The Shocking Truth for California

From farmers to manufacturers, the electricity shortage is putting the survival of the state's small businesses on the line

While lawmakers and regulators on the West Coast and in Washington, D.C., scramble for a solution to California's electricity shortage, many of the state's small-business owners are scrambling, too. They're trying to figure out how to pay utility bills that have risen 200% to 500% since summer.

At Anderson Farms, a nursery in Huron, near Fresno, the November heating bill was $83,000, four times more than 12 months ago. "I'm really panicked," says owner Robyn Black. "I don't think people begin to understand how serious this is. This could absolutely end our family business." In addition to the nursery, Black's family has operated a farm in Fresno since 1906.

At Payco Specialties, which paints lines on highways and parking lots and is based in Chula Vista, monthly electric bills ranged from a low of $321 to an astronomical $914 over the past year "with no change in operations," according to owner Rebecca Llewellyn. "We're not coping too well. I've got jobs today that I bid on three years ago. I have nothing in the contract for all this increase in electricity expenses."

When California was debating whether to deregulate its electric utilities, the largest small-business organization in the state took no position on the issue because it had no idea what the consequences would be. "Our members were definitely confused. In general, we supported deregulation, but we didn't understand it," said Shirley Knight, a lobbyist with the California chapter of the National Federation of Independent Business (NFIB).


  Today, the confusion has escalated, and not only among business owners. Governor Gray Davis, utility executives, regulators, and lawmakers have all acknowledged that the result of deregulation, which was supposed to lower bills, has been expensive chaos -- "an energy nightmare" is the phrase Davis used in his State of the State address this week. The effect, on utilities and consumers, depends on location. Investor-owned municipal utilities can buy power under long-term contracts, which has helped insulate them from spot-market prices. But under deregulation rules, the state's largest utilities, Pacific Gas & Electric and Southern California Edison, are forced to buy on the spot market, where prices have risen tenfold -- from $49 per megawatt hour in 1999 to more than $500 per Mwh in 2000.

Because many of the electric plants in Western states are powered by natural gas, the electricity crisis is showing up in heating bills, as well. In addition, a lot of fruit and vegetable growers -- California supplies roughly half the nation's produce -- use natural gas to power their water pumps, which means irrigation costs are soaring. This is on top of the rise in diesel fuel -- from 70 cents last winter to $1.25 this year -- and the bump in California's minimum wage, to $6.25 as of Jan. 1.

Black says some of her fellow growers are simply shutting down to wait for a solution. Others are hanging on, hoping rain will keep down irrigation costs. Some retailers are curtailing hours to save on utilities.


  Black is one of several small-business representatives who met recently with the Governor. "There is no short-term fix. It's so complicated," she says. "The only long-term solution is for California to build more supply." Davis has called for the formation of a state utilities authority that would buy generating plants and build new ones. California has built no major power plants in the last 10 years, a period in which demand for electricity, fueled largely by the high-tech sector, has risen three times faster than predicted. In the last year alone, demand for power in Silicon Valley grew more than 100%, according to estimates by the Electric Power Research Institute.

For now, bigger bills are inevitable. "We have accepted the fact that we're going to pay more -- we just need some stability so we know what to budget," says Betty Toccoli, president of the California Small Business Assn. Black worries that market instability and regulatory chaos will cause some creditors to tighten the reins on customers whose utility bills have quadrupled.

Both the California chapter of the NFIB (representing 30,000 companies) and the Small Manufacturers Association of California (1,200 companies) are surveying their members to establish how much their utility costs have risen, and which stopgap measures -- such as enforced conservation, re-regulation, energy-saving technology, or low-cost loans -- they would be willing to accept.

"It's a multifaceted problem," observes Black. "How do we build infrastructure? How do we protect the solvency of the utility companies? How do we avoid blackouts?"


  Some larger corporations have been exploring buying their own power sources, such as fuel cells or generators, to avoid interruptions and price spikes. While that may make sense for businesses with deep pockets, the cost and scope of such an undertaking make it an unrealistic alternative for most small businesses. Says Brad Ward, president of California's Small Manufacturers Assn.: "The little guys are the ones taking it in the neck."

Small-business owners, who are famous for wanting less regulation rather than more, find themselves in the unaccustomed position of looking to government for help. The California Small Business Assn. is calling on the state to start educating businesses about energy conservation. "The solution," fumes Llewellyn, "was not to deregulate in the first place."

"I think the federal and state governments have to realize that they have a very valuable asset in California agriculture," adds Black, alluding to the higher food prices that will result if many growers leave their fields idle.

"We haven't seen the end of this problem here in California, and I'm not so sure there won't be some sort of ripple effect to people in other states," warns Ward.

As in California, the effect probably wouldn't be a ripple -- but a jolt.

By Theresa Forsman in New York

Edited by Robin J. Phillips

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