ENERGY
CRISIS TO HAVE INDIRECT IMPACT ON REAL ESTATE:CLIENTS MAY FACE HARD CHOICES
LOS
ANGELES, CA -- Though the commercial real estate industry in
Speaking
at a regular meeting of the Los Angeles-based American Industrial Real Estate Association (AIR) at
the downtown Marriott Hotel, Nancy I. Day prefaced her remarks by dispelling
myths about the current energy crisis in California.
“Prices
are not going to come down and the supply is not going to be more plentiful
this year,” she said, noting that blame cannot be placed in one spot, but that
there’s plenty to go around.
Day,
formerly a senior vice president of government and regulatory relations for
New Energy -- the first U.S. non-utility company to engage in retail electricity
sales -- and current chair of the Los Angeles Economic Development Corporation’s
California’s Energy Strategy Team, said an overriding cause, however, was that
California’s utilities were forced to buy energy on the “spot market”, and were
concurrently prohibited from raising prices since 1996.
“In
May of 2000, wholesale prices went through the roof. The rate freeze had been lifted in San Diego, but the legislature
acted quickly to re-freeze rates,” Day said.
“California’s utilities were pushed to bankruptcy largely by these policies
and now the state is the buyer of electricity. Moreover, the Governor has endorsed the proposal
for the state to create a public power authority to construct and operate power
plants. I don’t think they’ll be able
to operate plants any more efficiently than the power companies.”
Day
also underscored that “acts of God” during the past year contributed heavily
to the current crisis. This included
what she called the drought in the Northwest, creating a shortage of hydropower,
and the second hottest summer on record in the Southwest. As a result, imports to California fell and we had to rely on the
antiquated in-state generators.
“At
the same time the western region experienced a 62 percent increase in natural
gas demand. Exacerbating the cost of
available electricity was the escalating price of natural gas, which roughly
tripled between January and September 2000, Day explained.
As
for laying the blame at the feet of deregulation, Day said “deregulation was
not the problem; it was our form of deregulation, notably an insistence that
the utilities buy power on the spot market.” Focusing on the business community,
Day said the only recourse is conservation. “If we can’t reduce our peak demand this summer
we will experience daily blackouts. Every
Californian, resident and business owner alike, must commit to reduce our peak
electricity demand. The single most effective tool will be to reduce air conditioning
load. This can be accomplished by setting the thermostat at 76 degrees or shifting
hours of operation to avoid the 3 p.m. summer peak period,” Day asserted.
She
said businesses are likely to also face operating cost increases, profit declines,
productivity declines, damaged product and equipment, lost market share, and
some business failures. To combat this,
businesses will have to curtail energy use on a programmed basis, or reduce
other costs.
Yet,
Day points out that California is not the only state impacted since the energy
crisis impacts all states in the western region, and all of them have to work
together to solve the problem. She noted
that Montana is the only state in the region that has added generating capacity
in excess of its population growth.
“It
comes down to a matter of supply and demand, weather conditions, old plants,
natural gas demand, price increases and public policy that could be termed ‘California
Dreaming’.
“Infrastructure
is not a sexy political issue until there’s a failure. Now we’ve got a failure
and government is turning to the tooth fairy. Clearly, the success and failure
of California elected officials in developing a competitively-priced and reliable
electricity system will profoundly affect the state’s economy and business decisions
whether to relocate here, stay, expand, or leave,” Day concluded.