Rising energy prices jolt California economy

By MICHAEL LIEDTKE The Associated Press 12/31/00 1:57 PM

SAN FRANCISCO (AP) -- California businesses are cutting corners, contemplating price increases and bracing for more budget-breaking anguish as the state's energy woes crackle through the economy.

With natural gas bills more than doubling in the past year, the financial pain already is being felt from Central Valley dairy farms to Silicon Valley computer chip plants.

"It is frightening," said Lee Murphy, president of the California Cut Flower Commission, whose members are absorbing huge losses to keep their roses warm.

It looks like the misery is just beginning.

Another financial shock may come Jan. 4, when state regulators are expected to approve an electricity rate increase of up to 20 percent to help utilities recoup more than $9 billion in losses.

Spending more money on energy will mean consumers have less disposable income to spend on other goods and services, a shift that could take some of the spark out of California's high-voltage economy, which is larger than all but five countries in the world.

"Energy is becoming a huge wild card in our economy," said Ted Gibson, chief economist for the state Department of Finance.

Rising energy prices could reduce the state's economic output -- estimated at $1.35 trillion this year -- by 1 percent, or about $13.5 billion during the next year or two, estimated Richard Gilbert, a University of California economics professor specializing in energy issues.

"It could become a significant drag on economic growth," Gilbert said.

To some extent, the outcry over rising energy prices reflects how spoiled the state has been by a prolonged period of stable rates.

Most California households and businesses have been shielded from soaring electricity prices by a rate freeze utilities agreed to as part of the deregulation law they pushed through the 1996 state legislature.

Pacific Gas and Electric Co. last week asked the Public Utilities Commission for a 26 percent rate hike; Southern California Edison wants 30 percent.

Even if rates go up just 20 percent, California's retail prices will be roughly the same as they were in 1995, after adjusting for inflation, said Severin Borenstein, director of UC Berkeley's energy institute.

Still, sharply higher natural gas prices are forcing changes at many businesses.

Mission Linen Service, whose customers include hotels, supermarkets and restaurants, figures it will have to raise prices to offset energy costs. In October, Mission Linen paid $20,173 for natural gas at its Fresno plant, up from $9,875 at the same time last year.

"Supposedly, it is going to double again in the next two months. It's not a good thing," said spokeswoman Kay Tyler.

Hoping to hold the line on room rates, many upscale California hotels are scrimping on the holiday frills and stepping up conservation. The San Francisco Hilton, for instance, recently replaced its incandescent lights with more energy-efficient fluorescent bulbs.

In Hollywood, Sony Pictures is urging its film crews to turn out the lights during breaks and make sure all the stage doors are closed.

"It's like keeping the refrigerator door closed. It does make a difference," said Jack Saraceno, Sony's vice president of studio services.

Other businesses are trimming payrolls to make ends meet, and in the worst cases, shutting down until prices ease.

Hit with a 14-fold increase in its natural gas bill, McKoen and Associates laid off 100 workers at a potato-flake plant in Tulelake, near the Oregon border. The company decided to temporarily close the plant shortly after converting it to natural gas from diesel fuel and used oil.

"Obviously, no one saw this coming, or we would have situated ourselves for it," said plant owner Mike McKoen said.

Many other businesses are being blind-sided by the dramatic price spike in natural gas, which had been a relatively cheap source of energy throughout the 1990s.

Uncertainty about the cost and availability of California's electricity looms as an even more daunting problem, according to business leaders and economists.

"Businesses are becoming apoplectic," said California Chamber of Commerce President Allan Zaremberg.

Natural gas prices nationwide are expected to ease as costs decrease during the next few months, but California's electricity headaches are more parochial. Utility executives and energy regulators say the state's power supply is inadequate, and high prices are likely for at least the next two years.

Possible interruptions in California's electricity supply are equally troubling to the state's high-tech businesses, which say they lose as much as $1 million during each minute of a blackout.

"Cost is an issue, but reliability is an even bigger issue for our companies," said Michelle Montague-Bruno, spokeswoman for the Silicon Valley Manufacturers Association, a high-tech trade group.

The twin threats of high prices and periodic blackouts might discourage businesses from expanding or locating operations in California, said Sung Won Sohn, Wells Fargo Bank's chief economist.

"It's another thing to add to the list of concerns about doing business in California," Sohn said. "It's something else to worry about, like an earthquake."

http://www.nj.com/newsflash/index.ssf?/cgi-free/getstory_ssf.cgi?f0007_BC_Power-CalifEconomy&&news&newsflash-financial

-- Martin Thompson (mthom1927@aol.com), December 31, 2000