VideoTim 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."
The good news for most companies is that the risk of rolling blackouts or voltage reductions is largely confined to three areas of the country. "One thing CFOs should understand is that our markets are regional in nature," says Nstar's May, who is quick to note that New England has plenty of generation capacity. "New England is in pretty good shape for the next five years. We don't have to worry about the lights going out or being interrupted. Most of the Northeast is like that."
An assessment of summer conditions released by NERC in May cautiously agrees. "We expect to see tight capacity in the Pacific Northwest, New England, and New York City," says NERC's Gallagher. "But in none of those areas do we expect to see rolling blackouts."
There's plenty of power in the region around New York City, but the Big Apple imports 20 percent of its demand, maxing out the transmission lines that feed the city. "If they are importing as much as they can," explains NERC spokesman Gene Gorzelnik, "then they need to start generating power [inside the city]." Despite resistance from businesses and residents, local utility Consolidated Edison was expected to complete installation of special generators within the city by June. "If any of those are delayed, there may be shortages in New York City," says Gallagher.
The Pacific Northwest, usually awash in cheap power from its many hydroelectric plants, has suffered a drought for almost a year that has left reservoirs at 53 percent of traditional levels. "We need rainfall of biblical proportions to bring us back to normal," says Jerry Rust, president of the Northwest Power Pool. "We will potentially see blackouts this winter."
Right now, that's primarily a problem for California, which can't rely on its neighbors for extra juice this summer. But California's problems pose a risk to the rest of the country. "It is the single largest economy within the U.S., and the sixth largest in the world, so there are definitely spillover effects," says DRI-WEFA's Shawn Intorcio. "We just have to wait to see how big the impact is going to be." In short, although energy markets are regional in nature, even companies located far from California should be worried about how well it manages its energy needs.
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