Calif. Businesses Swallow Rate Hikes Amid Slowing Economy

The $5.7-billion increase in power prices that will begin showing up in utility bills next month will hurt both business and consumers, siphoning off spending that otherwise could have helped pump up a slowing state economy, economists said Wednesday.

But analysts also sounded a positive note: If the higher power costs spur enough conservation to hold down rolling blackouts this summer, they could minimize long-term damage to the state’s economy.

Rate increases “are part of the solution,” said Stephen Levy, director of the Palo Alto-based Center for Continuing Study of the California Economy. “It goes under the heading of things that aren’t pleasant, and that do subtract from growth, but aren’t debilitating.

“If we ran huge blackouts this summer, it would be much more disruptive for the economy and for our quality of life,” Levy said.

California’s $27-billion agriculture industry, already struggling, was spared the full brunt of the increases approved Tuesday by the state Public Utilities Commission. Others industries contend they deserve a similar break, saying business can’t cut back as easily as consumers.

“We’re just kind of stuck,” said Young Su Han, owner of Azteca Market in Santa Ana, a small grocery and meat store.

“We’d like to conserve, but we can’t really cut down our electricity because the meats will go bad and the drinks will be warm.”

Both business groups and consumer activists say their constituents are bearing an unfair share of the burden. Consumers say they never sought deregulation and are now being asked to bail out a failed scheme cooked up by business interests.

Industry leaders counter that residential users are being sheltered from the full impact of cost increases, which may come back to bite them if companies are forced to raise prices or lay off workers.

Of the $5.7 billion the new rates will raise, $4.6 billion will come from business, agriculture and street-lighting customers and $1.1 billion from residential rate payers.

Carl Guardino, head of the Silicon Valley Manufacturing Group, whose members include Cisco Systems, Hewlett-Packard Co. and Intel Corp., contends that most businesses already pay much more attention to conservation than households. He said the increases won’t encourage conservation by consumers, who could do the most to help prevent blackouts.

Some business owners say they already are stepping up conservation and otherwise are cutting costs to cope with electricity charges, along with rising wages and workers compensation insurance premiums.

The Charlie’s Trio Cafe restaurant chain, based in Alhambra, has started cutting back employees’ hours. It also recently increased prices for the first time in two years, meaning that customers will have less to spend elsewhere.

“This increase isn’t going to kill me,” said Michael Fata, a co-owner of the chain, but he expressed concern that higher costs “are pushing the customers away.” “

Economists say that sort of pattern, in which rising energy costs ripple through the economy, has lead to serious downturns several times since the 1970s. Edward E. Leamer, director of the UCLA Anderson Business Forecast, noted that increases in crude oil prices preceded national economic downturns in the mid-1970s, early 1980s and even, less dramatically, at the beginning of the 1990s.

“The argument can be made that higher energy prices are really important drivers” of the economy, he said.

Still, Leamer said the economy is much less dependent on energy today than it was at the time of past oil-price-related downturns.

The effect is particularly limited in California, some economists say, because the state is the second-lowest user of electricity per capita among the 50 states. For all types of energy, California is the fourth-lowest user.

Though he has yet to reach a final conclusion on whether electricity rate hikes will severely hurt California, Leamer said, his impression is that “higher energy costs by themselves don’t have that big of an effect. But the [blackouts] are another story.”

For many businesses, the reliability of electricity service is far more important than the cost of power.

At Lily’s Florist in Monterey Park, owner Robert Yuan figures that his electricity bill will rise from $500 to about $750 a month. Yuan doesn’t have many opportunities to conserve because he needs to keep his flowers chilled.

“If we don’t keep them refrigerated, they’ll die,” he said. “That’s losing even more money.”

Yuan, 46, said he can handle the extra $250 a month in utility costs. He’s more worried that customers hit with higher utility bills of their own or caught up in other economic problems will buy fewer flowers.

Yuan’s concerns are widely shared. Business recruiters who have descended on California since the waves of rolling blackouts began last summer said reliability, rather than rate hikes, has emerged as the hot topic among companies that have expressed an interest in relocating.

“Fears of interruption are the big concern we’re hearing,” said Alex Fischer, economic development chief for the state of Tennessee who recently led a massive recruiting mission to Southern California. “Downtime and lost production are huge expenses,” compared with rate increases.

To avoid sudden outages, companies such as Ontario furniture manufacturer Oakwood Interiors have adjusted work schedules to avoid peak periods when rolling blackouts are most likely to occur.

Chief Executive Nick Lanphier said workers who used to start their shift in the afternoon are now reporting at 8 p.m. and working through the night. That has solved one problem but created others.

“The workers don’t like it and productivity is way down,” he said.

Utility customers such as Lanphier will be hit with a double whammy: They not only will pay the higher rates, but they also must pay the portion of the rate increase that was retroactive to March 27. That portion will be spread out in electric bills over the next year.

Lanphier said the big jump in electricity costs would be manageable in isolation. But over the last year he has also been hit with huge jumps in other operating costs, including workers compensation, health insurance and wages. Meanwhile, he said he is being undercut by cheap foreign imports, hindering his ability to raise prices enough to cover the increase in costs.

Officials representing the state’s agriculture industry, which received the smallest rate increases, called the decision by the California Public Utilities Commission fair. They said the industry’s circumstances and precarious economic condition, as its costs have risen and its products’ prices have fallen, justified further concessions.

“Agriculture is experiencing its third tough year in a row,” said Hank Giclas, vice president of Western Growers, a produce industry trade group. “[The caps] are a positive recognition of the fact that agriculture is unique and experiencing difficult times, but it doesn’t go as far as we would have liked it to go.”

Farm users are less able than other commercial customers to cut back on energy and adopt conservation techniques, officials say, especially during peak growing seasons. In fact, because of this year’s drought conditions, many are using more energy to pump ground water.

The higher energy costs come as California is beginning to experience a rise in its unemployment rate and a sharp decline in employment growth, two major economic barometers. Last week the state reported that unemployment rose to 4.8% in April, still low by historic standards, but up from a 32-year low of 4.5% in February. What’s more, in the first four months of this year, California has added jobs at less than one-third the pace of 2000.

Jack Kyser, chief economist for the Los Angeles County Economic Development Corp., is counting on no more than a one-year slowdown for California. That’s partly based on his assumption that Californians will adapt quickly to the energy crunch.

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Times staff writers Marc Ballon, Sarah Hale, Melinda Fulmer and Nancy Rivera Brooks contributed to this report.