Power prices a drain on jobs: As manufacturers retrench, observers wonder if it's a trend.

By Dale Kasler Bee Staff Writer

(Published Sept. 6, 2001) ANDERSON -- Maybe the Shasta Paper Co. could have survived that nasty sales slump or the onslaught of cheap imports. But a devastating increase in electricity costs put it over the edge.

One of the leading employers in Northern California's timber country, the colossal paper mill folded after its monthly Pacific Gas and Electric Co. bill jumped to about $1.3 million, a $500,000 increase. Opened 37 years ago to supply glossy paper to Life magazine, Shasta Paper laid off its 400 workers Aug. 20.

Energy "was the final piece," said plant manager Mal Bellafronto. "We just couldn't do it."

The energy crisis isn't over; it's just not as obvious. The screaming pain of rolling blackouts may be gone, but taking its place is an ailment that could prove just as troubling: a dull economic headache that could last for years.

"The short-term crisis is almost over. (But) we have to regroup and figure out how to deal with the financial hangover," said Severin Borenstein, director of the University of California Energy Institute in Berkeley.

What isn't clear is how painful the hangover will be -- whether Shasta Paper will prove to be an extreme case or represent, as Bellafronto believes, "the tip of the iceberg."

Economists at UCLA, in a closely watched forecast in June, said energy woes could push California into a recession. Some 66 energy crisis "casualties" have been cataloged by the California Manufacturers & Technology Association, including layoffs, shutdowns and business opportunities lost to other states.

Yet so far, only a few hundred jobs have been lost, and many economists believe most Californians will cope with the higher costs. Because Californians on average use less electricity than other Americans, the prices won't cripple the state, they say. Energy may be less of a threat than the generally slow economy.

"It's a problem at the margins," said Sung Won Sohn, Wells Fargo & Co.'s chief economist. "Businesses are not all going to pick up and leave."

Many of the factors influencing the business climate remain unsettled, making any forecast iffy.

It isn't known if Southern California Edison will go bankrupt like PG&E or if the state will succeed in selling $12.5 billion in bonds to repay the treasury for power purchases. Also in limbo is "direct access" -- the ability of customers to bypass their local utility and buy electricity elsewhere -- which is scheduled to be suspended by state officials today but could be revived by the Legislature.

Maybe the greatest unknown is the impact of the state's decision to spread out the costs over several years.

The state's wholesale energy costs shot up from $7 billion in 1999 to $27 billion last year to an estimated $50 billion this year. But customers' actual bills have risen less than $7 billion a year. By entering into billions of dollars worth of long-term supply contracts for beleaguered PG&E, Edison and San Diego Gas & Electric, the state has deliberately shielded customers from much of the immediate pain.

There's been a trade-off, though. As the cost of power has now plunged, those contracts will leave Californians paying above-market prices for years.

Defenders of the contracts say the state was right to ease the sticker shock. "We averted what might have been a nasty recession," said chief economist Ted Gibson of the state Department of Finance.

But UCLA economist Chris Thornberg said the state has prolonged the agony, and the economy would rebound sooner if "you take your bitter pill now."

Even if the short-term impact has been softened, UCLA forecasters believe the state still faces a mild recession.

"The negative impact of the power crisis, coupled with the overall downturn already occurring in the economy, is enough to push the economy into a slight contraction in 2002," the UCLA group wrote in June.

The consulting firm Cambridge Energy Research Associates, which teamed up with UCLA to create the forecast, says energy will push unemployment in California up a half a percentage point this year and 1.1 percentage points next year. The rate is now 4.9 percent.

Higher rates also could hurt California's competitiveness with other states, some of which have already tried to recruit California companies with the lure of cheap, reliable power, said relocation expert Dan Malachuk of the Andersen consulting firm in New York.

California's average electricity costs, which already were among the highest in the nation, have risen from roughly 10.5 cents per kilowatt hour to 12 cents per kilowatt hour, almost twice the national average. Only Hawaii's electricity costs are higher, according to federal statistics.

While other states have had energy problems of their own, none have had the melodrama that California has, harming the state's image with corporate-relocation specialists, said economist Jack Kyser of the Los Angeles County Economic Development Corp.

