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		 Subject: Utilities, Electric: Deregulation: The New War Over Oil: Outrage at 
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 The New War Over Oil: Outrage at the gas pump is spilling over into 
presidential politics. What's behind the shortage.(News of the Week) Karen 
Breslau; Jamie Reno; Keith Naughton; Howard Finemand; Tara Weingarten; Amy 
DiLuna; Adam Bryant ? 10/02/2000 Newsweek 22 Copyright 2000 Information 
Access Company. All rights reserved. COPYRIGHT 2000 Newsweek, Inc.  All 
rights reserved.  Any reuse, distribution or alteration without express 
written permission of Newsweek is prohibited.  For permission: 
www.newsweek.com 

Herk and Clover McClellan fulfilled a longtime dream last March when they 
opened Herk's Bees and Clover's Honey, a produce market near their home just 
north of San Diego. They plowed their entire savings--$50,000--into the 
store, and it quickly started turning a profit. But then gas prices shot up, 
and the cost of frequent trips to Los Angeles for farming supplies soared. 
Then their monthly electric bill jumped from $135 to $800. The one-two energy 
punch knocked them out, and they were forced to close their business last 
week. "We're going to lose it all," says Herk McClellan. "It's not right.'' 

Nothing seems right with the nation's energy picture these days. For several 
years low energy prices were the lubricant that helped keep the nation's 
economic engine humming. But suddenly the oil warning light on the dashboard 
is flashing, and it's just the latest in a troubling series of events that 
has made energy prices more volatile than they've been for years. Oil hit $37 
a barrel last week, a 10-year high that spooked the stock market. Natural-gas 
prices are also soaring. In California, New York and many other states, 
deregulation of the electrical industry is off to a shaky start, with 
electricity bills jumping higher than a Romanian gymnast. Meanwhile, the 
nation's healthy economy is keeping demand high, straining capacity. The 
situation is not as dire as previous shortages: the inflation-adjusted price 
of gas is still nearly $1 a gallon below the heights it reached in the 1981 
oil crisis. Still, many experts think the picture will get worse. The Energy 
Department says the cost of heating oil could jump by a third or more this 
winter, and a particularly cold season may force some people to choose 
between heating and eating. "If it's a colder-than-normal winter," says Bruce 
Lanni, an energy analyst at CIBC World Markets, "Katie bar the door.'' 

The outrage at the pump spilled over into the battle for the presidency last 
week. Vice President Al Gore labeled oil prices a "national crisis" and urged 
President Clinton to tap the nation's 570 million-barrel Strategic Petroleum 
Reserve to help moderate prices this winter. On Friday the administration 
complied, authorizing the release of 30 million barrels from the reserves, a 
supply created in the 1970s after the Arab oil embargo. The impact on market 
prices is questionable--the United States uses about 19 million barrels of 
oil a day. But the issue gave Gore the chance to portray himself as fighting 
for the middle class and to attack his opponents--both former oil 
executives--all at once. "I am going to stand up to Big Oil,'' Gore said last 
week, "and demand fairer gasoline prices for families and an end to unfair 
profiteering.'' Gore's position, however, marked a reversal of his own 
earlier recommendations on oil policy, and Bush shot back that Gore was 
pandering and called the move a mistake. The reserves, he said, are "meant 
for a national emergency." 

How did we get into this energy mess? Unfortunately, $11-a-barrel oil last 
year was an aberration. It fell to that level in part because demand dropped 
a few years ago when the Asian economies collapsed. But oil-producing nations 
kept supply levels high, in part because such countries as Saudi Arabia and 
Venezuela were battling for market share. Throw in a couple of unusually warm 
winters, and you've got a lesson from the first day of Econ 101: too much 
supply plus soft demand equaled low prices. But then as oil producers started 
cutting back production and economies around the world strengthened, the 
tight supply pushed up prices. That created a domino effect. Because there 
wasn't much money to be made in oil, many drilling companies cut back their 
exploration for both oil and natural gas. So supplies of natural gas dwindled 
as the U.S. economy steamed ahead. 

Meanwhile many states have deregulated their electricity industries--a move 
originally intended to increase competition. But it's been a disaster so far 
in many states. Deregulation uncoupled full-service firms into two kinds of 
companies--suppliers that generate power, and middlemen who transmit it to 
customers. As demand for power has surged, power plants have raised prices 
sharply, and many middlemen, freed from regulatory price caps, have passed 
them along to customers. And because of the uncertainty leading up to 
deregulation, many power companies held off from building new plants. Now 
that prices are up, many of them want to add capacity, but they're running 
into resistance from communities that don't want a power plant in their 
midst. At the same time demand for electricity has been growing sharply. It 
used to rise in tandem with the economy, but in recent years, economic growth 
of 1 percent has translated into a 4 to 6 percent growth in demand for 
electrical power, thanks in large part to all the computer-centric companies 
that keep big servers humming 24/7. 

