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San Diego Firms To Feel Energy Crunch in 2005

San Diego businesses , stunned by a $733 million cost shift to San Diego Gas & Electric Co. by the California Public Utilities Commission on Dec. 2 , are trying to gauge the financial hit they are likely to take from the action.

“I think it hurts San Diego’s competitiveness when the state regulatory agency sees fit to penalize San Diego,” said Julie Meier Wright, the president and chief executive officer of the San Diego Regional Economic Development Corp., a private nonprofit charged with helping companies locate, expand and solve problems. “Primarily, this will impact businesses , small, medium and large.

“When business pays the costs, ultimately, we all are paying the costs,” she added. “Businesses have choices of where they can locate. Anything that hurts San Diego’s competitiveness is a big red flag to me.”

The PUC approved a permanent cost-allocation plan among the three investor-owned utilities that could cost the typical San Diego industrial customer as much as $100,000 a year more on its electric bill, according to PUC President Michael Peevey, whose own cost-allocation proposal was voted down.

The new formula distributes costs for long-term power-purchase contracts entered into with the state Department of Water Resources to make sure customers had power during the 2001 energy crisis. The proposal, by Commissioner Geoffrey F. Brown, assigns the total costs of DWR contracts to the utility in which they were physically allocated and splits the projected annual “above-market” costs , $7.4 billion for 2004-2013 , to the utilities’ customers. Above-market costs are those in excess of what electricity currently sells for.

The incremental 10-year change from the current formula will mean a $418 million decrease for Pacific Gas & Electric; a $315 million decrease for Southern California Edison; and that $733 million increase for SDG & E.; The formula, which is retroactive to Jan. 1, uses a 10-year forecast of above-market costs.

Business and industry are expected to be the hardest hit, given that state law caps residential rates.

SDG & E; plans to file an appeal by Dec. 13, according to a company spokesman.

After the PUC action, Michael Shames, the executive director of the Utility Consumers’ Action Network, a San Diego-based consumer watchdog group, called the vote “flat-out wrong.” He said the contracts “were a direct result of the SCE and PG & E; credit problems and had nothing to do with SDG & E.;” But Commissioner Loretta Lynch, who voted for the new formula, countered that SDG & E; ratepayers previously had gotten off the hook from paying their fair share of above-market costs.


Business Blues

Reactions from local businesses and their representatives ranged from a wait-until-the-smoke-clears uncertainty to anger.

Jerry Livingstone, staff counsel for the Building Industry Association of San Diego County and director of government affairs for the National Association of Industrial and Office Properties, characterized the PUC’s action as “one more nail in the coffin.”

“From a building owner’s perspective, they are also being faced with increasing fees in almost every area,” he said, “and to top that off with electrical, it makes it much harder to compete with other locations, especially since this is locked in for a significant time period. It could have a significant downward pressure on the development of new properties. With the high cost of housing and the high cost of doing business, it will hurt those wanting to site here.”

Jim Janney, treasurer of O.A.P. Packaging, Inc. in Imperial Beach and a board member of the South County Economic Development Council, said his packaging distribution company is not a major energy consumer. But, he added, “We deal with a large number of businesses from North County to the border, and even across the border.”

With smaller manufacturers, said Janney, “any increase in energy consumption will have a pretty big effect on them, because they don’t have the margins to handle spurts like this.”

“It could have a drastic effect,” he added.

But large or small, he said, manufacturing could leave the San Diego region, “to the border region, to Mexicali, and move their energy requirements around.”

“You and I are going to pay for it one way or another,” Janney said. “Business has to push on costs to the consumer, and someone has to pay in the long run.”

Mitch Mitchell, the vice president of public policy and communications for the San Diego Regional Chamber of Commerce, said: “I believe that San Diego received a low blow from the CPUC. We have endured this energy crisis, and to tack on costs that are not ours is absolutely unacceptable.”


The Buck Stopped There

Mitchell predicts that small to midsized companies will see a $200 a month increase on their bills, “and that’s significant in terms of their operations.”

If the appeal fails, those cost increases could kick in as early as 2005, according to an SDG & E; spokesman.

“The biggest impact will be the large industrial users,” said Mitchell. “How they’ll absorb this additional charge, I’m not certain.”

Michael Morton, the president and chief executive officer of the Brigantine Family of Restaurants, offered a droll response: “Well, I think I just won’t pay my bill.”

