California braces for $5.7 billion electric rate hike

By Michael Liedtke AP Business Writer
Monday May 21, 2001

SAN FRANCISCO – Higher power costs zapped restauranteur Marino Sandoval and his customers even before California regulators decided this week how to allocate a $5.7 billion electricity rate hike — the highest in the state’s history. 

Faced with soaring natural gas rates that tripled his utility bill, Sandoval last month raised the prices at his popular Mexican restaurant chain, El Balazo, by as much as 20 percent on some items. A giant burrito that cost $4.95 at the end of March costs $5.95 today. 

“We had to do it because it seemed like the price of everything, from our beans to our tortillas, was going up almost every day. Our higher prices have everything to do with the higher energy prices,” said Sandoval, who runs six restaurants in San Francisco and the East Bay. 

From hotels to bagel shops, businesses throughout California have been raising their prices or imposing special surcharges to offset rising power costs. Most of the increases so far have reflected higher natural gas costs, which utilities have been passing along to their customers throughout the state’s power crisis. 

Now, businesses and households are bracing for electricity rate increases that could balloon the bills of the largest users of the state’s two biggest utilities, Pacific Gas and Electric Co. and Southern California Edison Co. 

The higher rates, which will begin appearing in June’s utility bills, threaten to jolt the state’s already jittery economy. 

“Pretty soon, we may see California staring down the barrel of a recession,” said Dave Puglia, a vice president for APCO, a public affairs firm hired by California business interests to study the economic effect of the state’s energy woes. 

Until now, California businesses have only had to pay a fraction of the state’s staggering electricity bill, which is on a pace to reach $70 billion this year — about 10 times more than in 1999. 

By itself, the $5.7 billion rate increase approved by the California Public Utilities Commission probably isn’t enough to topple the state’s roughly $1 trillion economy — the sixth largest in the world. 

“It will cause some hardships, particularly for some small business owners, but from the macro point of view, these rate increases aren’t going to have a major impact on California’s output,” predicted Sung Won Sohn, chief economist for Wells Fargo & Co., which runs the biggest bank headquartered in the state. 

But some business leaders are worried the hike will represent the coup de grace for many companies already reeling from rising expenses for gasoline, natural gas, health care benefits and workers’ compensation insurance. Against this backdrop, many employers also face pressure to raise their workers’ wages to help pay for California’s high housing costs. 

“If this keeps up, at some point, we are going to reach a breaking point in the economy,” said Allan Zaremberg, president of the California Chamber of Commerce. 

The California Chamber is part of the California Alliance for Energy and Economic Stability, a coalition that sought to shift more of the electricity rate increase from businesses to households. 

Under the plan approved by the PUC, businesses are expected to pay about $4.6 billion more for electricity and households will pay an additional $1.1 billion. 

Even if they are spared on their utility bills, consumers still will be pinched by higher prices for goods and services as businesses pass along their electricity price increases. 

Some California firms, particularly those making commodities sold around the world, won’t be able to substantially raise their prices without losing business from customers who will buy from competitors in other states and countries. 

Manufacturers of cement, glass, paper products and steel are among the companies that probably won’t be able to pass along their higher energy costs, Puglia said. 

The rate increases mean that utility bills will consume about 25 percent to 30 percent of a big manufacturer’s budget, Puglia estimated, up from about 15 percent now. 

“I wouldn’t be surprised if we see some companies go out of business because of this,” said Justin Bradley, director of energy programs for the Silicon Valley Manufacturing Association, a high-tech trade group. 

Even if they don’t shut down completely, many companies likely will lay off workers as they cut costs to pay for power. The California Manufacturers and Technology Association estimates that the energy crisis will result in the loss of 135,755 jobs — or about 40,000 more than the entire dot-com industry has laid off nationwide during the past 16 months. 

Painful though they may be, higher electricity rates and some resulting layoffs are a better alternative than the increased number of blackouts that probably would have occurred if retail prices hadn’t been raised, according to most economists. 

“People are wildly exaggerating how much this is going to hurt the California economy,” said Stephen Levy, director of the Center for Continuing Study of the California Economy, a Palo Alto research firm. “The rate increases are part of a long-term solution for California. We needed them to stabilize the market. On balance, this is a good thing.” 

Even though his monthly utility bill at one of his restaurants rose from $1,500 last year to $4,500 this year, El Balazo’s Sandoval shares Levy’s optimism. After all, customers continue to pour into his restaurants, despite his restaurant’s higher menu prices. 

“Business is so good that I have been too busy to think about whether I am going to have to raise my prices again,” he said. “If I have to, I will. I don’t think people are going to stop eating because of this.”