Power Crisis Casualties Firms dependent on natural gas struggling with skyrocketing rates

Kevin Fagan, Chronicle Staff Writer Tuesday, December 26, 2000

Carlos Ortega's best friend these days is a 32-gallon barrel of thick, sweet crude oil.

The oil heats the truck-size boiler roaring nearly round the clock to spew steam into his greenhouses, warding the winter chill off his hundreds of thousands of roses. On cold nights, Ortega uses more than a dozen of the 32- gallon barrels.

Without them, the inner Bay Area's last big rose grower would have to buy the cleaner, easier-to-use natural gas he usually burns -- and if he had to do that, he said, he would promptly shut down. That's because he would be paying $25,000 per month -- instead of the usual $3,500.

"I'm one of the lucky ones," Ortega said as he patrolled his nursery in Richmond, checking temperatures. "I'm still going to lose money, because I'm mostly just keeping my blooms alive, not growing them. But at least I could go to oil, and each barrel I burn is saving me.

"Others have no choice."

And how.

The much bigger Neve Brothers of Petaluma, the North Bay's only rose grower,

had no oil converter on its boiler. So on Dec. 1, when the natural gas bill came, the company swiftly closed its doors and laid off about half its 20- member workforce.

The owners now check gas prices every day, praying that they sink enough to let the nursery reopen.

"If I hadn't shut down, my bill would have gone from $34,000 to $290,000," said co-owner Lou Neve. "Now, you tell me how in the world a person can stay in business with a gas bill like that?"

All across Northern California, businesses socked in the pocketbook by soaring natural gas prices are getting creative like Ortega or closing down like Neve -- and that's just the beginning. With new bills sure to be even higher than last month's shockers, a sense of panic is setting in.

The body blow is being felt by every type of industry that uses gas-powered heat, from paper mills, dairy farms and flower growers to laundries and hotels.

And as they struggle to cope, the effect is rippling all over.

Growers like Neve and Ortega will not be selling as many flowers, which means they and the stores will not make as much money, which can mean layoffs or pay cuts. That means less money in workers' pockets, which means less money being spent. It goes on and on.

"You just wait, this will spread to everyone," said Rodney Ewing, plant manager at the Nor-Cal Perlite company in Richmond, which cooks volcanic pellets to be added into planting soil. Among his big customers are plant growers, and as they cut back, Ewing is scrambling to make sure his sales stay up.

"This is a disaster in the making, and most people don't know it yet," he said. "But they will, believe me."

Nor-Cal burns 100 therms of natural gas an hour -- the equivalent of the monthly total for a big house -- in two big ovens to make its product. As the bill shot from $14,000 in the fall to this month's expected $40,000, the company has tacked a 5 percent surcharge onto its prices. But that won't cover the whole shortfall, Ewing said.

"If the gas prices quadruple like they already have since last year, we're out of business," he said. "The gas industry can say this is all because a pipeline blew up somewhere, or they don't have enough gas, but I don't believe it. To me a shortage is when they don't have enough to sell, right?

"All I see is the gas industry making money hand over fist."

When customers point fingers, they start with Pacific Gas and Electric Co., Northern California's main utility. But the company notes its main role is merely delivering gas through its supply lines for a nominal fee.

The job of actually selling gas to industry falls to a network of independent natural gas companies such as Enron North America, which like most sellers in California is based out of state. They blame the skyrocketing prices on several things they had no control over: a recent explosion on a main pipeline in New Mexico crimping supply flow, an unusually hot summer that sapped reserves as power plants sucked up more gas than usual, and now, an unusually cold winter upping everyone's usage.

"Every one of those people who say they are now hurting from high prices had the opportunity to hedge their risk by buying forward (locking in a contract in advance at a steady price)," Enron spokesman Eric Thode said at the company headquarters in Houston. "If they made business decisions that didn't hedge their risk, that was their choice, not ours."

Asked how his business was going, despite the complaints and the pipeline problem, Thode hesitated, then said: "Great, but that's proprietary information."

Lee Murphy, president of the California Cut Flower Commission, said most of the state's 450 flower growers hadn't locked down contracts of the type Thode suggested because the prices offered -- even a few months ago -- were too high to believe.

"Even in the summer, our growers were being offered contracts at 90 cents a therm when they were used to paying about 20 or 30 cents a therm for years," Murphy said. "There was just no precedent for that happening, so they didn't take it. They didn't realize they were entering a brave new world."

Many other industrial users find themselves in the same boat as the growers.