Businesses are already struggling to cope with their surging energy costs. To 
cover the added burden, a number of companies are adding fuel surcharges. 
Many airlines, for example, tacked on a $20 special charge to round-trip 
tickets. FedEx put in place a 3 percent surcharge in the spring, and has 
since raised it to 4 percent, but says that's still not covering its added 
fuel costs. Saving energy is the new management mantra. To help cut its fuel 
bills, UPS is using the Global Positioning System to analyze the most 
efficient delivery routes for its 149,000 trucks. Managers at Boeing are 
turning off lights, computer monitors and heavy industrial equipment when 
they're not being used. In San Diego, where deregulation sparked a sharp rise 
in electricity prices, Sea World has raised thermostats in many of its 
buildings from 72 to 78 degrees (the aquatic stars aren't affected). Qualcomm 
Stadium--where the NFL's Chargers and baseball's Padres play--now turns on 
lights closer to game time. 

Perhaps nowhere are the stresses of limited power and surging demand more 
evident than in Silicon Valley. To avoid rolling brownouts, large, 
power-hungry companies like Sun Microsystems, Cisco Systems, Yahoo, 
Hewlett-Packard and Intel have agreed to voluntarily reduce power consumption 
when the regional electricity system is taxed to capacity. Sun Microsystems 
has resorted occasionally to power-saving measures that include dimming 
lights, turning off water coolers and allowing temperatures inside its 100 
buildings around the state to drift up by two degrees. At Cisco Systems 
headquarters, workers made do in dimmed cubicles during last week's heat 
wave. "We have a serious crisis," says K. C. Mares, the company's energy 
director. "We just barely made it through this summer. Next year is going to 
be even worse." Bay Area power demand increased 12 percent last year, and 
will continue at the same rate for the foreseeable future. 

Even though some people are calling $37-a-barrel oil a crisis, many 
economists aren't overly concerned. They point out that oil is still 
relatively cheap, adjusted for inflation, compared with previous oil shocks. 
And many experts predict that energy costs will fall back after an expensive 
winter. OPEC, after all, has no long-term interest in pushing countries to 
reduce their dependency on oil. The higher energy prices are also attracting 
many independent energy companies back into the business, and they're quickly 
dusting off drilling equipment that they had mothballed when prices hit rock 
bottom. Certainly, car shoppers appear convinced that the jump in prices is 
temporary. Sales of SUVs are up nearly 10 percent this year, accounting for 
nearly one of every five new vehicles sold. Many auto executives believe that 
consumers won't worry about gas prices until they top $2 a gallon and stay 
there for several months. 

But Gore, by prodding the White House to release some crude from the 
strategic reserves, is betting that the cost of energy has become just the 
kind of "kitchen table'' issue that plays with the electorate. Some may view 
his flip-flop on using the reserves as a clear political ploy, but polls show 
that people are more likely to blame big business than big government for 
problems like high oil prices. If oil prices move down through October, Gore 
will claim victory; if they go up, Bush will call dipping into the reserves a 
misguided political ploy (and probably remind voters that Treasury Secretary 
Lawrence Summers had concerns about such a move before last week's decision 
by the White House to release some of the stored oil). 

In the meantime many consumers are taking action to cut their own energy 
bills. If you're in the market for a wood stove, for example, take a number. 
"It's like a shark feeding frenzy," says Roy L'Esperance, owner of the 
Chimney Sweep Fireplace Shop in Shelburne, Vt. He recently sold 500 stoves in 
one week, and sales are running at twice the rate of last year. And some 
people appear to be trying to break the gas-guzzling habit. Memphis car 
dealer Kent Ritchey says he's been replacing some big, nearly new SUVs with 
smaller Toyotas. Sensing an effective new sales pitch, Ritchey started 
featuring gas mileage prominently in his Sunday-newspaper ads for the first 
time since the gulf war sent gas prices skyward in 1990. The payoff--he's 
breaking sales records for his dealership. "Gas mileage is vitally important 
again," says Ritchie. '' And it will remain important as long as 
consumers--and voters--feel like they're over a barrel. 

With Karen Breslau, Jamie Reno, Keith Naughton, Howard Fineman, Tara 
Weingarten and Amy DiLuna Folder Name: Utilities, Electric: Deregulation 
Relevance Score on Scale of 100: 
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