The breakdown of California's electric power system has hit plastics manufacturers like a jolt from a live wire.
Injection molder UPM Inc. in Baldwin Park and blow molder Poly-Tainer Inc. in Simi Valley lost power for at least 14 hours a day on three or four separate days during the week of Jan. 15, and UPM said the loss already has cost it at least one sizable order.
Electric rates for Trend Technologies Inc.'s plant in San Diego have doubled. Injection and rotational molder Cambro Manufacturing Co. in Huntington Beach, Calif., is looking at spending at least $5 million for its own generation system so it can say goodbye to the state's troubled electric grid.
Clearly, California's deregulation system blew a fuse. But do those problems foreshadow similar meltdowns in other states that have deregulated their electric markets?
Not likely, according to most observers. They say California's problems stem from a series of unique factors: a shortage of power plants, strong economic growth, weather-related problems and a regulatory system that ignores basic laws of the marketplace by capping retail but not wholesale prices.
That's not to say other states won't, and aren't, seeing some problems.
"California is unique, but there will be problems in other states," said Gordon Fry, a member of the Arlington, Va.-based American Chemistry Council's global climate and electricity team. "We've already seen the shortage of capacity in New England."
Generally, about the best assessment you could make is that deregulation has not lived up to its promise — at least not yet.
In some of the big states that have tried it — Illinois, Massachusetts, Pennsylvania and Rhode Island — deregulation either has not yielded any savings or much less than originally forecast. Still, some experts predict that when generation markets develop, there will be more competition.
"In New England, the generation markets are immature," said Bob Seega, vice president of public affairs for Narragansett Electric Co., based in Providence. "I don't know if anybody has a time frame by which that is corrected."
The system has a maximum capacity of about 25,000 megawatts, very close to the winter and summer peak demand of 22,000 megawatts, he said. About 4,900 megawatts are coming on line in 2001, which should help to ease the strain, he said.
Sheet extruder Toray Plastics (America) Inc. found deregulation's downside. It is facing power costs of $950,000 a month, one-third more than normal.
Rhode Island's deregulation system initially lowered rates in 1998, and that prompted Toray to leave the local utility and find another supplier, said Mike Hoffer, director of purchasing at Toray in North Kingstown, R.I.
But after a year, those savings evaporated, and Toray had to go back to its local utility but this time on a "last resort" plan that offers power at market rates, Hoffer said.
Narragansett increased rates for customers on last resort because natural gas and fuel costs are pushing up the cost of power substantially, Seega said. Narragansett initially swallowed that cost and lost about $15 million this fall, but it is asking regulators to let it pass that on, he said.
Hoffer argues political leaders did not think deregulation through.
"Somebody could argue you [at Toray] want your cake and eat it too, but the whole premise [of deregulation] was that we could get lower costs and more competition," Hoffer said.
"What this is doing is really causing major concern, in my opinion, in terms of protecting jobs and encouraging growth."
Deregulation has worked for some New England companies.
Injection molding giant Nypro Inc. in Clinton, Mass., has saved about 8 percent on its $2.2 million annual power bill at its Clinton headquarters plant, said Adam Parker, sourcing agent for the company.
While that's a positive, it's not the kind of savings Nypro initially was told it could get, he said.
"Early on, before the law passed, I was getting calls every day from energy marketers," Parker said. "Now, I don't get any."
Pennsylvania followed the same pattern as Rhode Island: Markets initially were competitive. Injection molder Plastek Industries Inc. in Erie, Pa., cut its power bills by 15 percent when the market first opened in 1997.
But since then, high demand, high natural-gas prices and a tight market have eliminated those savings, said Ray O'Donnell, corporate facilities manager for Plastek.
Port Erie Plastics in Harborcreek, Pa., has saved about 3 percent on its electric costs because it was more cautious than Plastek, said Jim Petrone, maintenance manager for the injection molder.
But the company has had a few more power outages than normal and does not expect the savings to last much longer because of rising natural gas prices, Petrone said.
Others have had similar experiences.
"We looked into what it would mean and discovered it meant nothing," said Bruce Cleevely, vice president of injection molder True Precision Plastics in Lancaster, Pa.
Pennsylvania does not have a capacity problem — the shared grid for Pennsylvania, New Jersey, Maryland, Delaware, Washington, D.C., and a small part of Virginia has a peak demand of about 50,000 megawatts, and peak capacity of 65,000.
But the region does have a shortage of new and efficient power plants that can make power cheaply, said Scott Surgeoner, spokesman for GPU Energy Inc. in Redding, Pa.
"I think what we are seeing is still a sorting out or shaking out of the generation industry," he said. "Over the next three to five years, as the generation industry really does become a free enterprise industry, you will start to see larger savings."
