Forecasters Expect State to Get Past Power Crisis

The last time California businesses got clobbered by a big, bad surprise--the unexpectedly dramatic retrenchment of the defense industry in the early 1990s--the result was economic catastrophe. More than a half-million jobs were lost, unemployment climbed to nearly 10% and poverty spread.

Will the state’s energy crunch produce a sequel to he disaster? It almost certainly will deepen the state’s expected slowdown this year. And an eminence no less notable than Federal Reserve Chairman Alan Greenspan warned last week of potential economic damage spreading from California to the rest of the country.

Yet most of California’s major economic forecasters dismiss the worst fears of consumers and businesses, and doubt the state will be ravaged again. What’s more, forecasters don’t see California falling into even a moderate recession this year, provided that political leaders devise a short-term fix to halt the rolling blackouts.

Their general assessment is that the energy crisis eventually will translate into higher utility bills, a drain on the state treasury or both. These economists say, however, the higher costs will be manageable for the overall economy.

By their reasoning, much of the utility cost increases will be offset by this month’s quarter-cent reduction in the state sales tax and a projected decline in gasoline costs. By spring, natural gas prices are expected to drop as winter demand tapers off.

The forecasters maintain that the recent strong momentum of California’s economy, coupled with the big state budget surpluses, provides an important safety cushion. Analysts also are encouraged that Greenspan now is endorsing tax cuts and appears poised to cut interest rates further, steps that could spur the economy nationally and in California.

“If we had to get hit with a crisis like this, we’re almost in the best possible shape we could be in” to absorb it, said Lisa M. Grobar, director of the Cal State Long Beach Economic Forecast Project. “It’s hitting us at a time when we have some resources to work with.”

The forecasters also point to the relatively light per-capita use of electricity and natural gas in California, a fact that could give the state an edge as energy problems worsen elsewhere. These analysts also cite readily available conservation measures that could ease the current power shortages and critically high gas prices.

Ali Zahedi, owner of Los Angeles-based Lafayette Textile Industries, already is taking action. He recently installed shut-off valves to staunch the flow of gas to fabric-drying equipment left idling more than two minutes. A $4,500 investment could save him a bundle. And while energy costs are still up, Zahedi said the conservation effort should enable his business to survive the crunch.

Even if the California economy takes an unexpectedly bad turn, there is a built-in circuit breaker: A downturn would dampen the demand for energy. That, in turn, could help stabilize energy markets long before the state goes into an early 1990s-style free fall.

Some economists say California could be helped by its latest crisis because the problem is driving companies like Ahedi’s to invest in backup power generators and more energy-efficient production systems.

But before anyone decides there’s no reason to worry, remember, it’s not for nothing that California has been derisively called the “What, Me Worry?” state. A decade ago, the leading California business forecasters universally blew the call on the early ‘90s economic collapse. None of the experts saw it coming.

And this time, there is no denying that the unpredictable rolling blackouts tormenting employers and the anticipated energy price increases are doing real damage.

If state officials fumble in their handling of the crisis and circumstances spin wildly out of control, all bets are off. That’s more than an idle concern; a paper released by a group of leading economists and energy specialists last week criticized the state’s effort to shield consumers from price increases and make the state a major power purchaser.

“A lot is swinging on a solution to the energy crisis. You can’t make a forecast without pointing out that the absence of a solution to the crisis could cost several percentage points of growth,” said David J. Teece, a UC Berkeley economist who organized the group that issued the position paper.

If the situation isn’t brought under control through contracts with power generators and the construction of new power plants, California’s image would be deeply tarnished, scaring away investment in the state for years to come.

“The longer it lasts, the greater the doubts about California being able to manage its problems,” said Anil K. Puri, co-director of the Institute for Economic and Environmental Studies at Cal State Fullerton.

Under the worst-case scenario, fears spawned by a California crisis could ripple through the economy, undermining consumer confidence, corporate investment and the stock market. Already, there are cases of major financial pain made worse by nervous customers.

Repeated electricity interruptions have forced Davis Wire Corp. to move some production away from its Irwindale plant, according to Jim Hillebrandt, general manager of the facility. He said some customers, worried about California’s fragile grid, have told him they’re planning to line up other sources of supply--just in case.

