CALIF. POWER CRISIS ZAPS TEXTILE INDUSTRY AS COSTS QUADRUPLE
Byline: Kristi Ellis / Katherine Bowers
LOS ANGELES — California’s intensifying energy crunch could fundamentally change the nature of the local textile and apparel industry here, long after the lights are back on for good.
That’s a worst-case scenario, but with Gov. Gray Davis having declared a state of emergency, the state’s apparel and textile industry is struggling with skyrocketing rate hikes — one textile company saw its energy costs go from $250,000 to $1 million a month — that could literally force businesses to pull the plug.
And if the businesses close, or seek other options to produce their orders — offshore, for example — it’s uncertain when or if they would return to their current arrangements, putting thousands of jobs at risk.
Last Thursday night, after rolling blackouts lasting 90 minutes hit San Francisco, Silicon Valley and Sacramento, the State Legislature approved the use of $400 million from an emergency fund to allow the state to purchase electricity on a day-to-day basis until a permanent solution is reached. That, however, will only last several days, and there is no clear estimate on how long the crisis might last.
Both Southern California Edison and Pacific Gas & Electric — the largest utility companies in the state — are near bankruptcy and suppliers will no longer sell to them, spokesmen confirmed.
The governor is pinning his hopes on a state-sponsored power auction this week to secure substantially lower power rates. If that fails, however, the state may be forced back into the same volatile electricity market that has threatened PG&E and SCE.
Without a long-term solution, officials said Friday, the state could spend as much as $5.4 billion in the next 90 days alone.
Even Wall Street has decided the California utilities’ future looks bleak. Bond-rating firms Standard & Poors and Moody’s Investor Service downgraded both utilities’ debt to “junk bond,” or speculative grade, status last week. The downgrades caused both companies to default on millions of dollars of short-term debt.
By Friday, SCE’s stock had plunged to $8.94, from its 52-week high of $30, while PG&E was trading at $10.19, down from $31.
As of press time, a longer-term deal was pending approval that would give the state’s Department of Water Resources the authority to purchase power through long-term contracts for the next five years.
It is unclear whether the state would resell the electricity to the utilities or what rates would be charged, a PG&E spokesman said.
These are last-ditch efforts to bail out a deregulation attempt that is widely considered to have failed miserably.
Several Southern California municipalities, including Los Angeles, declined to participate in deregulation. These cities have their own power plants and sufficient power, according to operators.
It doesn’t look like the state can expect any help from Washington, either. On Thursday, then-President-elect George W. Bush rejected a request for federal price caps by Gov. Davis and instead proposed softening environmental regulations that Bush claimed prevent the state’s power plants from running at full capacity.
Rolling blackouts have affected half a million businesses and there are more to come.
The California Public Utilities Commission passed temporary electricity hikes — ranging from 7 to 15 percent for commercial users — as an emergency measure to allow PG&E and SCE to continue purchasing power. Those hikes mean an additional $200 million in electricity costs for the state’s businesses over a 90-day period, according to the California Energy Commission, the state’s leading power planning agency.
That is, of course, if PG&E and SCE remain in business.
Electrical price hikes compound the problems for companies already struggling with higher natural gas prices. It’s a vicious cycle, since most state power producers are fired by natural gas. As they pay more for gas, they have been forced to charge the embattled utilities more.
The crisis is having a devastating impact on textile dyers, printers and finishers — large consumers of natural gas. These companies have seen natural gas costs more than quadruple in the past three months, according to Scott Edwards, president of the Association of Textile Dyers, Printers and Finishers of Southern California, which has 35 affiliated members.
The combined costs threaten to send some textile companies over the edge.
The crisis has prompted the ATDPF to join in a class-action lawsuit filed against transporters of natural gas in Los Angeles Superior Court on Dec. 15. The antitrust suit charges transporters with restraint of trade, conspiracy to monopolize and unfair competition and business practices.
But that suit could take months to wind its way through the legal system. In the short term, the ATDPF is seeking a grant or low-interest loan from the state, Edwards said.
“We may get through the present crisis to find prices quadruple in the near future,” said Edwards. “You can’t make a business plan based on wide swings in energy prices.”
Natural gas prices include the combined wellhead price, which is the price for drilling gas, and the pipeline price, the cost of transporting the gas.
He said the wellhead price stands at about $9.80 to $10 per therm, compared to $1.80 just three months ago. The pipeline price has also quadrupled and the combined impact has hurt textile firms.
Ilse Metchek, executive director of the California Fashion Association, said many textile companies are now debating whether or not they should temporarily shutter during this business cycle.
“A textile company is essentially a contractor,” said Metchek. “It is contractually obligated to fulfill an order, even if it loses money. But it is not obligated if it closes.”
Metchek warned of major structural changes if textile companies begin to close.
“If manufacturers import fabrics, cut [garments] here and have them sewn in Mexico, they no longer qualify for NAFTA benefits,” she said. “The whole structure of the apparel industry will change if you don’t have a local [textile] industry, which is our saving grace.”
At least one textile company has had to shut a division as a result of natural gas hikes, according to Edwards and other industry sources.
L.A. Dye & Print Inc., an ATDPF member based in Pico Rivera, Calif., closed its Rainbow Print plant division two weeks ago and laid off some 900 employees, Edwards said. Helmut Ackerman, president of of L.A. Dye & Print, could not be reached for comment at press time.
“The energy costs were too much,” said Edwards. “[The owner] was unable to raise prices on contracts he was holding for [retailers] and he couldn’t even break even,” said Edwards, noting Rainbow’s energy costs rose from $250,000 in August and peaked in November at $1 million a month.
