Power hit could plunge [California] into recession
Study warns of blow this summer to already slowing economy
BY JENNIFER BJORHUS Mercury News
Posted at 11:23 p.m. PDT Friday, April 20, 2001
Rolling blackouts and rising energy costs this summer could deliver a $17 billion blow to California, while slowing Bay Area job growth by 5,000 jobs a year and possibly tipping a decelerating state economy into recession, a new study warns.
That bleak forecast was released Friday by the Bay Area Economic Forum in the first analysis of the potential financial toll of California's thickening power quagmire. The report was pre-pared by the national consulting firm of McKinsey & Co.
The price tag does not include the $73 million a day the state is now spending to buy electricity. The analysis, being sent to Gov. Gray Davis, lawmakers in Sacramento and state and federal utilities officials, focuses exclusively on how rising energy costs and blackouts will affect the Bay Area and the state, and how to fix the problem.
The numbers in the report suggest the energy crisis could harm the state's economy worse than the so-called ``Asian flu'' of 1997-98, when tech exports to Pacific Rim nations slumped dramatically.
Among the report's highlights:
Electricity rate hikes and increased costs passed on by businesses will cut disposable income in the Bay Area, which currently exceeds $250 billion a year, by more than $1 billion this year, the report estimates.
Of the local businesses surveyed for the report, 42 percent reported that energy problems already have lowered their profit margins. A 50 percent increase in electricity rates means Bay Area businesses stand to lose $500 million in output.
Blackouts, the most serious energy threat, could cost Bay Area companies $1 billion to $5 billion in lost output this summer, reducing the region's annual growth rate by as much as 1 percent.
The power woes come after a big reality check for the Bay Area's overall wealth.
The plunge this year in stock option income, for instance, may well take a bigger bite out of Bay Area disposable income than higher electricity bills. Experts predict stock option income in California, which hit $84 billion last year, will plunge this year by at least 25 percent, or at least $21 billion.
Nonetheless, the power conundrum ``presents an enormous threat to the economic welfare of the Bay Area,'' the report concludes.
Statewide slowdown
``These are very, very significant figures,'' said Bay Area Economic Forum President R. Sean Randolph in an interview, ``especially when you add it to an economy that's very perceptibly slowing.''
The statewide picture isn't any better.
This year, California's economy was expected to grow 3.5 percent. Because of the anticipated summer blackouts, that growth could fall to 3.35 percent or 2.5 percent or lower.
A slowdown of 1 percent in the state's growth is a big hit -- bigger than the 1997-98 Asia financial crisis, which was responsible for less than a half percent drop in the state's economic growth, experts say.
The report's sponsors say that problems such as rising inflation, labor shortages or even the collapse of a foreign market usually don't reduce growth by more than 1 percent.
``The dimensions they're talking about are realistic,'' said Fred Furlong, an economist at the Federal Reserve Bank of San Francisco who reviewed the report. ``The impact could parallel that which we saw with the Asian flu.''
The energy crisis, Furlong said, is dovetailing with a crashed stock market that's eaten into personal income and a broad slowdown in technology spending that will take at least six months to play out.
Free-market approach
As for solutions, the analysis calls for a free-market approach and swift action to fix the flaws in California's energy deregulation scheme. The study makes no mention of efforts to ask the Federal Energy Regulatory Commission to affix price caps on sky-high wholesale electricity prices.
The report also questions the state's wisdom in buying electricity transmission lines from the utilities, calling it a ``stop-gap'' measure.
Instead, the McKinsey report urges the state to simplify the process for building new generators and for selling it, and to build better incentives for reducing power demands at home and at work. The most urgent of the issues is better conservation, said Sunne McPeak, president of the Bay Area Council. ``We've got to go beyond where we are right now for demand management for the summer months,'' McPeak said.
The state may need to somehow enforce mandatory reductions in energy use not unlike the water-use rules cities adopted during California's drought years, she said.
Solving the entire problem, of course, will require approaches on all fronts.
``This is not next September we move to a new story,'' said Furlong. ``We're talking about something that's going to be a few years in unwinding all the issues.''
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