California Power Crisis Breeds Opportunities

By Michael Bartlett, Newsbytes SCOTTSDALE, ARIZONA, U.S.A., 30 Jan 2001, 8:30 PM CST

When the lights went out in the Silicon Valley a few weeks ago due to rolling blackouts necessitated by a power shortage, the sudden darkness may have turned the light on for the hosting infrastructure provider industry.

The power crisis that is affecting virtually all of the Western United States is a marketing opportunity, according to a new white paper released today by Cahners In-Stat Group, a high-tech market research firm.

"This is a real threat to businesses in California and the United States. Not just power outages, but acts of God and human error," said In-Stat e-business analyst Kirsten Cloninger. "If any of these things happen, then a business is not available for its customers."

Hosting infrastructure service providers provide stability, said Robyn Bergeron, an In-Stat analyst specializing in e-business computing infrastructure.

"Some of the larger companies, like Qwest, AT&T, Exodus, AboveNet and Level3, offer co-location, which means two or more locations to make sure your company will stay online even if there is a problem in one area," said Bergeron.

"Every business wants shatterproof availability," said Cloninger.

Bergeron said each business that is considering hosting its Web presence in-house or farming it out must weigh the possibility of power outages along with other factors, such as the size of the IT staff it employs. She said the hosting companies have certain advantages.

"Exodus has 36 to 48 hours of battery time in case of a blackout, plus co-location facilities," she said. "If a data request goes to one facility and it is out because of a blackout or another problem, the data request is redirected."

Cloninger said she does not believe all mid-sized and large businesses will move mission-critical online systems to outsourced facilities, but she does foresee a hybrid solution. "Things will be split up between hosted and in-house. Take customer relationship management, for example. The call center might be outsourced, but other positions would reside in-house," she said.

"This is an opportunity for these hosting infrastructure providers to get out there, advertise and let businesses know their core competency," Cloninger added.

How Bad is the Crisis?

The providers might have a long time to prove themselves if the electricity crisis extends as long and as far as Matthew Simmons believes it will.

Simmons is the president of Simmons & Co. International, a Houston, Texas-based investment bank that focuses on energy. He spent part of the day testifying before the Senate Budget Committee, including new Senator Hillary Clinton, on the gravity of the situation.

"The energy problems are real, they are serious and they will last for a long time," Simmons declared. "Things will get worse before they get better, and California is just the tip of the iceberg for the United States and the world."

Simmons believes it will take 10 years to recover from the current crisis, which he said stems from a series of misunderstandings and mistakes.

"It started in the 1990s when demand started to spike up. But no one worried about demand growth because so many so-called geniuses said the 'New Economy' used less energy. Someday historians will look back on this as one of the silliest eras in US history," he said.

The problem with a shortage of energy, according to Simmons, is that it affects all parts of the economy. "I told the Senate Budget Committee that I could not imagine what was the second most important thing to the economy," he said. "When someone suggested food, I told them a body can live for a long time, but it cannot go without oxygen for more than three minutes. Energy is like oxygen to the economy."

Contrary to the predictions of some, the New Economy is consuming large amounts of electricity, said Simmons. He said the estimated time spent online by Americans in 1997 was 3 billion hours. That number increased to 9 billion hours in '98, 15 billion in '99 and 28 billion in 2000. "For that to happen, all sorts of things have to be plugged in," he asserted. "It is not just the computer in your house, there are servers, providers and on and on."

Simmons said the Energy Information Agency, which supplies estimates to the federal government, estimated in April 2000 that energy use in the US would increase 1.3 percent over the next 20 years. "In November, they revised that to 1.8 percent. That might not sound like a lot, but that is a big difference in a 20-year estimate in only six months," he said.

Other than the state of Texas, the US has used up virtually all of its reserves, Simmons said. He attributed this to the financial markets "punishing" companies that produced energy if they had any surplus capacity by dropping their stock price. The net effect, he said, was the industry shifted to a "just-in-time" mentality, and lower prices drove away potential suppliers.

California's electricity deregulation plan has been blamed by many for the state's energy woes, but Simmons said it alone is not the culprit.

"It is a poorly designed cast on a mangled arm, but the arm is already broken," he said. "The cast made the elbow turn the wrong way."

The last major power plant installed in California was Diablo Canyon, a nuclear-powered facility located near San Luis Obispo on the Central Coast. Simmons said when the plant came online in two parts in 1985 and '86 there were "howling protests," which soured other companies on opening generating facilities in the state.

Simmons said the lack of foresight continues, and predicted that the companies that currently comprise the heart of California's technology center will have to move.

"I just read in the news last week that a new generating facility was approved by San Jose, then disapproved the next day because Cisco did not want something that was not aesthetic next to their headquarters. I could not believe it. Cisco cannot stay in the Silicon Valley, and neither can many other companies, because they need 100 percent reliability."

More information on Cahners In-Stat Group is available on the Web at http://www.instat.com .

Simmons & Co. International is online at http://www.simmonsco-intl.com Reported by Newsbytes.com, http://www.newsbytes.com .

20:30 CST (20010130/Press Contact: Robyn Bergeron, In-Stat, 480-609-4537 /WIRES TOP, ONLINE, BUSINESS/)

-- Swissrose (cellier@azstarnet.com), January 31, 2001