June 2001

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Energy Crisis 

By AUS Consultants

Any additional periods of effective electricity loss in excess of 20 hours due to rolling blackouts would be sufficient to push the California economy into recession this year.

Electricity blackouts this summer will conservatively cost California businesses $21.8 billion in lost productivity, reduce household income by another $4.6 billion and take jobs away from 135,000 Californians, according to a study released May 9 by the California Alliance for Energy & Economic Stability.

"This study is a body blow for businesses that employ Californians and face numerous power outages this summer, meaning lost productivity and in many cases actual damage to their operational capability," said Jack M. Stewart, president of the California Manufacturers & Technology Association, part of the alliance that includes the California Taxpayers' Association, the California Chamber of Commerce, the California Business Roundtable, the California Retailers Association and the California Large Energy Consumers Association.

The alliance has endorsed an "equitable rate-increase structure" that encourages greater conservation of electricity by both business and residential users.

The study was conducted by AUS Consultants of New Jersey, which relied on data and information gathered from 34 companies in 25 industry sectors to assess economic consequences of blackouts and rate increases.

Here is the study's executive summary:

Businesses, industry, and consumers in California are suffering from a serious shortfall of electricity supply and high wholesale power prices. This situation has its roots in a mix of energy policy miscues, faulty deregulation, ineffective electricity demand planning, and sharply higher natural gas prices that have increased the cost of generating electricity.

Despite recent sharp increases in wholesale electricity prices, the basic imbalance between supplies of electricity and demand in California remains severe. Higher electricity prices will likely reduce growth in demand, both for households and industrial consumers. New generation capacity in California is under construction. However it will take several years before this provides significant relief from increasing demand pressures. The California Independent System Operator (CAISO) anticipates an electricity supply deficiency, or shortfall, of between 666 and 3,647 megawatts (MW) for the June through September 2001 summer period. At peak load demand levels projected by CAISO, this could lead to 110 hours of potential rolling blackouts. Considering that the average electricity shutoff period during the eight-hour March 2001 rolling blackout was 90 minutes, this translates into 20 hours of outage per customer this summer.

Rolling blackouts that culminate in 20 hours of electricity outage will have significant adverse implications for growth of the state economy and will result in lost jobs and reduced income for Californians.

• Gross State Output (GSP) for California would be reduced by $21.8 billion (constant 1996 dollars), or 1.7 percent, in 2001. This would reduce the growth rate of California GSP from the 2.3 percent currently projected by the UCLA Anderson Forecast to 0.6 percent for all of 2001. This loss has two components:
  • A direct loss of output experienced by all industries due to the effects of the blackouts in the amount of $6.8 billion. Of this, California's manufacturers would lose 18 percent, or more than $1.2 billion.

  • An indirect effect reflecting the fact that each dollar of output by one industry represents the purchase of output (i.e. goods and services) by other industries. This amounts to $14.9 billion.

• A loss of output of this magnitude would reduce household income for Californians by $4.6 billion. This is a loss of $104 for every one of California's 11.5 million households. Important to note is that this loss is in addition to the impact of higher electricity costs resulting from recent rate increases.
   
• 135,755 jobs would be lost in all industries in the California economy.

The CAISO projection is most likely a "best case" scenario. The electric power situation in California will likely become more unstable over the summer. This could result in more and longer periods of supply disruption, greater unpredictability regarding supply, and higher prices for electricity. A number of factors could combine to increase the rolling blackout period and effective blackouts.

• Stronger demand than is currently projected due to a hotter and drier than expected summer.
   
• Reduced electricity supply due to any number of factors such as unscheduled plant shutdowns.
 
• Longer duration of outages than the average 90 minutes experienced earlier this year.

If any, or all, of these occur, the output loss to California business and industry will be larger, as will the aggregate loss to GSP, California household income, and jobs. Any additional periods of effective electricity loss in excess of 20 hours due to rolling blackouts would be sufficient to push the California economy into recession this year.

The complete study is available at Cal-Tax Online.