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Date: Mon, 7 Aug 2000 01:19:00 -0700 (PDT)
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Subject: DJ BIG PICTURE: Wider Econ Risks In California's Power Woes
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---------------------- Forwarded by Carla Hoffman/PDX/ECT on 08/07/2000 08:24 
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	Enron Capital & Trade Resources Corp.
	
	From:  "Pergher, Gunther" <Gunther.Pergher@dowjones.com>                      
     08/07/2000 06:46 AM
	

To: "Golden, Mark" <Mark.Golden@dowjones.com>, "Kim, Cheryl" 
<Cheryl.Kim@dowjones.com>, "Leopold, Jason" <Jason.Leopold@dowjones.com>
cc:  (bcc: Carla Hoffman/PDX/ECT)
Subject: DJ BIG PICTURE: Wider Econ Risks In California's Power Woes 



13:26 GMT  7 August 2000
 =DJ BIG PICTURE: Wider Econ Risks In California's Power Woes


    By John McAuley
    Of DOW JONES NEWSWIRES


 NEW YORK (Dow Jones)--Hot weather and a still-robust economy have
intensified
 electricity demand in the face of drum-tight power supplies in California,
the nation's
 most populous - and, in economic terms, most important - state.

 The resultant rolling "brown outs" and the potential for blackouts in the
future could have
 a noticeable empirical and real impact on industrial production in
California and even in
 the national statistics. Indeed, the impact is likely to be greatest in the
highest
 value-added sectors: computers and computer components, two industries that
have
 been a key engine of U.S. growth.

 Not only that, electricity generation is an important proxy in the Federal
Reserve's
 estimation of industrial production. So, the measurement of statistics
could be directly
 affected.

 About half of the industrial output contained in the industrial production
index is
 compiled on the basis of actual output volumes - tons of steel, boardfeet
of lumber, or
 millions of autos assembled, etc. For other forms of output, accounting for
about a
 quarter of the index, contributions to total production are estimated based
on hours
 worked data, with the implicit assumption that productivity - or the rate
of real output per
 labor hour - doesn't change much over short periods of time in these
industries. But the
 remainder of the index, about 26% according to a Fed economist, is
estimated using
 electricity generation measures.

 For this purpose, electricity generation is itself estimated from measures
of electric
 power usage by industry. Here, as with productivity, the technical
coefficient, or the
 amount of electricity input per unit of output, is assumed to be constant
over relatively
 long periods.


         As Usual, Things Are Different In California


 California power companies, as part of the deregulation of the electric
power industry,
 offer their business customers "interruptible rate plans". That means that
for a
 discounted rate, customers "voluntarily" allow the power company to
interrupt their
 power supply in times of peak demand.

 Too bad.

 The heat of summer combined with continuing strong economic activity has,
in fact,
 resulted in widespread interruptions throughout California.

 And there is a precedent for how such interruptions can have both a
statistical and real
 impact on production: the San Francisco earthquake of October 1989.

 That quake disrupted electricity generation, particularly south of the city
in Silicon
 Valley. Largely as a result of that disruption, national industrial
production declined by
 0.5% (0.6% in manufacturing) in October 1989.

 The computer and semiconductor chip producers in Silicon Valley and
elsewhere in the
 state are very heavy users of electricity. It is reasonable to expect that
their total
 consumption of electricity, and their output, have skyrocketed since 1989.

 This industry has a twofold importance to the rest of the national economy.


 First, chips are essential inputs to the production of other industries
from "smart chips"
 in cars to central processing units for computers. Thus, a bottleneck in
chip supplies
 because of electricity interruptions could have ripple effects beyond
California.

 Second, chip production is among the highest value-added activities in the
U.S.
 economy - each stage of production adds significantly to the value of total
output. This
 means that the specific shock impact on this industry could have a greatly
magnified
 effect on overall economic activity.

 The usage is not confined to chip production, however. An extensive range
of other
 California-based industries - from chemicals to textiles - have intensive
electricity usage
 in their production.

 Their production will be estimated lower because of the reduction in
electricity. And in
 fact, real production will be lowered by a reduced electricity input.

 Ironically, these interruptions could complement the Fed's efforts to slow
economic
 activity and take some of the pressure off for further rate increases. What
infuriates
 Californians might actually be a welcome development for the rest of us.

    -By John McAuley, Dow Jones Newswires, 201-938-4425
    john.mcauley@dowjones.com


 Copyright (c) 2000, Dow Jones & Company Inc

G_nther A. Pergher
Senior Analyst
Dow Jones & Company Inc.
Tel.  609.520.7067
Fax. 609.452.3531

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