POWER CRISIS KEEPS BLEEDING CALIFORNIA TEXTILE FIRMS, RETAILERS
Byline: Kristi Ellis / Kristin Young
LOS ANGELES — California’s relentless energy crisis is draining sales from many retailers across the state and pushing a number of manufacturing plants, particularly textile firms, to the brink of permanent shutdown.
Store executives say they have implemented emergency measures to cut power usage and many have had to evacuate customers in the middle of the day due to rolling blackouts. At least, they say, this crisis did not hit during the holiday shopping period — which was grim enough with the lights on.
Textile firms, teetering under the weight of energy costs that have quadrupled, now face a new problem: The power marketers that hit them with the higher rates now doubt their ability to pay, and are cutting off their credit.
Here, WWD examines these two segments in its continuing coverage of California’s energy problems.
As the state endured its 10th straight day of power shortages Thursday, two large textile companies fought off closure.
Wholesale marketers of natural gas that have slammed textile companies with crippling rate hikes are now beginning to cut off credit. This could lead to cutting of their power altogether, unless the textile houses can find supply on the open market, which is difficult at best.
But many, including Gov. Gray Davis, who declared a state of emergency just a week ago, seemed to breathe a bit easier following his announcement that scores of bids received in a rare state-sponsored power auction on the Internet are significantly lower than expected.
Hailing the bids as the first step toward recovery, the Davis administration avoided the same volatile electricity market that has pushed the state’s two largest utilities — Southern California Edison and Pacific Gas & Electric — into bankruptcy.
Washington also extended a helping hand earlier this week.
The Bush administration, which initially balked at Davis’s requests for federal price caps, stepped in with a pair of emergency orders to keep electricity and natural gas flowing to the state for the next two weeks.
Despite these actions, many officials warned the electricity crunch could continue through summer. Rolling blackouts have already affected half a million businesses, and more outages are expected.
At stake is the entire structure of the local textile and apparel industry, already struggling with skyrocketing rate hikes that are forcing several businesses to pull the plug.
The beleaguered textile industry could soon lose two more players to the crisis in the next two to four weeks, according to Scott Edwards, president of the Association of Textile Dyers, Printers and Finishers of Southern California, which has 35 affiliated members.
In the absence of short-term relief, textile companies — large consumers of natural gas — will begin to topple one at a time, Edwards predicted.
As reported, L.A. Dye & Print Inc., an ATDPF member based in Pico Rivera, Calif., closed its Rainbow Print plant division this month and laid off some 900 employees.
Anaheim Mills Corp. was dropped by its independent marketer in December, and has to find another gas source by mid-February or consider closing, according to Steve Lieberman, vice president of the Anaheim, Calif.-based dye and finishing house.
Its gas bill went from $47,000 in December 1999 to $250,000 last month, Lieberman said. It could hit $500,000 for January, he added, due to penalties associated with using up its reserve and failing to replenish it.
“We were told on Dec. 5 by our marketer that it would not provide gas to us for the month because it was concerned about how we would be able to pay the inflated prices,” Lieberman said.
Company executives contacted Southern California Gas, a state-regulated utility, but the company could not sell them gas as a noncore supplier.
Still looking for a new agent in the wholesale market, the 12-year-old Anaheim Mills is on the brink of closing, Lieberman said.
“We are teetering on how to keep the facility open and keep 100-plus employees, and how to get through this crisis.”
Los Angeles County is home to 312 textile mills and 383 fabric finishing and coating plants, noted Jack Kyser, chief economist for the Los Angeles Economic Development Corp. Textile employment remains the only segment of the state’s apparel industry to report growth in recent years, according to the California Employment Development Department.
Edwards said the fact that natural gas marketers are cutting credit leaves textile firms with few options.
“Because prices have gone up so much — there has been a sixfold increase in wellhead [which is the cost to drill] and transportation costs — many textile companies are no longer credit-worthy to these marketers,” he observed. “A typical large bill has gone from $200,000 to over $1.1 million a month and these [natural gas] marketers are beginning to drop some of the textile companies, citing lack of credit or doubts about ability to pay.”
Natural gas prices, which have quadrupled in the past three months, include the combined wellhead and pipeline prices, which is the cost of transporting the gas.
Edwards has had little success in lobbying the Public Utilities Commission to allow textile firms dropped by independent wholesalers to become customers of the Southern California Gas Co. because the state-regulated supplier is already losing money.
The Southern California Gas procures gas from the same marketers as the textile companies. It can only increase rates with approval from the PUC.
“What was not foreseen with deregulation is that companies that once opted out of [Southern California Gas] would not be able to get back in,” said Edwards. “If a marketer drops you because you can’t handle a sixfold increase or are slow in paying, you have no recourse.”
As textile companies fall one by one, Edwards and his organization expect two scenarios to arise.
“The remaining guys will raise their prices because the customers will have fewer opportunities,” he said. Secondly, “with the rise in prices, there will be less ability for us to compete here and that will hasten the exodus out of the state.”
Anaheim Mills has been forced to charge an energy surcharge to its customers, primarily converters, to offset the skyrocketing natural gas prices.
“That makes all California dyers and finishers noncompetitive with others in the country and outside of the country,” Lieberman said.
Reviewing past records, Lieberman discovered Anaheim Mills paid $4 per therm for the pipeline price in December 1999. Recent gas purchased from another broker through mid-February reached $18 per therm.
By comparison, his East Coast counterparts currently pay a pipeline price of $7.59 per therm, he said.
“East Coast dyers who don’t have a lot of business are coming here and trying to pick up what they can — and they aren’t charging energy surcharges.”