Without long-term contracts, they continue to buy month to month on the spot market, taking whatever the best price is. And even though gas has at least dipped back down to slightly below $1 per therm from its $5 high earlier this month, it's still too much for most companies to easily absorb.

Add the 30 cents or so that PG&E tacks on per therm to deliver the gas on its lines and translate that to a business that uses just shy of 1 million therms a month -- like the Shasta Paper Co. near Redding, the state's last full-operation paper mill -- and you're talking big money.

Mill Vice President Brent Hawkins took one look at his October bill when it came last month, saw it had nearly doubled to $750,000, and promptly got out his calculator. With the projected price hikes, he estimated he would have to spend about $3 million on heat to pulp, flatten and dry his paper.

So he ordered the plant shut down as of Dec. 1. All but 16 of the mill's 460 workers were laid off.

Shasta Paper stayed closed while workers converted part of its boiler operation to burn recycled motor oil, and started using petroleum coke in the kiln. Hawkins got the rollers moving again in mid-December, but he was able to hire back only about 400 employees. He expects that, even saving money with the cheaper -- and less efficient, and messy -- fuels, he will run about $1.3 million in the red for December.

"Another downside of this is that everyone knows we're taking a pounding, so I'm having to pay cash on delivery for everything -- no credit," Hawkins said. "The guys who sell me nuts and bolts, latex and clay for coating my paper, they're all hurting too, so they're not taking any chances.

"It's a staggering problem."

Shasta Paper, an operation with annual revenues of about $144 million, isn't talking about raising paper prices yet. But that may well come in the future, Hawkins said.

He probably would have plenty of company. Dairies that saw their gas bills swell from $90,000 a month a year ago to an expected $900,000 a month in January are already planning to raise milk prices about 15 cents a gallon next month. Farmers growing everything from eggs to oranges are also contemplating passing on their higher costs, and even coin laundries are readying new rates.

"Someone's going to have to pay for these higher gas bills, and I'm afraid it's going to have to be our customers," said John O'Kane, president of ABC Diaper Service in Berkeley. "My bill went up 50 percent to $3,200 in November, and I'm kind of holding my breath for the next one."

Although he has yet to raise prices, he said, he will have to kick them higher soon. "Washing 100,000 diapers a week takes a lot of gas," O'Kane lamented.

And then there are the businesses that simply have no choice. Like the spacious Palace Hotel, the 125-year-old San Francisco landmark that gulps 1, 000 therms a day to heat 552 rooms, three restaurants and a honeycomb of ballrooms and other spaces.

The Palace's bill doubled last month, but all its managers can do is hunker down and keep their fingers crossed.

"We have our staff turning off lights and computers and conserving energy whenever they can, but when it comes to our guests, we can't scrimp on heat," said hotel spokeswoman Renee Roberts. "If they want their room at 90 degrees, they can have it at 90 degrees.

"People come here for a special experience, and comfort is a big part of that. We can't compromise."

--------------------------------------------------------------------------------

Heating Prices Soar, With Cold Months Ahead

A spike in the price of natural gas is leaving many consumers in a bind. The wellhead price, which does not factor in certain charges included in the retail price, has nearly doubled in the past year. Energy officials predict retail prices will continue to go up, and prices in the Bay Area are already rising faster than the national average.

U.S. home heating sources

1997 estimate

Natural gas

52.7%

Other

4.3%

Propane

4.5%

Oil

9.3%

Electric

29.2%

Source: Engergy Information Administration

http://www.sfgate.com/cgi-bin/article.cgi?f=/chronicle/archive/2000/12/26/MN37483.DTL

-- Martin Thompson (mthom1927@aol.com), December 26, 2000

Answers

just didn't know where to put this and hoping that the electricity will not go off again before i can type this. I am in oklahoma and our electricity has been going off and staying off considerably.. They say it is the ice... I say buurrhhhh. It's cold I am worried about tonight too.

-- resident (anon@cold.com), December 26, 2000.

It pains me to see this happening... remember when the telecommunications giants were deregulated? What happened? Our telephone service got worse and prices went up. Now deregulation is threatening to wreck our economy by strangling our primary source of economic growth: energy.

Some of my band-mates (see www.UrbanJazzCoalition.com for a picture that would indicate demographics of the group...) believe that George Bush will destroy our "strong" economy. What is strong on the surface can sometimes be weak inside, and this looming energy crisis points to that fact.

George Bush has now been set up as a scapegoat to take the fall for our economic collapse, a collapse triggered by deregulation passed under a Democratic administration. Remember that next election.

-- Ben (wyvern@amarand.org), December 28, 2000.