Blackouts alone could cost billions

State's economy will take big hit, business group says

Sam Zuckerman, Chronicle Economics Writer

Saturday, April 21, 2001, ©2001 San Francisco Chronicle

URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/04/21/MN210563.DTL&type=news

Blackouts could wallop California's economy to the tune of $16 billion this summer, far worse than the hit from higher power prices, a new study of the energy crisis contends.

The report, released yesterday by the government- and business-funded Bay Area Economic Forum, is one of the first attempts to put a price tag on power interruptions as distinct from the effects of electricity price increases.

For the Bay Area alone, the study forecasts that blackouts could reduce the annual output of goods and services by as much as $5 billion and trim economic growth by as much as 1 percent as factories, offices and laboratories are temporarily idled. That dwarfs the $500 million loss to the area economy the report estimates would result from a 50 percent jump in commercial energy rates.

"Although higher prices present a significant risk to the Bay Area economy, the lack of a reliable power supply is a much more serious threat," the report concludes.

Energy experts predict that the state will face at least 34 days of rolling blackouts this summer, when demand will rise as air conditioners are cranked up in homes, schools and workplaces.

The report concludes that consumers and businesses must pay higher prices to encourage conservation and ensure that electricity supplies are adequate. "While revising electricity rates is a politically charged issue, it is apparent that significant increases will be necessary to make up for the shortfall of the past year and accurately reflect the higher cost of energy," the report argues.

"It is clear . . . that the Bay Area economy and the state can absorb significant rate increases if allocated equitably," the study adds.

The Forum's report reflects the views of big businesses in the Bay Area, especially Silicon Valley's technology community, which need dependable electricity supplies to power sensitive operations.

"Steady, reliable power is absolutely essential," said Don McIntosh, facilities director for Sunnyvale chipmaker Advanced Micro Devices, about the report's findings. "The cost of energy is much less important to us than reliability of energy."

AMD's main production facilities are located outside the Bay Area, but it does operate a design center and an experimental chipmaking facility here.

POTENTIAL DISASTER

"A one-hour loss of power would be disastrous for us," said McIntosh. "You have the potential for ruining an entire batch of (silicon) wafers. In addition, it could take up to three days to recalibrate all the tools." To guarantee its electrical supply, AMD built a power substation drawing directly from Pacific Gas and Electric Co. transmission lines about 10 years ago.

Until now, that substation was exempt from blackouts. But under emergency rules set to take effect, the station will lose its exemption. AMD is currently looking at other ways to deliver uninterrupted power to its chip facility this summer.

While stressing the dire effects on businesses, the report concedes that most residential users aren't as vulnerable. For them, "blackouts are largely a matter of inconvenience."

The Bay Area Economic Forum and its partners are using the shock value of the report's big blackout cost projections to press their argument that supply is more important than price. "Reliability is paramount. The economic numbers say so," said Justin Bradley, director of energy programs for the Silicon Valley Manufacturing Group, which helped produce the study.

ESTIMATES QUESTIONED

But several economists said they are skeptical about the report's blackout cost estimate. They say it's wrong to assume that there is a 1-to-1 relationship between economic activity and energy use. In many case, business lost during blackouts could be regained later, they point out.

The report's blackout calculation "is pretty crude," said Mark Bernstein, an energy specialist with Rand, the Southern California research group.

Still, experts agreed with the report's overall conclusion that an unreliable electricity supply is a greater economic threat than higher prices. "I certainly think . . . that the reliability issue is more serious," said Tom Lieser, an economic forecaster at the business school of the University of California at Los Angeles.

But consumer groups are suspicious of claims that rate increases are needed to guarantee electricity supply. Higher prices, they contend, will simply support price-gouging by power producers and will not significantly add to supply. "They are giving us the choice of darkness or higher rates," said Nettie Hoge, director of The Utility Reform Network in San Francisco. "In fact, we're going to get both."

HOW ESTIMATES WERE CALCULATED

To calculate the effect of blackouts, the report's authors, a team from the consulting firm McKinsey & Co., measured the relationship between electricity consumption and economic growth. They found that for every $16,000 increase in output of goods and services in California, an additional megawatt hour of electricity is consumed. Hence, they said, a blackout that deprived users of 5,000 megawatts of power would reduce output by roughly $75 million to $100 million.

Depending on the frequency and severity of blackouts this summer, the total loss to the California economy could range from $2 billion to $16 billion, the study concluded.

The study focused on the Bay Area and did not calculate the statewide effect of rate increases for businesses. Locally, the $500 million loss it projects represents less than 1 percent of the region's $350 billion annual output of goods and services. That translates into a loss of about 15,000 area jobs over the next three years.

A 30 percent higher residential rate combined with the increases for businesses would trim the disposable income of area households by $750 million to $1.2 billion, a drop of one-third of a percentage point, the report estimates. Such a small hit suggests "there may be some room for residents to pay higher rates," the study claims.

E-mail Sam Zuckerman at szuckerman@sfchronicle.com.

©2001 San Francisco Chronicle Page A - 1

-- Swissrose (cellier3@mindspring.com), April 23, 2001

Answers

This is exactly why the power generators can get away with gouging and charging such outrageous prices for electricity in the unregulated "free" electricity market.

The "free market" for electricity is dysfunctional, because there aren't the "many buyers and many sellers" all "free to enter and leave the market" that is required for the proper function of a Free Market. (This requirement is set forth in Adam Smith's "The Wealth of Nations", which is the "Bible" of Free Market Capitalism. For the free market to truly work, each end buyer of electricity (not the utility middleman) must pay real-time power prices, and thus must know what this real time price is, at all times. The utility isn't the real "buyer", just the middleman. Right now, end electricity buyers aren't made aware, in real time, even what the approximate real time cost of electricity is.

This flaw will synergize with Y2K bottlenecks, and other additive factors, to place high stress on the capitalistic System of Payments (upon which civiiization depends) this summer and fall. The State of California will, inexorably and with virtual mathematical certainty, sink into total insolvency and then some form of Bankruptcy. The cascading effects of this "iatrogenic" augmentation of the effects of the "Y2K Bug Flood" will be awesome and far reaching indeed.

-- Robert Riggs (rxr.999@worldnet.att.net), April 23, 2001.