On the other hand, the absence of blackouts this summer restored some of California's image, easing fears that the state was going to plunge into some sort of socioeconomic abyss. Rampant blackouts, with their damage to business productivity, could have been far worse for the economy than rate increases.

And most Californians can handle the rate increases that have been doled out, Gibson and others said.

Customer bills have gone up roughly $6.7 billion a year, Gibson said. The sum reflects 30 percent rate increases at PG&E and Southern California Edison, 22 percent hikes at the Sacramento Municipal Utility District, and others.

All told, the increases are manageable for a $1.3 trillion-a-year state economy, said Gibson and others. That's true partly because Californians use less power on average than other Americans, so a big increase in prices doesn't create a huge dent in their budgets, Gibson said.

Besides, millions of Californians have been exempted from rate hikes. Prices haven't budged at Los Angeles' city-owned utility. Even in PG&E and Edison's territories, residential rates stayed the same for those using less than 130 percent of the "baseline" quantity of electricity.

Still, the burden could be crippling for some Californians. These include heavy-duty manufacturers and industrial users -- steel makers and the like -- that are voracious electricity users and have been forced to swallow the lion's share of the PG&E and Edison rate increases. Their bills have risen 50 percent or more, and many are in such competitive fields they're unable to simply raise their prices accordingly, according to the California manufacturers group.

"We can't pay it, and we can't pass it on," said Robert Bateman, president of an Oroville plastic bag manufacturer whose monthly PG&E bill has doubled to about $100,000.

Bateman's company, Roplast, is cutting production to save energy. By year's end it plans to lay off 60 of its 180 workers, a significant hit in a city where unemployment is estimated at 10 percent.

Shasta County, where unemployment is 5.9 percent, has been twice bitten by the energy bug.

Knauf Fiber Glass, a new manufacturer in the city of Shasta Lake, has delayed its plant opening for several months because of uncertainty over the energy mess, putting 150 jobs on hold.

The death of Shasta Paper hit even harder.

"The best job in town," said Randy Neuenfeld, 46, who spent a quarter-century packaging 500-pound rolls of finished paper. "A lot of people are trying to figure out what to do with their lives -- there aren't any jobs up here."

Shasta Paper paid $21 an hour plus benefits in a depressed region. The average employee was 50 years old and had 22 years on the job, said Sam Piearcy, president of the union.

"When they hire in here, people just don't leave," said Piearcy, 59, who joined the mill in 1978. "It was a family type of mill -- everybody took care of everybody."

Imports and an industry slump plagued the privately owned mill. The spike in natural gas prices prompted a one-week shutdown in December and the elimination of 71 jobs.

In June, when the PG&E electricity rate hikes began taking effect, the mill was pushed to the brink. The monthly bill went from $750,000 to almost $1.3 million. It would have been even higher, except that Shasta cut consumption by curtailing production.

In July, workers rejected management's call for a 20 percent pay cut, suspecting the plant was going to close anyway, Piearcy said.

A month later, the company announced it was closing.

Shasta Paper might not be dead, though. As workers have begun applying for government assistance and looking for work, union officials and plant managers have explored the possibility of reopening the mill.

Not surprisingly, they fear that energy costs could doom them again.

"That is going to haunt us," said Bellafronto, the plant manager. "Somebody's going to be paying for this fiasco for a lot of years to come."

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The Bee's Dale Kasler can be reached at (916)321-1066 or dkasler@sacbee.com.

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Hammered by higher rates Higher utility bills have begun affecting companies around the state. A sampling:

Shasta Paper Co., a struggling paper mill in Anderson, closed its 400-worker plant.

Richmond Technology, a Redlands manufacturer of packaging for electronics companies, is closing its 75-worker plant and moving production to Houston.

Roplast, a plastic bag maker in Oroville, expects to lay off one- third of its 180 workers.

The city of Visalia's industrial park lost six potential tenants, including a food container maker that chose instead to locate in Utah.

Knauf Fiber Glass delayed opening of its 150-worker manufacturing and distribution center in Shasta Lake.

http://www.capitolalert.com/news/capalert01_20010906.html

-- Martin Thompson (mthom1927@aol.com), September 06, 2001

Answers

A "slight" contraction in the Californa economy? It's hard to believe that the eggheads in Sacramento can say this with a straight face.

-- JackW (jpayne@webtv.net), September 07, 2001.