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Tech companies afraid of the dark

Silicon Valley technology companies shrug off energy price hikes but fear that publicity surrounding California's high-profile crisis will tarnish the region's reputation and quality of life.

6 min read
Silicon Valley technology companies aren't scared that an energy crisis will dent profits, but they're fretting that California's controversial power struggle may temporarily leave them in the dark.

While rolling blackouts terrify tech companies, executives are even more afraid that publicity surrounding the state's high-profile energy crisis will tarnish the region's declining reputation and quality of life.

In an effort to save the state's ailing power companies from bankruptcy and blackouts, the California Public Utilities Commission (CPUC) approved an emergency plan Thursday for temporary electricity rate hikes for all users of Pacific Gas & Electric and Southern California Edison. Small businesses can expect rates to increase 7 percent, while medium-sized businesses will get a 12 percent hike and large corporations will see a 15 percent hike.

The increases are likely to remain in effect for 90 days while the CPUC explores long-term measures to curb runaway wholesale energy prices and ease the beleaguered utilities' multibillion-dollar debts. After the trial period, many utilities experts say, the rates are likely to rise even further.

Even with the hikes, the utility companies warned that customers are likely to incur power shortages and blackouts as the cash dwindles and both face possible bankruptcy. PG&E, which supplies power to much of the San Francisco Bay Area, pleaded with investors and power sellers for breaks, saying the utility cannot provide adequate power for the region's mushrooming population and energy-sucking technology companies by itself.

But many Silicon Valley businesses say the rate hikes will not dent their corporate balance sheets. That's because some of the largest tech companies rely on power suppliers other than PG&E and Southern California Edison.

The two largest California operations of Intel, for example, are in Folsom and Santa Clara. The Folsom site receives energy from the Sacramento Municipal Utility District, while the Santa Clara site receives power from Silicon Valley Power--a popular supplier for regional tech offices.

Intel has negotiated long-term power supply agreements for both sites, so the power suppliers cannot spike prices to compensate for price variation on the so-called spot market. By contrast, PG&E's costs fluctuate wildly because it buys energy based on immediate supply and demand on the spot market.

Intel has several sites in PG&E and Edison territory, Intel spokesman Chuck Mulloy said, but the impact of the price hike "is at best minimal."

No power, no profit
Few Bay Area tech companies seem outwardly panicked about the price hikes' effect on short-term profits. They are willing to put up with price increases because the hikes, they say, are less costly over the long term than rolling power outages or a bankrupt utility company that is unreliable.

E-commerce companies that rely on smoothly functioning Web sites, often powered by servers and workers in the San Francisco Bay Area, lose anywhere from $1 million per hour to $1 million per minute when the power goes off. That's because customers can't place orders online, and the region's highly paid work force can't be productive.

Although it was not caused by a blackout, a November blowout at Seattle-based e-tailer Amazon.com showed how costly even a brief outage is.

During the Thanksgiving holiday weekend, Amazon suffered a series of outages. Investment firm Thomas Weisel Partners estimated that one 20-minute outage deleted roughly 20,000 product orders and $500,000 in revenue.

The threat of insolvent utility companies and rolling blackouts in the Silicon Valley could cost local retailers just as dearly, experts warned.

"While the price of energy is important to many companies, especially for small to medium-sized companies, we think the message is finally getting through: Price is important but reliability is even more important," said Michelle Montague-Bruno of the San Jose, Calif.-based Silicon Valley Manufacturing Group. "When you have unreliable power, you have blackouts. The cost of a blackout can far exceed the cost of a price hike."

The cost of living
In addition, Silicon Valley executives are concerned that the rate hikes will boost the cost of living in the Bay Area, already one of the most expensive places in the United States for technology workers.

The average house in the Bay Area cost $364,000 in the first 11 months of 2000, according to DataQuick Information Systems, while the average one-bedroom apartment in San Francisco rents for nearly $2,000 per month.

The CPUC's proposal boosts residential customers' energy rates 9 percent. According to consumer groups, the average PG&E residential customer will pay $59.40 per month for electricity, compared with $54.50 now.

A natural-gas shortage throughout the country also means that average PG&E residential customers will pay $125 for their gas bills in their next statements, up more than 60 percent from the same billing period a year ago. That means the average resident will pay $185 total, up from $105 a year ago.

Silicon Valley executives fear that negative publicity resulting from the energy fiasco--the subject of nightly news reports and newspaper headlines from Washington D.C. to Alaska--will sour individuals and corporations to the Bay Area, making employee recruitment and retention even more challenging than it already is.

Although consumers throughout the state are bitter about the hike, PG&E had lobbied for far greater price hikes, starting around 20 percent and growing to nearly 40 percent in its first year. The utility also wanted assurances that it eventually could pass billions of dollars in soaring wholesale energy costs to commercial and residential consumers.

The CPUC's internal analysts said the utilities need to double or triple electric rates over the next few years to keep up with soaring wholesale prices.

On Wednesday, the California Manufacturers and Technology Association (CMTA) blasted the rate hikes, in particular the disproportionately large hike imposed on large corporations. CMTA president Jack M. Stewart lambasted the plan, which he said threatens to displace workers and corporate headquarters and form "the genesis for industry departures from the state."

"Soaring natural gas prices have already caused some manufacturers to temporarily close their California facilities," Stewart said in an open letter to the CPUC. "Targeting large industrial users for the largest electric price increases could lead to additional closures. The CPUC's action is particularly puzzling given that traditionally high energy prices in California have already inspired large users to become the state's most efficient energy users."

Stewart said that no less than the economic underpinning of America's wealthiest state is at risk because of the rate hikes.

"The CPUC proposed only a temporary increase," Stewart concluded. "However, if the CPUC applies the same logic for permanent, larger rate increases, the impact on large industrial users could provide an impetus for a statewide economic downturn."

One option: conservation
Intel's Mulloy said the price hikes highlight some significant environmental challenges in California and may spark people and companies to reconsider wasteful practices. According to the Electric Power Research Institute (EPRI), a 10 percent reduction of energy consumption at peak usage times could reduce energy bills as much as 50 percent. EPRI provides consulting services for more than 1,000 companies on power generation, delivery and environmental issues.

"The near-term solution is simple: conservation," Mulloy said. "But the longer-term solution--we don't presume to know the whole solution. It's a discussion for the weeks and months and years ahead."

William M. Smith, manager of market-driven load management for EPRI in Palo Alto, Calif., said the energy crisis is stinging the entire nation but particularly western states. It is likely to become even more acute this summer, when much of the nation resorts to air conditioners to cool homes and offices.

Power plants in the Silicon Valley generate roughly 10 percent of the power the region requires. The rest is imported, mainly from the Pacific Northwest. The region is not scheduled to open another plant until the end of summer 2002, at the earliest.

Although businesses have little choice but to swallow the price hikes, consumers are expressing anger. Smith speculated that businesses may soon express their frustration by moving headquarters and factories elsewhere.

"Housing and traffic used to be the big concerns when companies were siting an area or looking for a headquarters location" in the Bay Area, Smith said. "Now electricity is becoming yet another issue. Having electricity there when you need it has become the overriding concern for Silicon Valley manufacturers."