Anaheim recently tacked on a 5 percent energy surcharge to its customers and created a two-tier pricing system: orders requiring the use of more efficient machinery are cheaper versus those needing less-efficient machines. The company has lost some business as a result, he said.
“People in this industry have made money and have equity,” said Lieberman. “In the next two months, they will have to decide whether they will give back everything they have worked for all of their lives or just close their doors.”
Already stinging from a glum holiday season, retailers statewide are contending with an energy crisis threatening more blackouts, significant rate hikes and, inevitably, lost sales.
The crisis is causing Macy’s West “considerable” financial losses, according to Steve Hutchins, vice president of operations for the San Francisco-based chain.
Seven Macy’s stores in Northern California that have contracts with beleaguered Pacific Gas & Electric went black and were evacuated on Jan. 18.
Some 15 Macy’s West stores contracted with Southern California Edison also felt the crunch. All have interruptible contracts with the power company, agreeing to exchange lower electricity rates by voluntarily reducing power usage. The stores were required to do so last week.
The chain is assessing the financial damage incurred on each store.
“I can tell you that had this happened during Christmas, we would have had a serious business loss,” said Hutchins. “And I don’t think we get that business back.”
Economists note it is almost impossible to assess how the crisis is impacting the bottom line of thousands of department and apparel specialty stores here. Anecdotally, the effects range from considerable to barely noticeable.
Since Jan. 18, several major apparel chains reported blackouts in PG&E’s Northern California territories. SCE retailers have been experiencing some power disruptions. Stores had blackouts ranging from 60 to 90 minutes.
Those Los Angeles-area retailers that are customers of the Department of Water and Power, a city plant that did not participate in deregulation and has sufficient power, have not been affected.
Retailers in Beverly Hills and Costa Mesa, home to the South Coast Plaza shopping center, are powered by SCE and have not had blackouts.
Like many state businesses in the last 10 days, 73 Macy’s West stores have been on stage-three alerts: the state’s Independent System Operator is running the power grid with a reserve of less than 1.5 percent.
Mervyn’s California said blackouts threatened a few units last week, but on-site generators kept doors open. A spokeswoman for the Hayward, Calif.-based retailer, had not determined at press time how much the blackouts affected sales.
But the anticipation of a blackout is almost worse, she said.
“This crisis just permeates everything,” she observed. “You never know when something is going to happen.”
Nordstrom said a blackout affected only one of its 38 stores in the state, a Nordstrom Rack in San Jose.
“So far, we haven’t had much of an impact but we are in high alert,” said a spokeswoman for the Seattle-based retailer. “[Gov. Gray Davis] has mentioned an 8 percent conservation goal and we’re striving to meet that.”
Last month, Nordstrom began training programs for sales associates in the event of blackouts. Instruction includes handling manual transactions and how to safely evacuate customers.
Some retailers said they worry less about rolling blackouts and more about expenses related to higher utility rates.
Macy’s West said it is paying 15 percent more in energy costs.
Blair Lambert, chief financial officer of Bebe Stores Inc., is concerned about higher utility rates — anticipating an increase from 10 to 20 percent.
A 90-minute blackout darkened Bebe headquarters in Brisbane, Calif., on Jan 18. Production halted briefly and employees were paid overtime to make up for lost time. The retailer’s 30 California stores were unaffected.
Higher labor costs have also become a consideration. A retailer is burdened with paying employee wages during blackout periods — whether or not those employees are productive — and pay overtime.
“If they keep them on the facility or even near the facility then they are responsible,” said Dean Fryer, a spokesman for the California Department of Industrial Relations.
Prompted by the state’s call for energy conservation, many retailers have significantly reduced their energy consumption.
Macy’s West spent $5 million to reduce use in 2000. The retailer installed energy management systems, air handling systems and efficient lighting. Consumption is down 10 percent.
About 100 Mervyn’s California stores are reducing business-hour lighting by about 50 percent. Significant measures were already instituted last summer when the crisis began to surface. The retailer reduced its floor lighting, turned off air handling units and reduced office lighting and computer displays.
Last week, Gap Inc. sent voice mails and made intercom announcements warning of blackouts. The San Francisco-based retailer said it is gathering information, but so far has received no reports of blackouts at any of its 338 statewide stores. Even its distribution centers in Fresno and Ventura, Calif., were spared, according to a spokesman.
“We offer tips for the stores, office and home,” he said. “We tell them to turn off lights when the stores are closed, use only track lights and display lights when the stores are open and not use lighting during stocking hours in the early morning and late evening.”
Nordstrom has been shutting down equipment, compacting trash once daily instead of twice, and running conveyor belts less at its distribution centers in Newark and Ontario, Calif.
Bill Dombrowski, president of the California Retailers Association, is working overtime on behalf of 9,000 members to come up with voluntary conservation programs. “We’re going to the Independent System Operator and saying, ‘Here’s a pool of megawatts we can save you in a time of crisis. Keep our lights on.”‘
Retailers also expressed concern about the effect of the crisis on consumer confidence. “We’re already seeing declines in spending and this is one more component to further slow consumer spending,” said Bebe’s Lambert.
“When you have the basics, such as electric and gas bills, go up, then you pull back,” said Jack Kyser, chief economist of the Los Angeles Economic Development Corporation. “Last year, times were good, now it’s a major shift. It’s just going to put more pressure on [retailers’] already stressed bottom line.”
But there are optimists.
If it came down to choosing between higher utility rates or unreliable sources of electricity, Brad Williams, a nonpartisan senior economist at the California Legislative Analysts Office in Sacramento, said he’d choose the higher rates.
“Higher prices do leave households with less disposable income and businesses with lower profits. But it’s just one of the many factors affecting the strength of the economy,” Williams said. “I don’t think higher rates would knock [California’s] economic expansion off course.”