Los Angeles County is home to 312 textile mills and 383 fabric finishing and coating plants, according to Jack Kyser, chief economist for the Los Angeles Economic Development Corp. Textile employment in the county has risen to 16,600 in 1999 from 10,400 in 1992, according to the California Employment Development Department — the only segment of the state’s apparel industry to report growth in recent years.
Mills work mostly on a commission basis; they don’t own the gray goods. A retailer such as Wal-Mart commissions a mill to “add value” by dyeing or printing fabrics supplied by retailers.
“The margins are tighter because they are adding value to product and don’t have much of a markup,” said Edwards.
“What is important is that the textile production serving the garment industry in L.A. is a chain of commerce,” he continued. “The knitters are here because the dyers are here. The dyers are here because cutters, sewers and fashion designers are here. If you break the chain, you are breaking the industry.”
Add to these complications the fact that many textile companies have “interruptible rates” — discounted utility rates offered to large consumers in exchange for blackouts when power is in short supply, said Barry Sedlik, Southern California Edison’s manager of economic and business development.
“Many have enjoyed discounted rates for a decade or more and now in a few short months they’ve been interrupted 12 or more times,” Sedlik noted. “Blackouts are very difficult to plan for and cause great disruption for the [textile] industry, which requires continuous production.+ When the power goes out, machinery can be damaged.”
Manufacturers, not as hard hit during the current crisis, have already experienced increases in textile and contracting prices.
Ken Silverman, president and owner of San Francisco City Lights, a contemporary activewear manufacturer, spent the day Thursday waiting for the lights to go out.
With a flashlight in one hand and a battery-operated radio in the other, Silverman prepared for his first blackout in 15 years. His cutting room across the street went down first. It lasted two hours, interrupting the work of 20 cutters.
On this day, Silverman was fortunate. The outages did not hit his main 60,000-square-foot facility and its 100 employees. He sent the computer consultants home.
“It’s like getting ready for an earthquake, which is impossible,” said Silverman. “You have supplies on hand and hope it’s not disastrous.”
The crisis could force him to find another source of fabric production. Deliveries from two textile mills in San Francisco and two in Los Angeles are arriving later and later due to their own energy crises.
“If the lesser of two evils is to work with mills on the East Coast to process garments and produce fabrics, then that is an option I have to set up,” he said. “It’s a disaster.”
Ron Perilman, president and chief executive officer of City Girl, a sportswear manufacturer based in City of Commerce, Calif., reported that he could be forced to raise wholesale prices by 10 percent.
The 65,000-square-foot City Girl facility has monthly energy bills of $5,000, said Perilman. He expects a 6 percent increase to take effect this month.
Plans are under way to start cutting overhead to protect his margins.
“I will look to get rid of any external people who fall into the ‘luxury’ category,” Perilman said, citing assistant designers, merchandisers, interns and shoppers as potential candidates for layoffs. Also, he said that he’ll pursue cheaper fabric suppliers, cut out middlemen and buy directly from fabric mills to lower costs.
Bay Area manufacturers, who have experienced blackouts in past months, are also taking a hit on margins and looking for ways to cut overhead.
San Francisco-based Isda & Co. was forced to close its doors up to nine days last yea,r due to power outages, said Roger Kase, president of the better sportswear company.
He was forced to send his 30 employees home on the blackout days, and lost sales in his retail outlet as well as reorders from retailers who couldn’t get through.
“PG&E has not built the infrastructure to deal with energy use and the placement of energy use, which surged when the dot-coms moved in,” said Kase.
A 20 percent rate hike, effective this month, has forced the company to convert from halogen to fluorescent lighting.
Isda sources all its production in Asia and will not see contracting costs increase. But the company has lost two points on its gross margin, due to the rising costs of energy and raw materials.
“We are still planning the same net margins through savings in other places,” Kase added.
Blanc Noir, a junior streetwear, activewear and outerwear firm based in Novato, Calif., produces most of its sportswear in Botswana, Russia, Macao and China, but the electricity hikes will affect domestic T-shirt production, according to founding owner F.G. Gozashti.
Gozashti noted that domestic fabric prices have already increased an average of 10 to 15 percent due to the energy crisis.
“The direct effect will be absorbing price increases and taking a hit on margins. You can’t go to a department store and tell them that you have to raise prices due to rising energy costs in California. They wouldn’t accept that,” he said. “Ultimately, the quick-turn business will be challenging, if help doesn’t come down the pipeline soon.”
A spokesman from Levis Strauss & Co., which has its headquarters and a contracting base in San Francisco, said the company had not yet experienced blackouts. But, he said, the Business Resumption Team, which usually tackles crisis situations such as fires and earthquakes, is developing a strategy to deal with possible outages.
“If we have a blackout late in the day, we will send employees home. But if it happens earlier, we’ll ask them to vacate the building and prepare to come back,” the spokesman said.
He declined to comment on rate increases.
Contractors, many with limited negotiating power once they have accepted a manufacturer order, are also scrambling to cut overhead to absorb electricity rate increases.
Esther Dunbar, a principal in G.S. Dunbar & Co., a contractor in Montebello, Calif., said the company is already operating as leanly as possible.
The company, which contracts with sportswear manufacturers such as Graff of California and Cee Sportswear, operates 185 machines and pays $3,000 to $4,000 a month for electricity. Dunbar said she expects the first increase of about 15 percent to hit this month.
“If a big increase stops us from using the machines to produce the units, there is no use staying in business,” Dunbar said. “It’s desperation time.”