California crisis ripples through US economy

If it's true that California leads the nation in such trends as fashion, food, leisure, and new ideas, the question on everyone's lips these days follows right behind:

Will the Golden State's energy crisis carry the nation into a deeper recession?

Certainly the threat exists. California's economy represents about 13 percent of the overall US economy. Silicon Valley, the hub of the dotcom revolution, has been among the hardest hit by the power shortage.

Higher electricity costs are already affecting the Central Valley, the breadbasket to the world. Even President Bush said this week he is "deeply concerned" the economic fallout of unstable energy in California will likely spread beyond the state.

With California's industrial clout and 33 million residents, analysts say the Golden State's problems will at least complicate attempts to turn around the national economy.

"California has raised the odds that the rest of the country will go into a recession," says David Wyss, chief economist at Standard & Poor's in New York.

In fact, the US is already in a recession, says economist Richard Berner of Morgan Stanley Dean Witter. Add the power outages and, he says, "California will have a deeper recession than the rest of the country."

While some think that assessment is overblown, the power crisis is raising serious concern from Washington State to the White House. Mr. Bush has extended until Feb. 9 two directives that have allowed electricity to keep flowing to utilities that cannot pay their bills, but he has vowed not to lengthen that protection. For their part, California leaders remained huddled yesterday, trying to come up with formulas to keep the lights on short term while long-term strategies can be put in place.

Economists say that unknown energy availability is what's causing as much concern as the possibility of higher rates.

"When the state does not have a reliable energy plan in place, businesses have to hedge their plans, transfer activities to other states or countries, or put things on hold," says Ross DeVol, director of regional studies at the Milken Institute. If the current electrical crisis continues, he says, growth will slow in the state by about 1 percent, meaning a loss of 50,000 to 75,000 jobs.

But some key analysts say talk of recession and altered business plans is premature. "Everything that has been said and written about this crisis is based on the premise if energy blackouts continue, but that is not going to happen," says Steve Levy, president of the Center for the Continuing Study of the California Economy. Nine power plants are slated to be built in the next two years. "Energy is California's most solvable problem," says Mr. Levy.

Part of the answer to how far California's problems will domino across the West - and US economy - depends on how hard the state's own industries are hit.

"Concern is rippling through every business in the state, because they are getting calls from customers wondering if they will be able to deliver," says Jack Kyser, director of the Los Angeles Economic Development Council. He estimates $1.8 billion in lost wages and sales from the rolling blackouts in January.

Those lost wages and lost jobs have the potential to ripple outward. Neighbors - from Oregon's aluminum plants to Arizona's farmers - are already grappling with California's woes, and states even further away could get caught in its wake.

Lourenco Goncalves knows about lost production. "We were interrupted 14 times this month [January] compared to not once from 1987 to 1998," says the CEO of California Steel Industries, who fears his firm will close if the interruptions continue. "So many other industries depend on what we send them.... If they can't depend on my products, they will [buy them] elsewhere."

In the Central Valley, where half the nation's fruits and vegetables are grown, farmers are being hard hit, especially dairies, nurseries, and anyone who needs energy for irrigation. "Farmers don't have many options at times like these. We can't pick up our land and move," says Karen Mills, associate counsel for the California Farm Bureau Federation.

Beyond the threat of more blackouts, California's shortages are also presenting energy problems for neighboring states. During the winter, California usually has enough power to send excess to Oregon and Washington. This year, officials in those states are having to generate their own hydroelectric power to fill the gap, diverting water from salmon-spawning grounds.

The California-driven scarcity has pushed prices so high that some aluminum and metal fabricators in those states have shut down so they can resell their power allotments. For the time being, they can make more money reselling the power than selling their own products.

"Since California is draining the Western markets of power, what's left is going for higher and higher prices," says Mike Hanson, spokesman for the Bonneville Power Administration, a power wholesaler in the Northwest. "The costs are hurting businesses in states north of California and forcing businesses here to curtail operations."

But for the moment, it is California that is hardest hit, giving businesses another reason, besides the state's notorious reputation for red tape and taxes, to complain.

"Let's face it, if you are a business looking at California, and you have the possibility of moving somewhere else where you have reasonably assured power, lower cost of living, and an equal labor pool, where are you going to put your business?" asks Mark Czarnecki, president of the Electric Utility Benchmarking Association in Houston.

This is a question other states are hoping will resonate among businesses. Tennessee, for one, plans to send 1,000 flashlights to California businesses to make their point: The lights are on in Tennessee.

But others note that even earthquakes and water shortages have not made companies haul out the packing boxes. "The bottom line is: People like it out there," says James Schriner, director of location strategies at Deloitte-Touche Fantas. "The companies we talk to don't say, 'Take California off the radar screen' - they understand the situation."

(c) Copyright 2001. The Christian Science Publishing Society