale price of electricity.
The crisis is a consequence of the deregulation of the market for electricity in California. Beginning in March of 1998, California's private utility companies were freed from price controls as a result of sweetheart agreements between the state legislature and the utilities. Although they may be hurting now, they aggressively lobbied for the present system as a way of freeing them from unprofitable investments.
Many warned about the consequences of deregulating an industry dominated by giant regional monopolies. Industry critics pointed out that California's electricity supply was “not workably competitive,” and predicted that price competition among producers would not take place. If there had been many producers, the price of electricity would be close to its marginal cost (the cost of producing the last unit of electricity generated). However, a handful of large producers would charge prices that assured them maximum profits.
The regulation of utilities was a legacy of reforms instituted in the Progressive era at the turn of the century. To prevent monopolies from gouging the public, state and municipal governments were empowered to regulate the prices these companies could charge. This system is being overthrown in line with the general assault by big business on all restrictions on the realization of profit.
The three main utilities in California—Edison, PG&E and San Diego Gas and Electric (SDG&E)—had for years built up debt from the high cost of building and maintaining power plants. The deregulation plan, passed over the objections of consumer-rights groups and publicly owned utilities, provided for the selling off of most of the privately owned power plants and the abolition of price controls no later than March 2002. The utilities would then have to purchase electricity on the open market and re-sell it to consumers.
The price of electricity, formerly capped by the Public Utilities Commission, was thereby deregulated. A market for electricity was established, based on a daily bidding system. Rates could change hourly. According to the proponents of the plan, competition from many producers would keep prices low and make for more efficient production and delivery of electricity.
Initially, Edison, PG&E and SDG&E made millions by selling off their power plants at several times their book value to electricity brokers. In addition, they were able to buy low-cost electricity and sell it very profitably to their customers at rates that had been set artificially high by the PUC, as part of the transition to uncontrolled prices.
Things began to change in April, however. Prices for electricity skyrocketed. In the San Diego region, the only area where prices had already been uncapped, rates tripled and consumers were faced with draconian electricity bills, in some cases matching their monthly rent or mortgage payment. Elderly residents on fixed incomes had to give up using air conditioning, a health hazard during the city's hot summers. Under intense protest, the legislature was forced to impose a rate cap of $500 per megawatt-hour.
Edison, which last year was paying $35 per megawatt hour, recently had to pay $1,400, a 40-fold increase.
Companies such as Southern Energy, Dynegy Inc., NRG Energy and Reliant Energy, now operating as a price-fixing cartel, have such market power that they can withhold electricity until buyers agree to pay exorbitant rates. The Los Angeles Times quotes Bob Foster, a senior vice-president of Edison, as saying, “Why are prices on a Sunday in 1999 seven times lower than prices on a Sunday in 2000?... Same load, no plants are out or anything like that. What would do that?... As demand started going up, the marketers figured out a way that they could exercise market power.”
This strategy enabled Houston-based Reliant Energy to register a 600 percent rise in profits this summer, with about $100 million coming from California. For Edison's Foster, the problem is not that exorbitant profits are being made off of the impoverishment of thousands of Californians, but that his company is prevented from cashing in until rates are fully deregulated.
Technically, cartels and price-fixing are illegal in the United States. But encouraged by business-friendly Democratic and Republican administrations and courts, the electricity brokers are able to strike with impunity against electricity users.
One of the biggest friends of the utilities is Governor Davis, a Democrat. He was the recipient of $239,000 in electricity industry money in campaign contributions between January 1999 and June of this year.
Even though Davis has the power to seize the generating plants in the state to meet the demand for electricity, he has locked himself in negotiations with the utility companies to try to work out a deal that will protect their profits. Under consideration is a plan to use the state's budget surplus to rescue Edison and PG&E. These meetings, from which the public is excluded, will undoubtedly result in higher rates and other economic blows to ordinary consumers. There are no plans to demand that the electrical monopolies rebate a part of their super-profits, let alone efforts to prosecute them for price-fixing.
California is not the only state that faces a crisis. A July report by Robert Varela, editor of Public Power Weekly, revealed that conditions in New England give “every generating unit the market power to set whatever rates it may desire as a market clearing price, no matter how absurdly high.” For example, the New Hampshire Electric Cooperative reported to the Federal Energy Regulatory Commission that Hydro-Quebec has a standing bid to sell into New England at $20,000 per megawatt hour.
http://www.wsws.org/articles/2000/dec2000/cali-d28.shtmlDear Editors,
I am interested in the way in which public companies and utilities are affected by the tendency of profit to equalise across industries. Public companies are more complex than private companies to study, because often they are subsidised and their outcomes are not exactly quantifiable, in terms of a definite return.
It seems, from studying Marx's Capital and from observing what has happened to public companies, that these institutions are subject to the same laws of profit as private companies. If the Government company is less efficient or, to put another way, has greater than average production costs, then these public companies begin to make losses or experience reduced profits. An example would be Telstra (a company that was formerly a public Australian telecommunications company). During the nineties, Telstra seemed to be maintaining less of a profit than would have been the case in the private sector. For example it retained staff which would have been retrenched in the private sector and retained services (quality and quantity) which would not have been maintained in the private sector. This meant that the government's calculation of the profitability of maintaining Telstra (long-term) vs. the return on the sale of the infrastructure tends to be in favour of the sale. This is because the private sector is able to make a greater return from the infrastructure than the government, as it is able cut costs (labour and services), which the government is unwilling to do for political reasons.
