California Crisis Hurts Businesses and Idles Workers

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January 20, 2001

California Crisis Hurts Businesses and Idles Workers By LAURA M. HOLSON OS ANGELES, Jan. 19 — The power crisis in California is beginning to take its toll on businesses, workers and consumers across the state.

Managers at a Miller brewery, uncertain hour to hour if the power will be on, have shifted beer production to Texas, laying off 200 workers and counting $600,000 in losses from power shutdowns this week.

Valero Energy Corporation, whose refineries produce about 10 percent of California's gasoline, has been unable to ship fuel to parts of the state because blackouts have shut down the pipelines it uses.

With power interrupted, the West Coast's largest steel plant, California Steel Industries Inc. in Fontana, east of here, told most of its 1,000 workers to stay home today.

This week alone, the cost to the state of its energy debacle amounted to $1.7 billion in lost wages, sales and productivity, according to the estimate of Jack Kyser, chief economist at the Los Angeles County Economic Development Corporation. But while rolling blackouts and the immediate prospect of bankrupt utilities are uppermost in the minds of Californians, including business executives, the bigger economic concern here is what will happen in the longer term.

With no new power plants expected to start operating for at least two years and demand growing at a steady pace, today's uncertainties are unlikely to disappear any time soon. And that, business leaders and some economists say, can only discourage growth in the world's sixth- largest economy, where the downturn in technology stocks has already slowed growth, leaving many fearing a recession is close at hand.

"If you are looking at a picture of California and seeing these people trapped in elevators, of course people will think twice" about investing in the state, said Tom Lieser, a senior economist at the Anderson Business Forecast, part of the University of California-Los Angeles business school. "Why would anyone want to open or expand a business right now?"

Executives are marshaling their forces across the state to send this message to lawmakers: fix the power problem or watch the buoyant California economy run aground. And while the state's lawmakers increasingly recognize that utilities, power generators and corporate power users alike are angling for government action that favors their interests, they are loath to call any bluff, if jobs and economic vitality are at stake.

Craig R. Barrett, chief executive of the Intel Corporation, a keystone of the state's technology industries, has declared that the company will not be building more plants in California any time soon, blaming unreliable and expensive power supplies.

And in Los Angeles, where the economy is driven largely by small businesses and light manufacturing plants, economic development officials are demanding meetings with top state leaders, saying companies that want to move here have put those plans on hold. Worse, they warn, persistently high energy prices could lead to substantial layoffs and companies leaving the state altogether.

Elaine Cullen, who recruits high technology and biomedical companies to the San Gabriel Valley, east of Los Angeles, said California's Frankenstein-like experiment with power deregulation has cooled the interest of outsiders. Already, a food processor that her group, the San Gabriel Economic Partnership, was trying to lure has put its plans on hold, she said.

Los Angeles has endured earthquakes and riots, Ms. Cullen said, but the fact that a basic necessity like electricity is no longer guaranteed is almost too embarrassing to explain to newcomers. And losing a transplant is not even her worst nightmare.

"I'm trying to save the businesses I've got," she said.

The crisis here stems from short energy supplies and a deregulation plan that puts no limits on what utilities pay for electricity but strict limits on what they can charge their customers.

The dysfunctional arrangement has left the two biggest utilities, Pacific Gas and Electric Company and Southern California Edison, on the brink of bankruptcy, and state officials tied in knots over how to clean up the mess.

So far, the business impact has been sharpest on companies like Miller Brewing that have agreements with the utilities to reduce their power consumption during state-mandated emergencies in exchange for lower electric rates.

In the first five years of its deal with Southern California Edison, service was interrupted just once to Miller's brewery in Irwindale, about 30 miles east of Los Angeles, said Victor Franco, the plant's community affairs manager. In the past six months, the plant has been shut down 22 times.

The costs are substantial. Miller has laid off 200 of its 750 workers, and the company has asked others to take vacations or sit through training sessions when blackouts idle the brewery, which sits on three and a half acres. Under its union contract, the company is required to pay the workers even if they are sent home from a shift.

The alternative is to keep the lights on and the brewery operating in defiance of its power agreement. Then, Mr. Franco said, Miller's price for electricity jumps more than a hundred-fold, from 6 1/2 cents a kilowatt to $7.20 a kilowatt.

"We've always been this cutting- edge state," Mr. Franco said. "But I don't believe California can continue to suffer this kind of loss."

It is in no sense certain that the energy crunch will push California into recession, or even amount to anything more than a downward blip in a still powerful economic expansion.

If the state can quickly solve its midterm energy issues — by securing electricity contracts to tide it over until the new power plants come online and encouraging power users to conserve — the economic pain will be modest, said Mr. Lieser, the U.C.L.A. forecaster.

As for the effects beyond the state's border, market watchers say companies far from California are already paying extra for the overnight borrowings that finance their day-to-day operations, as lenders and investors grow anxious about any company that shows signs of weakness.

Neal Soss, chief economist for Credit Suisse First Boston, said a severe crisis here, with sporadic power interruptions for 90 days or more, would shave about one-half of one percentage point from the nation's gross domestic product. In that case, he said, the Federal Reserve Board might have to consider easing interest rates to keep the situation from growing more grave.

An immediate resolution to the state's problems is not apparent. Today, Standard & Poor's, the credit rating agency, placed the State of California's debt on "credit watch," warning that Sacramento does not have adequate funding — barring rate increases — to buy enough power to avoid blackouts.

Currently, the state has a projected budget surplus of about $5 billion, and Gov. Gray Davis has proposed setting aside $1 billion of that sum to help the two big utilities stave off bankruptcy.

"They have some money to buy time, but beyond that they have to come up with a solution," said David Hitchcock, the Standard & Poor's analyst who monitors California.

Governor Davis has acknowledged that just about every knowledgeable observer — save himself — says the solution will include substantial increases in electric rates.

If and when those increases come, consumers and businesses both will have less to spend on everything else, sapping the economy of some degree of strength.

Even those who are part of the solution to the state's power woes are feeling the pain.

Utilities in California get 20 percent of their power from plants at schools, hospitals and factories that generate enough energy for their own needs and sell the rest, said Jan Smutny-Jones, executive director of the Independent Energy Producers, a trade group in Sacramento.

But now these power producers are not being paid. Hal Dittmer, whose Wellhead Electric Company in Sacramento owns three small power plants, said he received a letter from Pacific Gas and Electric this week asking him to forgo payments from the utility until April 1 — what would amount to an interest- free loan to the utility of $10 million to $15 million.

"If I have to dig into my pockets to keep this company afloat, I will," he said. But if he cannot get credit to buy the natural gas that run the plants, Mr. Dittmer added, he will have no choice but to shut down, idling 42 workers.

http://www.nytimes.com/2001/01/20/national/20CALI.html?printpage=yes

-- Martin Thompson (mthom1927@aol.com), January 20, 2001


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