San Francisco area businesses warn of recession

The Bay Area Economic Forum in the San Francisco area warned the California energy crisis could push the entire state into recession, if demand isn't curbed and power generation increased. A partnership of the Bay Area Council, the Association of Bay Area Governments in northern California, and six area chambers of commerce, the forum said it prefers rate hikes to electricity blackouts and said the local economy would suffer less with rate increases.


by OGJ Online Staff

HOUSTON, Apr. 20 -- The Bay Area Economic Forum in the San Francisco area warned the California energy crisis could push the entire state into recession, if demand isn't curbed and power generation increased.

A partnership of the Bay Area Council, the Association of Bay Area Governments in northern California, and six area chambers of commerce, the forum said it prefers rate hikes to electricity blackouts and said the local economy would suffer less with rate increases.

The group commissioned McKinsey & Co. to conduct a study of the impact of the energy crisis on the local economy.

"The energy crisis poses a greater immediate threat to the competitiveness of the Bay Area than other major infrastructure challenges that we are facing," council president Sunne Wright McPeak said in a statement.

A 50% increase in commercial and industrial electricity rates will cost business $500 million/year in lost output, but threats to reliability will have a more devastating impact. The survey of 500 employers found reliability is more critical to the well being of the economy than higher rates.

"The lack of reliable power presents a clear threat to the broader economy, far overshadowing the impact of any price increases," said Jim Robb of McKinsey & Co.

Based on the California Independent System Operator's projections for shortages of power this summer, blackouts are almost guaranteed. Lost output could cost the California economy $2-$16 billion, according to the study.

Worse yet, the Bay Area Council is fearful the ISO's summer forecast might be optimistic. What if California experiences a very warm summer? The impact could be even worse, pushing the entire state into a recession, the council said.

The energy crisis will cut economic growth in the San Francisco Bay area to less than 3.2%, down from the previously forecasted growth rate of 4.2%. The impact of a 1% hit to economic growth is enormous. Few other economic forces, including collapse of a foreign market, higher inflation, or a local labor shortage, could have such an impact.

Other impacts of the crisis involve the perception that the Bay Area will not be a thriving place to live and work, said Eugene Long, executive director of the Bay Area Governments.

The study also revealed the following:

� Nearly 42% of the respondents said the crisis has already lowered profit margins and competitiveness.

� Residential rate hikes and the effect of increased costs passed along by local businesses will reduce Bay Area income by $1 billon/year.

� Per capita residential electricity consumption increased 8% between 1995-1999.

� One in five Bay Area companies is considering relocation. The Forum worried the number will rise if blackouts occur this summer as expected.

The study said the solution to this summer's looming crisis lies in a combination of conservation through demand management and increased generation to bridge an estimated 4,000 Mw energy gap. Absent such action, it forecast blackouts will be "endemic" this summer, and prices of power will be as high as $200/Mw-hr.

Price is the best way to bring supply and demand into balance, the study concluded.

It said market-based rates will improve demand response to tight supply conditions. The report also recommended industrial rate structures be designed to shift consumption away from peak hours.

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