Calif. Power Woes To Affect Data Centers
Analyst: 15 percent surcharge presents 'new hurdle' for industry

By Rich Miller
CarrierHotels News Staff

Jan. 8, 2000 -- New electricity surcharges in California could "significantly affect the profitability" of data center operators in the state, according to a new report from high-tech investment bank Epoch Partners.
In a research report released this morning, Epoch analysts Mark Langner and Todd Fernandez say colocation providers may experience "negative, but not overwhelming" financial impact from California regulators' decision Friday to allow a 15 percent surcharge for large industrial customers.
The analysts also said that in the current environment, investor fears about power costs may be a bigger concern than the actual financial impact of the rate hikes.
The California Public Utilities Commission (CPUC) voted 5-0 Thursday to allow the state's major utilities - including Edison International, Southern California Edison and PG&E Corp. - to impose a 1-cent-per-kilowatt hour surcharge, which equates to an approximately 15 percent increase for large commercial and industrial customers.
The move followed weeks of power shortages in California, which deregulated the electric power industry two years ago. Major utilities say they are losing money because they now pay more for electricity on the wholesale level than they can charge retail customers.
The Epoch research report estimated that utility costs represent about 35 percent of direct service costs for colocation providers.
"The raising of rates statewide by 15% or even higher in the future could significantly affect the profitability of these businesses," wrote Langner and Fernandez in their analysis. "Combine this with an overall slow down in discretionary technology and corporate spending, and co-location providers are faced with a new hurdle in their race to self-sufficiency."
Providers with a strong presence in the California market include Exodus Communications, Equinix Inc., AboveNet (MetroMedia Fiber), Digital Island, Level 3, AT&T, Global Center (Global Crossing), Genuity and Digex, according to Epoch, a San Francisco-based investment bank.
Epoch estimated last week's rate hikes could have a direct impact of approximately $700,000 in additional costs for Exodus and about $300,000 for Equinix, and similar impact on their competitors. Colocation providers are likely to pass these costs along to customers in the form of increased rates, meaning a "near-term stumble that could easily be recovered later."
"We think this issue is one that greatly impacts not just co-location providers, but broadband service providers and enterprises across the board, and therefore warrants investor monitoring," Epoch concluded. "If rates continue to spiral upward, the result could be co-location rates that limit outsourcing adoption by enterprise customers or stymied growth for service providers that require access to co-location centers in order to deliver services."
Langner and Fernandez expressed concern about how headlines about the California power shortage might affect market sentiment.
" A bigger short-term risk may come from stocks affected by negative media coverage and unfounded 'power cost' fears by already spooked investors," Epoch added, noting that power cost and availability will "be a point of discussion ... in the upcoming round of earnings conference calls and one that will stay on the minds of investors until a resolution is achieved."