Is this explanation correct? I am aware that governments don't make their decisions based on these simple calculations. There are strong business interests and corruption involved. I am using this logic for the purposes of the example.
Does the fact that Telstra is a monopoly provider of telecommunications (I mean before it was privatised) affect the calculation? Telstra could maintain greater than average profits due to its ability to monopoly price, e.g., above the free market position. It would seem that Telstra would be able to maintain its viability longer against the equation of selling the infrastructure. Of course this may mean that consumers and other businesses face higher costs and call for privatisation.
Telstra was a non-profit organisation, which did not have shareholder returns to satisfy. Does this affect the outcome? In terms of the actual equation that the government performs, without taking the community into account, it seems that it would not. It would affect the sections of society receiving the benefits from the profits (or the profits otherwise spent). For example the shareholders vs. the general public receiving increased services.
Regards,
RS
10 March 2000
Dear RS,
The analysis you make seems to me to be on the right track. This question has to be examined on the basis of Marx's analysis of the equalisation of the rate of profit across the capitalist economy.
In Capital, Volume I, Marx shows that the sole source of surplus value is the additional, or surplus, value extracted from the working class. Having disclosed the origin of surplus value—its production—he then examines in Volume III the social mechanism through which the total mass of capital is distributed among its different components and how the rate of profit tends to be equalised across all sections of industry.
In Volume III, Marx demonstrates that each section of capital does not receive profit according to the amount of labour which it directly exploits, but according to its share of the total capital of society.
In other words a capital of say 100, comprising constant capital of 80 and variable capital of 20 and extracting surplus value of 20, will receive the same amount of profit as one comprised of 20 constant capital and 80 variable capital and producing surplus value of 80. Although the second capital has produced a surplus value of 80 it will receive a profit less than that, while the first capital will receive profit greater than the 20 surplus value it has produced.
Marx deals with this question in Chapter IX of Volume III. “So far as profits are concerned,” he writes, “the various capitalists are just so many stockholders in a stock company in which the shares are uniformly divided per 100, so that profits differ in the case of the individual capitalist only in accordance with the amount of capital invested by each in the aggregate enterprise, i.e., according to his investment in social production as a whole, according to the number of his shares” [ Capital, vol. III, p. 156).
This means that the price of production of each commodity—the price around which supply and demand will oscillate in the market—will not be the value of the commodity but rather the price which brings that capital a rate of profit equal to the average rate in society as a whole. This average rate is given by the ratio of the total surplus value produced to the total amount of capital used to extract it.
Competition is the mechanism through which this equalisation of profit rates is carried out. If the rate of profit for one industry is higher than the social average, capital will tend to move into that industry, increasing the supply of commodities and thereby reducing the price until the rate of profit falls to the average rate.
Of course, if for any reason capital is unable to move into that industry its profit rates will remain higher than the social average. In short, the capitalists in that industry will be able to appropriate a greater share of the available surplus value. Capital in other sections of industry will have to pay higher prices for these commodities and its profit will be reduced. This is the source of the struggle between individual sections of capital which try to establish monopolies in their area of production and the rest of the capitalist class which tries to break them down. The current battle with Microsoft is a classic expression of this process.
The push for the privatisation of government-owned enterprises and services started in the late 1970s and early 1980s. It was provoked by the falling average rate of profit which emerged in that period.
Capital demanded on the one hand that deductions from the available mass of surplus value in the form of government spending (on government-owned enterprises as well as social welfare) be decreased in order to make available a greater mass of that surplus value for distribution as profit. This took a number of forms—the demand for lower taxes (supply-side economics), demands for cuts in government borrowing to lower interest rates, campaigns against the inefficiency of government-owned enterprises and so on.
There was another motivating factor. Capital demanded that areas of the economy previously monopolised by the government, often for social and political reasons, be opened up to it. So in the past 20 years we have seen the privatisation of water, electricity, telephone services and roads.
In the case of Telstra, the higher prices it was able to charge for telephone services in metropolitan areas when it was a monopoly provided the resources for the subsidisation of services in rural and regional areas. But with the opening up of telecommunications to private capital and increased competition, leading to a reduction in charges, this cross-subsidisation has come under pressure. This has led to political problems for the government.
In announcing its $2 billion half-yearly profit earlier this month, Telstra management gave prominence to its plan to axe another 10,000 jobs in order to try to boost its share value. Management made the point that with the reduction in prices for services it had to cut costs in order to remain competitive.
However, this resulted in a political furore with government MPs in rural seats, where there is tremendous hostility to the cuts in jobs and services which have already taken place, claiming this would mean reduced services for the bush. At present Telstra is still 51 percent government owned. But with the markets demanding full privatisation Telstra management insists that it cannot broaden its activities through mergers and acquisitions unless it is fully privatised.
Prime Minister Howard is in favour of full privatisation and insists that even if the government relinquishes ownership Telstra will still be compelled by government regulations to provide adequate services to rural and regional areas. However, full privatisation will meet with opposition not only from the opposition parties but also from government MPs.
In this situation of stalemate, Howard is being castigated by the leading mouthpieces of finance capital (in the Murdoch press and in the Australian Financial Review) for not proceeding with the program of “economic reform”. So far as the “reform agenda” is concerned it might require the return of a Labor government to the Treasury benches. It was a Labor government which carried out the full privatisation of the Commonwealth Bank under Keating, in direct contravention of the party's stated position.
Yours sincerely,
Nick Beams
16 March 2000