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LIGHTS OUT OPPORTUNITIES EMERGE FROM THE DARKNESS.

"We've sort of been asleep at the switch in California," says Tom Lieser, a senior economist with UCLA's California Forecast, in the unflappable tone of someone who's seen the Golden State clip and rise up again many times in his long career.

Donald Morrison, CPA, a Sacramento business consultant has stronger words: "The rank stupidity of both the people in business who blessed [deregulation] and the people who cooperated is breathtaking."

California's energy crisis has been daily headline fodder for months: Stage 3 Alerts! Rolling Blackouts! Ten-Billion Dollar Bailout! Never have utilities been so interesting. If the citizens of the Golden State have been asleep, they've fast woken up, quickly picking up terms like "ISO," "power grid," "partial deregulation" and "buying on the spot market."

"It's amazing how fast we've all become experts on this," says Lieser. "We did the same thing with oil a couple of decades ago. When there's a crisis you learn something about it."

In 1996 then-Governor Pete Wilson signed into law a bill deregulating the utility business. At the time, Californians were paying higher rates than most states (10 cents per kilowatt hour compared to Oregonians, who spent five, for instance). Under the provisions of the deregulated market, California utility giants Pacific Gas & Electric Co. and Southern California Edison would sell off their generators to pay off debt and buy electricity from generators around the country on the spot market. The utilities only would be responsible for electricity distribution and collecting money from consumers.

Though PG&E hoped that spot-market electricity prices, subject to free-market competition, would be cheaper than their long-term contracts, they were not entirely comfortable that retail rates were fixed while the rates the utility companies were paying generators would be subject to the whims of a free market. "If this were a guarantee, I'd sleep better at night," said PG&E CEO Gordon Smith at the time. "We take the risk if our costs go up."

Costs did go up. When the "new economy" sent California's economy skyrocketing, demand for electricity increased beyond anyone's wildest expectations, and the cost of buying electricity went stratospheric.

Then on Feb. 1, Gov. Gray Davis signed legislation allotting $10 billion in bond money to buy power for the utilities. "This is not the end of the story," Assembly Speaker Robert Herzberg, D-Van Nuys said at the time. "It's just one of the chapters in a very long 'Moby Dick'-style book."

Even with what some are calling a state bailout in place, energy experts worry that the crisis will only get worse come summer when people begin turning on air conditioners. Most industry watchers say that Californians might be in for a bumpy ride for another few years, and since the state's long-term power contracts lock in a relatively high price for electricity over the next 10 years, the trouble might last even longer. "Even if it doesn't become a recession, it's not going to feel very good to go through this," says Lieser.

BLACKOUTS ARE MOST DAMAGING

Analysts agree that many businesses can readily absorb higher utility costs. "Silicon Valley is probably already the world's most expensive place to locate new business, yet it has continued to grow at a fairly fast pace," notes Lieser. "It has the lowest unemployment rate the in the U.S. at this point. It also has the highest home prices and the lowest commercial vacancy rates for office space. If people are willing to put up with all that, it says something about the nature of the business: The product cycles are so short that you can't afford to be out of reach of your suppliers and your principle customers."

Lieser adds that while the likes of companies such as Intel have complained that they will quit building chip-making plants in the Golden State because of the energy situation, they probably wouldn't have built them here anyway. "I just don't think California is competitive for a new chip plant at this point," he says. "They overdid it. [Intel] implied that they were actually contemplating an expanded manufacturing presence in California, whereas they haven't expanded anything in California in a long time--except their head operations."

But cost is an important factor for industries that use large amounts of electricity. In highly competitive fields where the profit margin is already low, increases in energy costs could really hurt, even putting some businesses into Chapter 11. Heidi Schunke, CPA, an in-house accountant for Napa Pipe, says hers is already a dog-eat-dog world even without the added stress of a utilities crisis.

"This will take the cream away and make it so that we re just paying off the loans from our last famine cycle," says Schunke, who says that Napa Pipe's top local competitor already has filed for bankruptcy. "The market is competitive, and we need to be conservative in our costs. This is taking away from our ability to invest in capital and improve ourselves so that we can produce."

But the threat of more rolling blackouts like those that hit Northern California in late January is close to intolerable, no matter what your industry. A day after Gov. Davis signed legislation putting California in the energy business, Severin Borenstein, director of UC Berkeley's Energy Institute said the new legislation doesn't deal with the shortage. "This summer, we're headed toward a train wreck," he told the San Francisco Chronicle. "It is possible to drive the California economy off a cliff by not dealing with the shortage that we are potentially facing this summer.

