U.S. feels California's energy pain

Producer price index jumps more than 1%

BY JENNIFER BJORHUS

Mercury News

Rising energy costs pounding Californians are rippling through the national economy and eventually could lead to higher prices for items ranging from food to furniture.

On Friday, the government announced that its producer price index, an early measure of inflation, jumped more than 1 percent in January -- the biggest monthly increase in more than a decade. Higher costs for energy, tobacco products and passenger cars pushed up the index.

But it's the increase in energy prices that resonates in California. Natural gas prices are rising across the country but have hit staggering highs in California in recent months. And while most economists say rising energy costs aren't yet a serious drag on the state's unusually robust economy, the costs have the potential to dampen, or even halt, economic growth.

Already, some economists have revised their forecasts for the state's growth. The University of California at Santa Barbara Economist Forecasting Project had been predicting California would outperform the nation's 2.5 percent growth in 2001. Taking the state's energy problems into consideration, it's now saying the state's economy will grow by only 1 percent this year.

``I look at it as California's shooting itself in the foot,'' says economist Bill Watkins, executive director of the project. ``You're not going to see major investment in the state until this is resolved.''

You don't have to convince the state's farmers.

Agriculture affected

``It's hammering agriculture, and it's an indication of what we're going to see when we head into the peak agriculture production and processing time this summer,'' says Michael Boccadoro, executive director of the Agricultural Energy Consumers Association in Sacramento.

Boccadoro said dairy processing plants, flower growers and poultry farms are getting hit hardest. One cheese plant that Boccadoro wouldn't name saw its monthly gas bills skyrocket from $200,000 in 1999 to a staggering $1.1 million in December. Boccadoro said he hadn't heard of any layoffs or closures, but said some operators are talking about shifting production out of state.``Clearly these rates can't be sustained,'' he said.

Others agree.``You're starting to see the inflationary impact of higher energy costs,'' says Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. ``It's going to cause a problem. I think this summer is going to be pretty interesting.''

Silicon Valley's large tech companies are more worried about reliable electricity than the costs of electricity and gas, according to the Silicon Valley Manufacturers Group.

For small and medium-size businesses, it's a different story. The energy crisis has taken an economic toll.

Citing high energy costs, Shasta Paper in Redding temporarily closed its plant, laying off 460 workers. ReadyPac Produce in Irwindale near Los Angeles reports that this year's energy bills will exceed last year's by $1 million and continued problems could lead it to move operations to Arizona.

Around the Bay Area, business owners are talking about stunning gas bills. IBC in Hayward, a family-owned company that makes molded foam containers and packaging, began using space heaters on the shop floor on cold mornings. Then the gas bill came. It had shot up from $1,000 in December to $2,500 for January.

``We were mortified,'' said general manager John Hunter. The company hasn't tweaked its prices yet, but may have to, he said. ``Depending on what the next bill comes in at we'll have to take a look at it.''

Alex Wilson, co-owner of Wilson's Jewel Bakery in Santa Clara said he gasped when he opened the January bill. It had doubled.``I think we're being ripped off,'' Wilson said. ``It's very ugly.''

And the California energy taint is spreading. California's problems have definitely leaked to border states where electricity is being priced higher throughout the entire Western net, says Greg Mount, vice president and senior international economist at Bank One.

Rolling blackouts, down-time from interrupted electricity and gas spikes are distressing, to say the least. With the national economy slowing dramatically and Silicon Valley tech companies watching profits drop, it all adds to a general climate of uncertainty.

But whether or not California's energy crisis will drag the economy beyond a slowdown is hard to say. Many businesses are weathering the energy squall quite well.

Economist Steven Levy, director of Center for Continuing Study of the California Economy, said he doesn't think rising energy prices alone will exacerbate the state's economic slowdown -- unless prices keep going up for a year or more. He noted that gasoline prices rose 50 percent last year and people just kept fueling up as the state's economy recorded a bumper year.``It's a major item used by everybody and it didn't stop anything,'' Levy said.

An anomaly

Other economists argue that the January PPI numbers appear to be a one-time anomaly and don't signify anything bad.

Cigarette manufacturers may have boosted prices to recoup litigation costs, and sluggish car sales suggest the increase in passenger car prices is the result of a measurement problem, said Mark Zandi, chief economist at Economy.com in Pennsylvania.

``It's wacky,'' said Zandi, who dismissed the energy increases as the result of an unusual one-time spike in natural gas prices. The energy portion of the index will decline next month, he says.

Tell that to Lou Grandona. Grandona, supervisor of AGS Quality Linen commercial laundry in South San Francisco, has a three-year fixed-price contract for gas. But his electricity bill rose 30 percent from December to $2,500.

``We are going to have to raise our prices. Even our vendors are raising their rates to us. It's all going to pass along to each other,'' Grandona said. ``You just don't know what's going on any more.''

Contact Jennifer Bjorhus at jbjorhus@sjmercury.com or (408) 920-5660.

-- Swissrose (cellier@azstarnet.com), February 17, 2001