Energy Woes’ ‘Silver Lining’
Businesses cheer big cost increases about as often as Halley’s comet darts through the night sky. But amid the strange astrophysics of the California energy crunch, that rare capitalist phenomenon is back.
Many business lobbyists and owners, along with economists, expressed support Tuesday for the chief aims of the California Public Utilities Commission plan to boost electricity rates as much as 46%. Their reasoning: Higher power bills could translate into lower demand, fewer rolling blackouts this year and progress toward a longer-term solution to the state’s electricity troubles.
Still, what may be good for the overall economy won’t be good for everyone. Small businesses and low-income consumers could be hurt. The extent of the probable pain will become clearer as details of the rate hike are hammered out.
What’s more, some business lobbying groups said that if too many customers are shielded from rate increases, incentives to conserve will be undermined and blackouts will continue to plague the state. Consumers could be stung indirectly, too, by higher prices at the cash register linked to retailers’ higher utility costs.
Overall, though, business forecasters dismissed the idea that the electricity price increases would significantly damage California’s economy, noting that neighboring states also are adopting hefty rate increases. If rate hikes help California avert blackouts, they reason, one of the major threats to the state economy will be lifted.
“Although nobody wants to pay more for electricity, the rate increase is probably necessary to help keep the lights on,” wrote Allan Zaremberg, president of the California Chamber of Commerce, in a letter to his organization’s members.
“If there are any ‘silver linings’ in these dark clouds, it is that price increases will help reduce demand this summer. Only by bringing supply and demand into balance will California be able to prevent blackouts,” Zaremberg added, calling the prevention of blackouts one of the chamber’s top priorities.
In fact, economists said California’s relatively low use of electricity--a result of its temperate climate and its small concentration of heavy industries--means it will be pinched less than other states. All told, California’s leading business forecasters expect the state to avoid falling into recession this year, although they predict a substantial slowdown from last year’s rapid expansion.
Perhaps the only thing many business owners like less than cost increases is uncertainty, and nothing is as uncertain as when a rolling blackout might strike. As a result, many companies have grudgingly accepted paying higher rates in hopes of improving reliability.
Power interruptions have been so costly for Ontario furniture manufacturer Larry Parnell that he says a possible rate hike of 40% or more looks cheap in comparison. His company, an “interruptible” customer of Southern California Edison, was forced to shut down 13 times this year when electricity supplies got tight, costing him $10,000 an hour in lost production.
“Forty percent, 60%, whatever, I’ll pay it in a heartbeat,” said Parnell, president of Oakwood Interiors. “This last year has messed us around so much that all I want now is continuity.”
Parnell said he’ll cope with the rate increase by looking for ways to conserve energy. But he said customers also will feel the pain through higher prices.
“I hate to do it, but we’re going to have to pass some of this along,” he said. “Consumers are going to be the real losers in all of this.”
The rate increase comes just as California’s businesses have seen a number of their costs jump in the last year, from the 50-cent hike in the state minimum wage and the skyrocketing cost of natural gas to soaring premiums for workers’ compensation and health insurance.
Although price inflation at the consumer level has remained relatively tame, businesses can’t keep eating the cost increases indefinitely, said Shirley Knight, assistant state director for the National Federation of Independent Business, a small-business lobbying group.
The electricity rate hike “is going to be the straw that broke the camel’s back,” Knight said. “Most small businesses will try to pass this on to consumers. We’re going to see a vicious circle of price increases.”
Others, too, are predicting fallout on Main Street. Electricity accounts for such a substantial portion of retailers’ overhead that they will be unlikely to make it up with expense cuts elsewhere, said Bill Dombrowski, president of the California Retailers Assn. He expects that many retailers will be forced to raise their prices as well as cut back on hiring.
But some business owners say they lack the leverage to pass along the electricity rate hike to their customers. Chino-based STC Plastics, for example, makes plastic bottles for water coolers, a commodity product in an industry teeming with competitors. President Scott Keller said his customers will simply order from someone else if he tries to raise his prices, which is why he is investigating a move out of state.
“I compete with people outside of California who don’t have to deal with this,” Keller said. “It really makes it tough.”
Keller said Phoenix and Las Vegas top his list of places to relocate. But in the last few months he has received recruitment letters from as far away as Hazard, Ky., and Syracuse, N.Y., touting their communities’ supplies of cheap, reliable electricity.
Cities around the country have stepped up their business recruitment efforts in California since rolling blackouts began last summer. What’s more, areas within the state with relatively secure municipal power supplies--such as Los Angeles and Shasta County in Northern California--have used the crisis as a marketing tool.
Power is definitely the watchword for officials of the Economic Development Corp. of Shasta County, who are in Los Angeles this week wooing manufacturers at the giant Westec machine-tool show at the Los Angeles Convention Center.
Jim Zauher, the Shasta group’s president, acknowledged that the cost of electricity is just one factor in any company’s decision to relocate. But he said news of rate hikes by Edison and Pacific Gas & Electric Co. already has some visitors to his booth doing the math on what higher rates will cost them.
“They’re starting to calculate the damage,” he said. “They’re realizing this isn’t going to be a short-term situation. The reality is starting to hit home.”
Energy costs are a growing headache for manufacturers such as Kimberly-Clark Corp. The Dallas company figures it will pay $7.5 million more this year in electricity and natural gas costs for its mill in Fullerton, which produces bathroom and facial tissue, paper towels and disposable diapers.
“We’re the single most-affected Kimberly-Clark operating facility in North America,” said the Fullerton mill’s manager, Edward Bowersox.
He said he was surprised by the severity of the proposed rate increases. Bowersox also said he is afraid that California’s higher energy costs will keep Kimberly-Clark from making the capital investments needed to keep the Fullerton mill competitive.
Another complaint among some business groups is that the PUC’s proposed rate hike would exempt so many power users from a cost increase that it could sabotage much-needed efforts at conservation. Under the PUC’s plan, about half the residential customers of Edison and PG&E; wouldn’t see higher bills, leaving large commercial users to pay the lion’s share of the tab.
Consumers not subject to higher rates will have no reason to curb their usage, said Gino DiCaro, spokesman for the California Manufacturers Assn. He said the big fear among manufacturers is that they’ll get slammed with higher rates and still be vulnerable to rolling blackouts this summer.
“You’re talking about a huge number of consumers with no incentive to conserve . . . while large users will feel a significant amount of pain,” DiCaro said. “That’s a huge problem.”
All the same, business groups and forecasters generally say the state’s economy appears more secure now that California has begun a realistic effort to resolve its energy problems.
“It’s a case when what looks to be bad news is good news,” said Jack Kyser, chief economist of the Los Angeles County Economic Development Corp.
The rate increase plan, Kyser added, “starts to restore financial stability to the whole system.”
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Times staff writer E. Scott Reckard contributed to this report.