Tom Dugan, president of Newgate Internet in Sausalito, agrees that while his energy bill has doubled, the blackouts have been the most damaging. "It's expensive," says Dugan. "I mean, we're not General Motors over here, but if you've got 20 people you've got to send home and you've got to pay them for the day, that hits you right in the wallet."

Further, Dugan says a potential client from New York told him he wouldn't work with a California company because of the blackouts. He feared that the server would go down. "I thought at first the guy was kidding me," says Dugan. "But I talked to him later and he said, 'No, I'm serious, I'm not going to work with you because you're in California and your server is going to go down."'

CAUTION!

While six new power plants are under construction in California, and the California Energy Commission has approved plans for the construction of three more, all nine won't go into operation until summer 2003. The plants will provide enough energy for 6 million households. California has a population of 30 million. In short, it's time for business to be cautious.

"Look at what you can do to save energy because this situation is not going to go away for a couple of years," says Jack Kyser, chief economist with the Los Angeles Economic Development Corp. "Keep in close touch with your customers to see what they are telling you so that you don't get caught off guard."

Look at your bills and do the math. "If tripling your utility bill would put your [or your client's] business significantly at risk, then you better start making cuts now," says Morrison. "We haven't begun to bite the bullet of these increased costs."

THE GOOD NEWS FOR BUSINESS CONSULTANTS

Kyser predicts a surge in business for CPAS in the coming 6-12 months. "A lot of companies will be coming to you saying, 'We have a problem here, how do we work through all this?"' he says. "You're going to find a lot of companies going back to reexamine their business plans and financial situations to see if they might have to do some restructuring. They now have a higher cost structure--not just higher electric costs and higher natural gas costs, but increased workmen's compensation costs, increases in health care premiums for their employee healthcare plans, and some industries have a minimum wage work force. There is a lot of concern that the cost structure has suddenly ratcheted upward to a much higher level than most people had expected."

Lamed Whitney, CPA, a Benicia-based small-business consultant began raising concerns with his clients in January. He says looking at the big picture, not only the business's own electricity needs, but those of their customers and suppliers, is an important step in preparing for more energy emergencies.

"I've talked to some business people who are saying it's going to affect not just their business, but their receivables," Whitney says. "If they have customers who are heavily energy dependent, those customers are going to have problems in production and sales, and their cash flow is going to suffer. You need to look at their ability to produce, especially with blackouts."

Whitney adds that it's really about sitting down with clients, setting numbers aside and looking at all of the factors that impact their business.

PERSONAL FINANCIAL PLANNERS

Now is a good time for personal financial planners to evaluate their clients' stock portfolios to see what kind of exposure they have in, not only the two California utility companies, but also similar distribution companies in other states says Mitch Freedman, a Sherman Oaks CPA/PFS. "Do some research to determine what the intermediate terms look like for distribution pipelines to see if they are making the same mistakes as the California companies have," advises Freedman. "See if they have the same kinds of restrictions on price controls." Freedman says that clients approaching retirement or in retirement should take some defensive measures by shifting stock.

For clients who are on fixed incomes, particularly those who are in retirement, whom CPAs have helped with budgets and expectations of expenditures, Freedman notes that electricity costs might become a measurably increased daily cost of living. "Be cognizant of potential impact on long-term plans as a result of changes in utility costs," says Freedman. "For some it might be a significantly increased cost."

Now is also an ideal time to educate clients on the unpredictability of the stock market. No matter what the cause, notes Karen Goodfriend, CPA, a Menlo Park-based financial planner, "there could be a market downturn at any time. This is a good time to remind clients, because it was hard to get the message across a year ago. People were tempted to take a lot of risk."

Goodfriend says her advice to clients will stay the same: stock portfolio diversification is the safest bet. "When clients invest, they shouldn't be heavily concentrated in tech, utility or California business," she says. "[That way,] if the energy crisis affects utility stock, the effect will be tempered. We would not advocate one way or the other that it's a good or bad time to buy utility stocks. The idea is to be invested in a very broad base of companies and types of investments: tech stocks, old economy, some utility, international. If one industry is hit hard, the effect on the overall portfolio might not be as great."