Small wonder that they’re nervous. Hillebrandt said the dozen power outages at his plant so far this month have meant $400,000 in production losses, while the downtime has led to $145,000 in lost wages for the plant’s 260 employees.

“These folks have mortgages and car payments,” he said. “There is a big trickle-down effect.”

Low Consumption Is an Asset

Around the state, the toll is mounting. Jack Kyser, chief economist of the Los Angeles County Economic Development Corp., estimates that the last two weeks’ production cutbacks and lost wages because of rolling blackouts have cost the state economy $2.3 billion.

Kyser also foresees a 50-50 chance that job growth will be 2.1% or lower this year, down from his early December prediction of 2.8% and a big drop from last year’s gains of about 3.5%. Other analysts, too, are considering scaling back their forecasts for this year. But they still expect the state economy to expand and avoid recession, so long as political leaders or utilities lock up a decent supply of electricity.

The main reason for the relative calm amid the energy chaos is the forecasters’ sense that the chaos ultimately will yield cost increases that hurt, but not devastate, most consumers and businesses.

An important factor working in California’s favor is its relatively low consumption of energy. According to an analysis by Ted Gibson, chief economist for the California Department of Finance, Californians are the second-lowest users of electricity per capita among the 50 states. And they are fourth-lowest in their use of all types of energy.

Gibson attributes this to the state’s conservationist traditions, moderate climate and the relatively small role that steel companies and other heavy manufacturers play in the California economy. This might be irrelevant if California isn’t getting the power it needs, but it also can add up to a competitive advantage over other states.

And while electricity and natural gas costs are important expenses for businesses, they typically represent only a small share of their overall budgets. One analysis of U.S. Commerce Department data estimates that electricity and natural gas costs combined account for only 3% to 4% of the average business’ expenses.

For a long time, energy has played an ever-smaller role in the U.S. economy. Energy consumption per dollar of the Gross Domestic Product has declined at an average annual rate of 1.7% over the past 25 years, according to the Energy Information Administration.

Still, where will the money come from to pay for the increased costs? Some businesses, no doubt, will see their profits shrivel or disappear, and poor families will be pushed into even worse straits.

But for many, this year’s sales tax reduction in California could cover a big chunk of the tab. Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University in Orange, points out that the quarter-cent reduction that took effect Jan. 1 is expected to save Californians $1.2 billion this year.

By comparison, Adibi figures that electricity costs will rise somewhere around $1.6 billion this year, based on the percentage increases included in the 90-day rate hike approved this month by the California Public Utilities Commission.

Although that is $400 million more than the anticipated sales tax saving, Californians also should benefit from the expected upcoming price declines for gasoline and natural gas.

Conservation should help, too. Stephen Levy, director of the Palo Alto-based Center for the Continuing Study of the California Economy, said the crisis could be eased greatly by conservation measures reducing electricity use by as little as 2% or 3%.

Conservation Increasing

This week, conservation has increased by an average 1,000 megawatts a day, state officials estimate--enough to light a million homes and prevent brownouts on some days. And after customers start feeling the sting of higher electricity prices, it should pick up.

“Californians, while they have a terrible record on building infrastructure, have a wonderful track record on stepping up to the plate in a crisis,” Levy said.

Part of the reason California economists downplay concerns of a severe downturn is simply the caution inherent in the forecasting business. On the other hand, many of the worst fears are fanned by political or business interests that overstate the problems to frighten politicians into action.

Craig Barrett, chief executive of Silicon Valley’s Intel Corp., recently made national headlines when he said the computer chip giant wouldn’t consider expanding in California until the state’s power supply stabilizes. It sounded pretty scary, but the fact is, Intel hasn’t built a new factory here since 1988.

But other companies are making concrete changes in their operations--moves which could actually pay dividends for the firms and the state economy.

Take Shasta Paper Co. in the Northern California town of Anderson. Skyrocketing natural gas costs motivated the paper mill to “make every energy improvement we could remotely justify,” according to Brent Hawkins, the company’s vice president. The firm converted some of its natural gas-powered equipment to run on coke and recycled motor oil, which reduced gas use dramatically and gave the company a leg up on competitors.

“We’re going to break even this month, and we’ll be in the black by February,” Hawkins said. “I’m very optimistic about my business.”