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Analysis: California's Firms to Lose Power and Money

May 14, 2001

Article by Ian Campbell

WASHINGTON, (UPI) -- Summer in California and across its mountains, deserts, green valleys and metropolises the temperature is rising. The air conditioners will go on and then, here and there, go out. Rolling blackouts will spread across the construction sites, the malls, the dealing rooms, the Internet companies, the homes, pitching America's most populous state into a crisis it has prepared -- but for which it is unprepared.

Electricity is the life blood of the modern economy. How can a mall manage without it? How can businesses work when computers are down. How can the dealing rooms of banks or brokerages trade? How can the Internet economy function when servers are lifeless? The crucible of the embattled new economy faces hemorrhage this summer. Is this a danger to business, or even to health? Is California ready?

According to Ann Banning-Wright, managing director of Syska & Hennessy's OnlinEnvironments, a firm that specializes in keeping essential information technology online, there is "a crisis waiting to happen."

Even short power cuts can be devastating, Banning-Wright says. If a company is warned by the electricity supplier that a power cut is coming, it takes time to power down information systems. Bringing them back online does not tend to go smoothly. "The whole process can take hours," Banning-Wright says.

Losing electricity supply for hours could cost companies hundreds of millions of dollars, she believes. In her view, there are "implications for shareholders." They should be aware that companies headquartered in California or with sizeable operations there may find that their business is damaged seriously this summer by power cuts.

For financial institutions the threats posed seem particularly grave. Trading is an urgent activity. The loss of data feeds and computers would leave traders stranded. For them there is the frightening threat of a day of high market volatility combining with an inability to act. In addition to suffering loss of trading business, financial institutions could lose huge sums through a failure to buy or sell its proprietary positions when markets are moving.

Yet, according to Banning-Wright, most firms are unprepared. They have taken the supply of electricity for granted: not surprisingly, perhaps, given that they live in one of the most advanced states of the world's richest country. But California's unfortunate political choices have brought the state to this, a plight familiar to those in the Third World.

Power cuts may be a threat to the sanity of California's businessmen. But how about to physical health? Banning-Wright says that hospitals are better prepared than firms. They have their own generators for critical units. They test systems regularly, often on a weekly basis.

In homes, too, the health threat seems small. Though the poor health of the elderly or the sick can be exacerbated by excess heat, the dangers seem small, provided the loss of air conditioning is not sustained for long periods. Quality of life will be affected but not, fortunately, life itself.

Financial health seems more at risk. Even medium- and long-term plans are being affected by the prospective power cuts, whose effects are surprisingly far-reaching. For example, the University of Southern California's Lusk Center for Real Estate recently held a two day meeting which concluded that "The ability of a builder or developer to supply electricity ... is becoming as important an issue as providing roads, water, schools and other infrastructure," in the words of Stan Ross, the Lusk Center's chairman.

Yet the problem goes deeper than this, according to the Lusk Center. "Troublesome as it is, the state's energy shortage is only a part of a much larger issue -- California's steep decline in infrastructure spending," according to Stuart Gabriel, executive director of the center. Gabriel says that infrastructure spending has fallen from about 20 percent of the state's gross domestic product in the 1960s to about 2 percent now. "California currently ranks last among the 50 states in per-capita spending on infrastructure," he adds.

California's mess is political. The booming state that should have been investing most in infrastructure has been investing least. Worthy environmental goals have stood in the way of power generation. Water conservation and supply has also been lacking. A botched deregulation of the electricity market that condemned utilities to bankruptcy when wholesale prices rose has brought the state close to energy disaster. The Internet bubble has burst, leaving property prices inflated in the Bay Area, San Diego and Silicon Valley.

Fast-growing California's success story is unraveling. Now this capital of the modern is exposed to nature. A hot summer will bring the state and its companies down.