In Illinois, which let all businesses choose suppliers as of Jan. 1, it's still too soon to tell how it will work, said Brian Sterling, a spokesman for the Illinois Commerce Commission, which regulates utilities. When asked to describe how Illinois' more cautious approach has worked, he replied: "It hasn't failed."
The market for electricity in Illinois has not developed as hoped, "primarily due to a lack of supply," said Todd Ely, vice president of the Illinois Chamber of Commerce in Springfield.
Electricity marketers that initially were interested have stopped calling, said Larry Erikson, vice president of Illinois Valley Plastics Inc. in Washington, Ill.
"With the California thing, everybody is a little skittish," he said. "In my mind, it is an overreaction."
There are significant differences between California's system and other states.
For example, in most other places, like in Pennsylvania, power suppliers can enter into long-term contracts. But California requires power to be sold from generators to utilities and other power providers only one day ahead.
"California did not create an open market," said Mark Yacker, director of government and public affairs for the Electricity Consumers Resource Council in Washington.
California's chief problem: It does not have enough generating capacity to meet demand, and growth in surrounding states is gobbling up power that California used to be able to buy, said David Potter, a spokesman for electricity marketer NewEnergy Inc. in Los Angeles, a subsidiary of AES Corp.
"A core question California needs to answer is how we site and permit our power plants," Potter said. "There are lots of concerns, and they are valid, about `we don't want a power plant in our backyards' and environmental concerns. But we need power."
California's utilities, except around San Diego, say they are teetering on the edge of bankruptcy because the rates they charge are capped, yet what they pay for power from generating companies is not capped. They claim to be losing billions of dollars and cannot pay power generators for what they have already bought, Potter said.
Rates have already risen, at least temporarily, and the state government is looking to start buying power itself.
But observers and political leaders from Democratic Gov. Gray Davis on down pin part of the blame on greedy power generators that are making big profits and strong-arm tactics by utilities.
"There is no physical shortage of electricity right now [but] there is a financial shortage of electricity," said Peter Navarro, professor of economics at the University of California, Irvine and authority on electric deregulation. "This is extortion on the part of utilities and the generators."
California's power supply system has ample room for price manipulation, and there are not enough competitors to make a vibrant market, he said. Federal regulators hurt the situation by deregulating prices on natural gas pipelines into the state, he said.
But the state's regulatory system created many of the problems, and the state's economic growth for the past decade has made power scarce, said Lynne Church, president of the Electric Power Supply Association, a Washington trade group for electricity generators.
The state needs to allow long-term contracts for electricity and come to grips with the fact that because of shortages and environmental regulations, it costs much more to produce power in California right now than it can be sold for, she said.
"It is hard to figure out how to participate in a market if there are so many unknowns," Church said. "It is extremely disturbing that state leaders have let it get to this point."
Whatever the cause, companies in the state are being hit hard.
UPM, in Baldwin Park, saw small power interruptions last summer, but this month it escalated to four days of lost power, of between 14 and 18 hours a day, during the week of Jan. 15, said Jason Dowling, sales coordinator.
The company lost power because it signed up for a special plan several years ago to get a 15 percent discount. In return, the utility could shut it down in case of emergencies like earthquakes.
What UPM did not anticipate is that the whole system would break down, forcing the molder to silence its presses and send workers home for days at a time, Dowling said. If the company chose to run during those periods, its power bill would be 100 times what it pays normally.
UPM has shifted more work to evening and swing shifts and will treat Saturday and Sunday as normal work days, making Monday and Tuesday the weekend, he said.
It already has lost at least one order, when a customer wanted a guarantee that the part would run 24 hours a day, Dowling said: "The mold was en route. They stopped it en route and pulled it back."
Paul Strong, president and owner of blow and injection molder Poly-Tainer in Simi Valley, said he lost power three times for 18 hours each time during the week of Jan. 15. He had to lay off 300 employees temporarily and is expecting more shutdowns.
Strong said he looked at moving his company to Utah in 1998, but some state incentives, including better electric rates, convinced him to stay. But that rate plan was later rescinded by state regulators, and now the problems are leaving him quite frustrated.
"If we have another week like we did last week, we could lose business," he said.
Cambro has had to shift work to other molders, according to Steven Thomson, vice president of manufacturing.
"Somebody was seriously asleep at the switch to go into a program on the assumption that supply and demand would balance to support a price decrease. I just find that unspeakable," Thomson said.
Still, most power industry observers expect deregulation in general to work out eventually, particularly for business customers. While the jury is still out for residential customers, for manufacturing it will yield savings in the long run, according to Narragansett's Seega.
"Our CEO has said, `I think that for business customers it will work,'|" Seega said.