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March 13, 2001

Rising Energy Prices Could Tip Washington Toward a Recession

By ROBERT GAVIN Staff Reporter of THE WALL STREET JOURNAL

OLYMPIA, Wash. -- Sharply rising electricity and natural-gas prices in Washington state could cut disposable household income by as much as $1.7 billion a year, cost 43,000 jobs over the next three years and help push Washington's slowing economy into recession, state officials warn.

The worrisome outlook, contained in a study performed by state fiscal analysts, represents one of the first analyses of the potential of the West's energy crisis to affect the broader economy. Such ramifications are among the factors Washington Gov. Gary Locke is weighing as he considers possible responses to the crisis, including declaring an "energy emergency" that would give him broad powers to compel businesses, government and individuals to cut energy consumption and to order power generators to produce more power.

Matters could get worse. The study warned of "significant risks" that household energy costs would jump 50% or more from mid-2000 levels for as long as three years. Among the risks: poor hydroelectric generating conditions as a result of acute water shortages, rising natural-gas prices and the volatile western wholesale market for electricity.

Slowing Job Growth

The analysis assumes households will continue to consume energy at current levels and that no new power production will come on line. Under that scenario, power price increases would slash annual disposable income in the state by $1.7 billion, or about 1% of total disposable income, according to the report. The subsequent reduction in household spending, in turn, would ripple through the state's economy.

The analysis estimates the energy crisis could cut Washington's annual average job growth over the next three years to 1.5% from current projections of about 2%, or by 43,000 jobs over the next three years.

To be sure, the impact of rising energy costs alone won't be enough to drive the Washington economy into recession, state officials say. But, officials say there is reason to worry, when such costs are combined with the impact of an already souring national economy and a bearish stock market that has sucked some $2 billion in stock-option income from Washington's technology-heavy economy.

"The upsurge in energy prices is the kind of sudden shock that can derail a slowing economy," says Irv Lefberg, coordinator of economic forecasting for the state's Office of Financial Management, which oversaw the analysis.

The analysis was prepared as the Northwest, which gets about 70% of its power from hydroelectric dams, faces its driest winter since 1977. The drought will cut average monthly hydropower production capacity by a third, or more than 5,000 megawatts, over the next six months, according to the Northwest Power Planning Council, a multistate organization based in Portland, Ore.

Passing Costs to Consumers

Among western states, Washington consumers have perhaps felt the squeeze of rising energy costs most acutely. The main reason: Municipal and municipal-type utilities, known as public utility districts, serve about 75% of the state's electricity customers. These utilities, which are exempt from traditional rate-setting procedures that often take months, have quickly passed on to consumers the costs of buying power on the volatile western wholesale market.

The state's biggest municipal utilities, which serve about 750,000 customers in the Seattle area, have hiked rates between 28% and 50% during the past six months, as insufficient hydroelectric supplies have forced them to purchase power on the volatile spot market. California regulators, in contrast, so far have limited residential increases to just 9%.

The widening impact of the energy crisis in Washington can be seen in Pioneer Americas Inc.'s announcement last week that the Houston chemical producer would cut production and the 160-person work force at its Tacoma, Wash., plant by half. Larry Landry, the plant manager, says higher energy costs hammer both his plant and his customers -- many of them energy-intensive industries such as aluminum smelters and paper makers. These customers are halting or curtailing production and dropping orders for sodium hydroxide and other chemicals manufactured by the plant. About a year ago, the Tacoma plant had 110 Northwest companies placing orders; today, only 78 are doing so.

"It's just kind of like a spiral," says Mr. Landry, adding the long-term future of the facility is uncertain.

Also facing an uncertain future is the Northwest's aluminum industry, which employs about 10,000, mostly in Washington. The Washington economic analysis cites a recent industry study estimating that smelters can't operate profitably once electricity prices hit $35 a megawatt hour.

The Bonneville Power Administration, the federal power-marketing agency that sells to Northwest utilities and aluminum smelters, now estimates its rates will rise to about $41 a megawatt hour during the next two years. (Smelters, under contracts that expire in October, now pay about $22 a megawatt hour, and several have chosen to shut down production and resell the electricity at a significant profit, temporarily idling workers at full pay.)

Scott Lamb, a spokesman for Kaiser Aluminum Corp., of Houston, which operates two plants in Washington, says short-term rates above $35 don't necessarily spell the doom of aluminum production in the region. Other factors, including the price of aluminum and plant efficiency, also affect profitability. But, he concedes, "Anytime the price starts to get into the $30 range, it's tough."

Write to Robert Gavin at robert.gavin@wsj.com

http://interactive.wsj.com/articles/SB98443500929451562.htm

-- Martin Thompson (mthom1927@aol.com), March 13, 2001

Answers

Just relocate the smelters to Phoenix. I think aluminum melts on the asphalt here or maybe those puddles are people (I'm not really sure, it happens so quickly). Free solar energy!

-- Guy Daley (guydaley@altavista.com), March 13, 2001.

Sadly for Arizona, your extra heat won't help smelt aluminum. Unlike smelting iron or copper (which does rely on heat), smelting aluminum requires electricity. The "Hall process" used to smelt aluminum is an electrolytic one: the ore is disolved in boiling cryolite in LARGE electrolytic cells (each anode weighs one TON), and a huge amount of DC current is passed through the cells to precipitate out the aluminum metal. No cheap electricity means no cheap aluminum smelting.

BTW, if you ever get a chance to tour an aluminum smelter, go for it. For a heavy industry it can be very pretty. E.g., ever see a 1 ton Xmas tree ornament?...

-- Barb Knox (barbara-knox@iname.com), March 13, 2001.