Less Power To The People

California's energy crisis is crippling the state--and small business gets the worst of it

What a shock. Three months ago, I sat stunned at an industry trade association meeting while I listened to my brethren in Southern California lament how they had been forced to shut down seven times during the summer months thanks to a shortage of electricity. Now they worried their rates were going to climb because Southern California Edison Corp. was running short of money to buy electricity on the open market. When I got back to the office, I called our customer rep at Pacific Gas & Electric (PCG), the energy provider for Northern California, and heard that my company would soon be facing the same problems--probably in the summer of 2001.

She was off by a few months. This Christmas, California's energy woes blew in like the Grinch, minus the happy ending. PG&E Corp. called my family's plastic bag manufacturing company on three occasions in December, warning that we might lose power. The utility blamed demand spikes caused by hyperactive Christmas displays and a cold snap. To add insult to injury, PG&E asked state regulators for a 30% rate increase to pay down the more than $4 billion it had borrowed to buy electricity--a market created by state politicians when they partially deregulated electricity in 1996, promising cheap and abundant power for all.

So much for power to the people. Running a business in California was already hard enough, with soaring labor rates, rising rents, and tough environmental regulations. I ushered in the New Year learning that state regulators had decided to bail out the utilities by increasing my electrical bill more than 10%, adding $45,000 to my costs. Yet this increase only helps keep PG&E in business. It does nothing to increase the supply of electricity I need to keep my machines running, a supply so short my utility guarantees rolling blackouts this summer.

How did my fair state ever get into this mess? Five years ago, it decided to deregulate the wholesale price of electricity while keeping the shackles on what utilities charge consumers until 2002. Back then, California was still emerging from the 1991 recession. The Internet boom? Not even on the radar. Then the economy exploded, demand outstripped supply, and the utilities had to buy power on the open market at prices they couldn't pass along to their customers.

I had no idea any of this was brewing prior to the industry confab last fall. There I heard that several Southern California rivals had faced the nasty choice last summer of paying $9 a kilowatt hour, vs. the normal 7 cents, or shutting down. One manufacturer estimated that operating through these periods would have cost him an additional $400,000. I don't know any bag manufacturer who could eat that kind of increase without choking.

Worse still. The news doesn't get any brighter. The other day I opened my natural-gas bill and found my rates had risen 50%, thanks again to an imbalance between supply and demand. This couldn't happen at a worse time. I just installed a $750,000 pollution-control device that uses natural gas to destroy fumes generated by the use of solvent-based inks on our printing presses. We're switching to these inks because our customers demand the sharper graphics they deliver compared with the water-based inks. But the huge increase in operating costs has raised the question of whether we can afford to start up the unit. And since both the wholesale and retail price of gas are completely deregulated, there's no telling whether this increase is the last.

So what do I do? Like thousands of California businesspeople, I have made decisions that will ripple across the economy. I have postponed equipment purchases until utility costs settle down--a long uncertainty makes figuring a payback too risky. And I have demanded that the factory find a way to make do with three fewer people to offset our increases in energy costs. Such decisions multiplied by the thousands might just slow the economy enough that the utility crisis of 2001 is ended by killing the very demand that caused it.

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