Let There Be Light

Why California's electricity problem may leave you in the dark.

Tim Condon isn’t overly worried about the soaring electricity costs at his own office. After all, electricity is still a small portion of the operating costs for Household Automotive Finance, in San Diego. But the CFO is worried about the electric bills of Household’s customers– all subprime borrowers. “For someone with a modest disposable income, energy costs have a disproportionate impact,” says Condon. “It is like a regressive tax.”

Talk shows may debate the demise of the Internet bubble, but the real issue facing the economy this year is much more fundamental. Once a predictable cost for both consumers and businesses, energy prices have emerged as the factor that could determine whether the slowing economy slides into recession.

Condon notes that although unemployment is still relatively low, consumer debt is at record levels and high energy prices translate into increased prices for food and other goods. “You look at all of this together and say, boy, this is something to be very afraid of right now.”

And then there are the outages. The well-documented electricity- supply problems already plaguing California will escalate throughout the summer. The North American Electric Reliability Council (NERC) estimates the state will see a minimum of 260 hours–15 hours a week– of rolling outages this summer. And that number assumes demand for electricity will drop in response to an average rate increase of 46 percent. Without sufficient conservation, there could be as many as 700 hours of outages, says Tim Gallagher, who coordinates NERC’s Reliability Assessment Subcommittee.

California companies like Rodney Strong Vineyards, in Sonoma County, understand all too well what that means. If the winery’s crushers and refrigeration units aren’t working when the grapes are ripe, says CFO James Bielenberg, a year’s worth of product can be ruined. “Sugar levels in a grape on the vine can rise above desired levels in a matter of hours,” he says, and picked grapes will begin to ferment naturally if not processed immediately. “If that happened to, say, our Alexander’s Crown Vineyard cabernet, which has a retail price close to $30 a bottle, we would have a serious problem–a loss of about $4 million.” Insurance would cover the financial loss, he says, “but then we’ve lost market share and have to build that line item up again in the marketplace. That is the real risk for us.”

OUT OF JUICE

That’s life in the Golden State these days. But what about the rest of the country? Clearly, companies everywhere are paying more for all types of energy. “We are in an energy crisis,” says Tom May, CEO of Boston-based utility Nstar Electric & Gas Corp. Nationwide, electricity prices are expected to average 10 percent higher than last year, according to Heather Upton of research firm DRI-WEFA.

And that’s not counting the cost of power interruptions. Power- hungry industrial operations may suffer the most serious financial hits when prices spike, but every business is hurt by outages. “Energy is a very small part of most company budgets, but there still isn’t a proper way for CFOs to value the cost of not having it,” says Jason Makansi, president of Pearl Street Inc., an energy-technology consulting firm. “You could have one or two outages, and the lost opportunity costs might run $10 million to $15 million. Somehow, that isn’t reflected in the general ledger as an energy problem.”

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