It wasn’t supposed to be this way under deregulation.
Power was going to get cheaper,taking the sting out of at least one part of California’s high cost of doing business.
But just the opposite has happened: businesses in Orange County and across the state are paying some of the highest electricity rates in the nation, and will be doing so for years to come.
More than anything, California’s power crisis stands to hasten a reshaping of the state’s economy in the next 10 to 15 years as higher energy bills take their toll on companies already struggling to operate here.
OC and all of California’s transition to a brain-trust economy of engineers, corporate headquarters and service industries stands to be accelerated by the power crisis. Old-line manufacturing, apparel and even some electronics production is set to bear the brunt of higher electricity costs.
The difference could be enough to send marginal industries packing, observers say.
“Companies that are having the most difficulty are in the commodity-type businesses,” said Barry Sedlik, Rosemead-based Southern California Edison’s manager of economic and business development. “Food processing, plastic, metal fabricators, printers,they have limited ability to pass these costs on. They are being heavily challenged and heavily squeezed to try and do something about it.”
Of course, the economic makeover of OC and the state already is under way, and the move to more specialized areas,chip design, fashion and high-end services, to name a few,isn’t all bad. But experts and businesspeople expect the power crisis to bring the changeover to a head, with dislocation and short-term pain for many businesses and workers.
“It is going to have a severe impact on the competitive nature of the market,” said Steve Ross, manufacturing manager at Los Alamitos-based Arrowhead Products, a maker of parts for the aerospace industry that counts 700 OC workers and $70 million in yearly sales. “It could drive more companies that are easily movable outside the state. It is going to put many smaller companies out of business.”
Forget the real estate meltdown of the early 1990s, Orange County’s 1994 bankruptcy or the dot-com bust of 2000. California’s energy debacle is likely to reshape the economy more quickly and more brutally than any of the past crises that the state has been through.
“This is one of the most challenging issues that California has faced in quite a long time,” Edison’s Sedlik said.
While market prices for electricity have stabilized, Californians face the added costs of paying off state bonds for power purchases and the uncollected difference of what the state’s three utilities paid for electricity but couldn’t pass on to users.
In June, customers of Southern California Edison, Pacific Gas & Light and San Diego Gas & Light saw an average increase of 32% in their power bills.
Small and midsize businesses saw an average jump of 36% in each kilowatt hour of energy that they used, while larger companies saw an average increase of 51%.
In some cases, big power users say they have seen their bills go even higher. For one, Arrowhead Products’ Ross said his monthly power bill has shot up from around $30,400 last year to $103,000 today.
California’s new average price of 14.9 cents a kilowatt hour now is more than twice the national average of 6.9 cents. States such as Tennessee and Missouri,which are trying to lure California companies,boast average power prices lower than the national benchmark.
Worse, California’s energy prices still could go higher. June’s average 32% rate hike was designed to meet the current and near-term shortfall that California’s Department of Water Resources faces in buying power. Past shortfalls incurred by the utilities and the state still are up in the air.
Any additional increase will add insult to injury. After the June increase, businesses and consumers are set to pay an extra $7 billion or more a year in power costs for the foreseeable future. That’s equivalent to the federal government’s one-time tax-cut advance of $600 per couple that’s just hitting mailboxes.
According to Chapman University, higher electricity rates are likely to drain $500 million in spending from the OC economy this year. The tax rebate is expected to offset that by adding $520 million to the local economy. But that’s a one-time deal.
Ted Gibson, chief economist at the California Department of Finance, portrayed the added electricity costs as modest compared with the size of the state’s $1.4 trillion gross product.
“The rate increases that have been approved amount to a little under half a percent of gross state product,” Gibson said. “We judge that there is a modest effect on an economy-wide basis.”
According to Gibson, the most recent rate increases should cover the interest and principal repayment on the $13 billion revenue bonds the state is planning to issue soon. Skeptics aren’t so sure, and the question of the utilities’ as-yet-uncompensated payments is another issue altogether.
Californians could end up paying an added $100 billion in the next 15 years, if the $9 billion in utility debt and $13 billion in pending state bonds are factored in. The overall cost could top $125 billion,or 9% of the state’s economy today,in the next 15 years.
Tom Lieser, senior economist at the University of California, Los Angeles, said he expects the effect of the power crisis on the state’s growth to be nominal. But it will be felt in other areas, he said.
“The bonds will have to be repaid over some period of time, and that adds incrementally to the financial burden of the state,” Lieser said. “It probably would cut into funding for some programs.”
On the ground, though, businesses say they’re already feeling the fallout from the power crisis.
