http://www.contracostatimes.com/news/california/stories/steel_20010107.htm

Published Sunday, January 7, 2001

Power costs slam area's factories POWER CRISIS

Industry in the East Bay is scrambling to deal with the escalation of energy prices, which can raise the costs of products, services By Glenn May STAFF WRITER

PITTSBURG -- If you think your energy bills are getting steep, imagine what it costs to run a steel mill these days.

For Pittsburg's USS-POSCO steel mill, this fall's surging natural gas prices shot the gas bill from the monthly norm of $500,000 to $2.5 million for December, company President Bob Smith said.

And that's before you factor in electricity rate hikes.

While industry executives around Contra Costa County are somewhat tight-lipped about the effects of rising gas costs and the related increase in electricity prices, they are clearly concerned about costs.

"It's certainly time to look at contingency plans," said Cary Dyer, executive director of Industrial Association of Contra Costa County, a 50-member trade group

At Gaylord Container, a cardboard manufacturer in Antioch that employs up to 180 people, energy accounts for about 10 percent of costs, said company spokesman Dick Storat.

"If energy costs go up 10 percent, total costs go up 1 percent, and that's significant," Storat said.

Natural gas costs have gone up by far more than that in 2000. University of California professor Severin Borenstein said wholesale gas prices are five times or more higher than average 1999 levels.

A year ago, he said, prices were about $2.50 per million British thermal units. In November, prices went as high as $50 per million Btu for a day or two, but have since settled closer to $15.

Heating a pot of coffee takes about 2,000 Btu.

Gaylord's Storat declined to say what effect the increased cost has had on the Antioch plant's operations.

But at POSCO, Smith said operations and hours were scaled back significantly in December in hopes of dodging the worst of the natural gas spike. For some of the company's operations, he said, "it was too expensive to produce product."

He said the company has not resorted to layoffs and has no plans to do so, but acknowledged that shifts were reduced and employees were encouraged to use up holiday time in December to take up the slack at the plant.

For POSCO mechanical tender Bob Phillips of Oakley, the cutback in hours meant sharply cutting spending on Christmas gifts. What's worse, he said, he already has had to dip into savings and investment money to keep up with bills.

He worries about his future paychecks and "if it gets too bad we'll sell the house and live out of the fifth wheel," he said, referring to his camper.

His hours already cut by higher gas bills at the plant, Phillips said he also is keeping the thermostat down at home to keep his own tab under control.

There are many causes of the natural gas price spike, experts say, many of them linked to California's electricity crisis.

Because gas powers a huge chunk of California's power plants, increased demands for power leads to increased demand for gas.

"There's no question more demand for electricity drives demand for natural gas," Borenstein said.

Other causes of the spike include increased demand in the East for gas, lagging exploration for new supplies because of low prices earlier in the decade and the limited number of pipelines coming into the state.

Claudia Chandler, a spokeswoman for California Energy Commission, said one major pipeline linking the Southwest with California remains out of service after an explosion last fall.

As with electricity, Chandler said, questions have been raised about corporate behavior regarding gas prices.

She said state officials are investigating whether companies that are both gas producers and electricity generators signed supply contracts which, in effect, resulted in them paying themselves higher prices for gas in order to drive up the marketwide price of gas.

With electric power now fetching top dollar, Chandler said, generators could afford to pay inflated gas prices.

The twin increases in gas and electricity rates could present interesting alternatives for some business leaders.

Like many industries in Contra Costa, Gaylord has its own power plant on site to power operations. It can and does sell excess power to the California grid, Storat said.

In Washington state, several heavy industries with their own power supplies have already halted operations, finding it more profitable to sell the power on the grid than to use it themselves.

In Richmond, the Chevron refinery has a different tradeoff to consider.

The refinery has a large generator on site, one that can burn either natural gas brought in by pipeline or liquefied propane gas, a product manufactured at the facility.

"With the higher natural gas prices, we have to look at how we can manage our costs," said Chevron spokeswoman Marielle Boortz.

She said the company can save money by using propane for the power plant and has taken advantage of that option, but must remember that its first priority is customers, including those who buy liquefied propane gas.

While many industries generate their own electricity, its price still poses a threat.

POSCO's Smith said the company signed long-term supply deals for electricity to hedge costs, including contracts with Calpine, the builder of two big new power plants in Pittsburg.

While those deals will help, he said, they contain escalator clauses that mean higher costs if the price for power keeps going up.

The steel industry also grapples with plenty of foreign and domestic competition, leaving slim profit margins in the industry, Smith said, so it is hard for POSCO to swallow big hikes in fuel costs.

"We do not have the luxury of being able to pass these costs on to the consumer," Smith said. "They have too many alternatives in terms of where they can buy their steel."

Staff writer Glenn May covers Pittsburg and Bay Point. Reach him at 779-7170 or gamy1@cctimes.com.

-- Martin Thompson (mthom1927@aol.com), January 07, 2001