His 11 restaurants now eat up between $75,000 and $90,000 per restaurant, per year, on energy costs, most of it for electricity.

“I am always leery of estimates like $200 a month,” he said. “I think it will be a lot more. Refrigeration is a big user of electrical power, the same as air conditioning, and we have lots of both. All restaurants do.”

But, he said, “If it’s only $200, we will take that and go on. It will be just a little less on the bottom line. California is a tough state to do business in. It’s another straw on the camel’s back.”

David Cohn, whose Cohn Restaurant Group in San Diego owns such popular eateries as Corvette Diner, Indigo Grill and Blue Point Coastal Cuisine, among others, sums up the situation this way: “We were hung out to dry.

“I think it’s another piece of bad news for the California business community, in that now we have been paying some of the highest rates in the country and will be paying more,” said Cohn, who has seen his group’s energy costs climb by about a third during the last five years, now ranging from $5,000 to $15,000 a month, depending on the restaurant.

“Restaurants are high users of utilities,” he said. “It’s hard to have people dine in the middle of the night when the rates are lower, or not have the lights or the air conditioning on when they’re needed. It’s hard to cut back on things like that, and we’ve tried to conserve, but there is only so much you can do.

“We know we are way out of balance for what we’re paying for utilities,” he continued. “Our intent is not to pass this along to our guests. This would make us less competitive and affect the guest experience. Certain companies can do that , run a middle-of-the-night shift, but when people dine, it tends to be during peak hours.”

Ray Warren, the general manager of the San Diego Marriott Hotel & Marina, said he didn’t know yet what financial fallout the PUC vote may have on his operations. But he, too, said he’s been investing in energy conservation as an alternative to passing along costs to the guests.

“Any increase in utility rates has a huge impact on big hotels like this,” he said. “We’re continually looking for energy-saving opportunities. In the last three years, we’ve invested millions of dollars in the mechanical and equipment plants to make them more efficient.”

David Cherashore, the executive vice president of Evans Hotels, said his power bill for the Lodge at Torrey Pines this year is approaching about $450,000 , more than twice as much as originally budgeted when the hotel opened in 2002 while the state’s energy crisis was abating.

“Our overall cost of electricity has increased since we opened, mostly due to increasing occupancy and business,” said Cherashore.

But, it’s a big bill.

“It’s killing me,” he said. “It’s so hard to know exactly what will be coming our way. It’s prickly on the PUC level these days. But with residential capped, it doesn’t leave them a lot of room. It appears that it will be coming businesses’ way. It’s another reason Buck Knives has gone to Idaho.”

That venerable company, which had done business in San Diego County for more than a half-century, recently announced its plans to pack up and move to what they consider to be a more business-friendly locale.

“They’re the business poster child,” Cherashore said. “They weren’t the first to leave and they won’t be the last to leave. This will be an additional burden. You can only suck up the costs for so long before you have to pass them on to customers. Where hospitality is concerned, that ultimately puts us at a disadvantage, relative to other regions of the country.”

And, he added, unlike other businesses, most hotels can’t simply pack up 180 rooms and relocate.

John Hawkins, the chairman of the San Diego Regional Chamber of Commerce and president-CEO of Cloud 9 Shuttle, also made reference to Buck Knives.

“Buck Knives left, and not just over workers’ comp,” he said, adding that San Diego on “one level or another is a tough place to do business because of the government. You keep doing stuff like this and it really puts a damper on it. The economic ecosystem can ill afford to lose any businesses, and Buck Knives was a fine company. The lesson doesn’t get lost on other businesses in the state. It’s a cumulative effect. You don’t know what the straw might be for an individual business that breaks its back.”

The San Diego EDC’s Wright agreed.

“It’s not easy for a company to pick up and move,” she said. “We shouldn’t take for granted that companies will stay. For global companies, looking at opportunities in other parts of the world is understandable. But if we lost to a neighboring state because we are not competitive, we are going to lose them.”

Wright said she is especially concerned about the impact on the biotech industry in San Diego.

“For pre-commercial biotechs, every dime that goes into energy costs doesn’t go into research and development,” she said. “And the region is loaded with pre-commercial biotechs. It’s the hope of our economic future. Decisions like this are most unfortunate.”

The chamber’s Mitchell added: “With what’s happening in this city, with the potential of increased water rates, we are not going to be a wonderful destination. The weather is great, but it’s the cost of operations that impact your bottom line. That will be the number one concern.”

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