“Of course we are impacted,” said Nasim Bangloria, owner of Santa Ana-based apparel producer Culver USA Inc.
Culver USA, which makes T-shirts and other apparel, has seen its power bill go up by as much as 40% since June, Bangloria said. Culver USA counts 15 to 20 employees and yearly sales of about $1 million. It’s one of many small apparel producers scattered across OC and the rest of the Southland.
Apparel and textile production is among the sectors bearing the brunt of California’s energy woes. For the past decade or so, apparel producers have operated on thin profits because of competition from Mexico, China and other low-cost countries. Most large U.S. apparel producers already have moved their operations elsewhere. Higher power costs could be a devastating blow to the Southland’s apparel industry.
“Everyone is being impacted,” Bangloria said. “From the dye houses to knitwear manufacturers,” she said.
In May, higher natural-gas prices pushed already struggling Anaheim Mills Corp., a fabric dyer, to shut down its operations and lay off about 120 workers.
The apparel industry is saying the power crisis could snuff out local production, leaving just design work, administration and specialized manufacturing here.
Huntington Beach-based Quiksilver Inc., Irvine-based St. John Knits Inc. and other big-name apparel companies aren’t expected to be as harshly affected. Like everyone, they’re coping with higher power bills. But while Quiksilver and other surfwear makers design their products here, they contract out production, mostly to factories overseas.
St. John Knits does produce in Irvine, but the high prices the company’s high-end women’s fashions command offer a buffer against rising production costs. Apparel industry observers say St. Johns Knits is the type of specialty producer that can withstand competition from abroad.
But that’s a comfort low-profit players don’t have.
“We are really hurting,” said Culver USA’s Bangloria. “I don’t have any choice but to pay these bills and cut down as much as possible.”
The company is between a rock and a hard place, according to Bangloria. While much of her industry has sent production to Mexico, she said she’s too small to do so cost-effectively.
“Mexico is good for someone that is big or has large volumes,” Bangloria said.
Some small manufacturers in a position to relocate already have started doing so. In April, Costa Mesa-based Valentec-Wells LLC, a metal stamping and plating company, closed its OC plant and shifted manufacturing to two Midwestern states. The move idled about 100 workers here.
Valentec-Wells now operates a plant in Ohio, where it employs around 100 people, and one at the Lake City Army Ammunition Plant in Independence, Mo., where it has 80 workers.
IPC Communication Services Inc., a printer and compact disc replication company with a Foothill Ranch plant, recently shifted some operations to Michigan, which it said offered “locational advantage” over California.
IPC is part of Milwaukee-based media company Journal Communications Inc. and employs about 100 people in OC, down from 150 a few months back.
“Companies are faced with making investments in their production,” Edison’s Sedlik said. “They need some kind of idea on what they should be doing.”
And it’s not just old-line businesses that are at risk. OC’s coveted electronics manufacturing industry also is vulnerable to higher electricity rates.
“It adds to our bottom-line costs and doesn’t help us to be as competitive,” said Steve Smithling, manufacturing and operations manager at the Foothill Ranch plant of Toronto-based contract electronics manufacturer Celestica Inc. “We are trying to compete with companies from around the world, including Asia and Mexico,and that’s tough. The increased electrical costs don’t help our situation.”
Celestica, which expanded its OC operations last year and counts 600 local employees, has seen its power cost go up more than 20% in recent weeks.
“If you were setting up a new manufacturing facility in Southern California, you would think twice today,” Smithling said.
Mike Kanda, vice president of human resources for Textron Aerospace Fasteners in Santa Ana, a unit of Providence, R.I.-based Textron Inc., said he’s hearing talk from other businesses about moving out.
“I know smaller ones in the Santa Ana Chamber of Commerce that can’t absorb these kinds of increases and are looking to go out of state,” Kanda said. “We have other locations, and certainly their costs are lower than ours.”
At Arrowhead Products, Ross said the maker of metallic and non-metallic ducting faces competition from other states and abroad. The ability to pass along higher electricity costs is limited, he said.
“Unfortunately, since we work on a contractual basis, we cannot share that cost with our customers,” he said.
Even if Arrowhead and other manufacturers are able to pull through this crisis, most of them won’t come out unscathed. Lower profits translate into a lower return on investment. That, in turn, means companies could have less money to spend upgrading machinery or expanding facilities.
The result could be more companies shifting work to facilities in other states, contracting out production elsewhere or relocating entirely.
“As electrical prices continue to rise, profits begin to reduce,” Ross said. “If this continues, companies will have to look at other ways of reducing costs, and sometimes they may even consider layoffs, which is in no one’s best interest.” n
