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Cost of Doing Business Here Keeps Climbing

Cost of Doing Business Here Keeps Climbing

Power, Water Issues, State Budget Deficit Cloud Area’s Future

BY RENE’E BEASLEY JONES

Staff Writer

C.J. Buck figures it costs his company between 20 percent and 30 percent more to do business in Southern California vs. Washington or Idaho.

For one thing, Buck, a fourth-generation chief executive of El Cajon-based Buck Knives, pays at least twice as much for electricity as compared to rates in the Northwest, he said.

“There’s a high chance we’re moving,” Buck said. “We’ve made no decision. It’s such a tough decision.”

Besides the region’s ongoing electricity concerns, other issues loom large for businesses trying to make a go of it here. Some leaders fear a combination of forces may cause an exodus as companies look for greener pastures.

For example, San Diego County stands to lose one-third of its annual water supply by Dec. 31 after a recent deal collapsed between local, state and federal agencies. If the pact for Colorado River water isn’t resurrected by the end of this month, the federal government will restrict California’s access to the river.

The thirsty biotech sector and other water-dependent industries, such as manufacturing, restaurants and hotels, must worry about the availability of a resource that’s abundant elsewhere.

The Legislature has raised workers’ compensation payments for employers and mandated new storm water permits, to name a few actions that have increased the cost of doing business in California.

Real estate costs continue to skyrocket.

And, now, the projected $34 billion shortfall in the state budget has some local business leaders wondering if Sacramento will raise taxes and conjure up new corporate fees to fill the gap.

“The cost burden continues to be shifted onto businesses to make up for mistakes at the state level,” said county Supervisor Dianne Jacob. “The state is simply going to run business out of San Diego and California with energy, water and the cost of the onerous regulations coming out of state government.”

Jacob’s district includes Buck Knives, a business with annual revenues of more than $30 million and 260 jobs she has worked to retain for the East County.

She doesn’t believe officials in Sacramento understand the importance of small business. “It’s the backbone of our economy,” she said.

KPI Cos. had locations in Oceanside and Carson. In August, the company consolidated its operations in Riverside.

The cost of real estate was about 20 percent cheaper in Riverside vs. Orange or San Diego counties, said KPI President Bill Ipsen.

That’s a concern for businesses, but affects the availability of employees as well, Ipsen said.

“How are we going to get (workers) to live near our facilities when they can’t afford to live in those counties?” he asked.

Energy costs weren’t an overriding factor in the decision to move the 6-year-old company, which refurbishes medical imaging equipment. But Riverside owns its power generating capacity, so electricity was cheaper than in San Diego County, he said.

KPI pays less for water in Riverside too.

Still, it costs more to do business in California as compared to other states, Ipsen said.

“It affects our bottom line,” he said. “But we’ve chosen to stay here.”

BioPhysix Inc., a new San Diego biotech firm, conducted research in Chicago, Boulder, Colo., and the city of Orange near Anaheim before settling into San Diego’s Mission Bay area in October.

The primary reason for coming here: Rental space in a science park that offered executive offices adjacent to spacious labs, conference rooms, instrumentation and more, said BioPhysix founder Roy Dittman.

Secondary reasons included climate, nightlife and clean beaches.

“The big complaint we have here is the electric bill,” he said. “We were shocked when we got an electric bill for more than $4,000 for one month. I never heard of such a thing. That’s over 10 times what we paid anywhere else for electricity.”

Dittman heard other biotech firms in San Diego were having a hard time making ends meet because of high utility bills.

He’s pleased with the lab space he found here, “but we need to do something about the electric bill.”

Gail Naughton, co-founder of La Jolla-based biotech firm Advanced Tissue Sciences and dean of San Diego State University’s College of Business Administration, said rising costs in rent and the high cost of salaries delayed Advanced Tissue Sciences’ profitability.

But those issues did not directly result in the company filing for bankruptcy protection earlier this year.

A bigger problem facing biotech firms is the need to build manufacturing facilities that meet aggressive federal standards years before knowing if products will be approved.

“When a product approval is delayed, as with our diabetic ulcer product, and market penetration is slower than expected at first, then millions of dollars are burned in maintenance and overhead,” Naughton said.

Advanced Tissue Sciences officials never considered moving the company’s operations to a cheaper place to do business, Naughton said.

“We did look at more cost-effective manufacturing and distribution sites, which were more centrally located and less expensive in terms of land costs and salaries,” she said.

Naughton doesn’t believe companies that move here for the region’s intellectual capital and innovative spirit will be dissuaded by energy and water issues.

The state budget, however, remains a real concern because it affects education at all levels.

That could keep academics from relocating here “and would be problematic in attracting new employees to the area who hold academic collaborations and education for their families as a top priority,” Naughton said.

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