Freedman agrees. "I believe in having a very diversified portfolio with numerous asset classes, and numerous capitalization sizes. I think individuals should always consider the current economic situation, but not necessarily fear investing in certain areas."

What about utility stocks, once considered the safest of the safe, particularly for the fixed-income elderly? "A public utility was always thought of as a safe investment that would be able to generate dividends for shareholders," says Freedman. "The valuation in these companies would ebb and flow based upon the money markets. Now all of a sudden we're seeing that there are other elements of evaluation. What kinds of purchasing arrangements do they have? What restrictions are there on the ability to adjust prices? Has management been making good decisions?"

Robert Healy, CPA, a Walnut Creek personal financial planner advocates a wait-and-see attitude. "[The energy crisis] is going to have an impact," he says. "[But] I think it's a little premature to jump the gun with clients and say, 'Oh my gosh, you've got to change directions.' I don't feel like anybody really knows what's going to happen at this point."

A RECESSION IN SIGHT?

Despite the spate of bad news: increased unemployment, weak fourth quarter-earnings announcements, lowered consumer confidence, a wobbly stock market, and now an energy crisis, economists are not yet willing to predict a recession for the state. "You will have a slowdown, bigger than we had expected," says Kyser. "But the state will be able to escape a recession."

Still, Kyser's confidence isn't unshakable. "The energy crisis struck with a stronger force than anybody expected. You've had some people say the state is going to go into a recession. We're not willing to say that. But definitely we can say the longer the situation goes on, with all the uncertainty, the more clouded the state's outlook becomes."

Lieser advises keeping the economy in perspective. "Through December of last year, for 2000, California was growing at roughly twice the rate of the U.S. There is always a problem when you use a loaded term like 'recession.' People may not know statistically what it means, or what's implied in terms of how you get there from where you are."

Lieser says the U.S. economy might well go into a slight recession. "We actually do have a moderate recession in the national economy coming from financial market problems, loss of wealth in the stock market, and problems at banks spreading in the financial markets." This taken with the fact that the Federal Reserve Board lowered interest rates twice in January indicates a major national slowdown. "There is evidence that the national economy is slowing down quite a bit, and will dip into negative territory before it recovers again later this year."

In short, says Lieser, the energy crisis is one more nagging long-term problem facing the state in competing for new business. "I hadn't seen the energy crisis as the acute situation that it has become," he says. "We might have envisioned a problem with the financial markets pushing us down, but not this thing. Now we have to deal with a serious national economic downturn affecting our markets, and a serious unique regional situation on top of that."

Lieser has one more thought on the subject: "I hope all the accountants don't leave."

Laurie Mason is a San Francisco-based freelance writer.

LOS ANGELES COUNTY: WHAT ENERGY CRISIS?

RESIDENTS OF LOS ANGELES COUNTY have more than sunny skies and sandy beaches to be thankful for. They also should be grateful for the fact that they've been mostly unscathed by the power crunch hitting the rest of the state. The cities of Los Angeles, Burbank and Glendale have municipal power systems. "They have plenty of power at lower cost," says Jack Kyser, chief economist with the Los Angeles Development Corp. "They're not buying power, there is no interruptible power, the prices haven't gone up, so they're in fine shape." Pasadena also has a municipal power system, but it is tied into the California Independent System Operator, which controls the state grid. "But so far they haven't experienced any problems delivering electricity to their customers says Kyser.

This situation gives Los Angeles County a stability that most don't recognize when discussing the power crisis. "People rush in and say 'the California power crisis' but you have to say for the people in the City of Los Angeles, 'What power crisis?, They're selling power to the state," says Kyser. "Their biggest concern is that they won't get paid."

ENERGY RESOURCES

CALCPA MEMBER James C. Counts has set up a listserve to warn members when the California Independent System Operator changes the alert status for the power grid. To join the listserve, e-mail, CalifStageAlerts-subscdbe@yahoogroups.com. Counts also has written an article on understanding California energy alerts that can be accessed at http://www.calcpa.org/californiacpa/articles/2001/02.02.html.

Blackouts are threatened throughout California this summer. CalCPA member Larry Russell has written an article on how to safeguard your computer and telecommunications systems during power outages. You can access it at http://www.calcpa.org/californiacpa/articles/2001/02.01.html.
COPYRIGHT 2001 California Society of Certified Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2001, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:MASON, LAURIE
Publication:California CPA
Geographic Code:1U9CA
Date:Mar 1, 2001
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