Preferred Issues: Energy Woes<@SM> In Golden State <@SM> May Zap Banks

SAN FRANCISCO — The Federal Reserve Board’s interest rate cut elicited a collective sigh of relief among bank executives across the nation, but that sigh soon turned into a gasp among those with business in California.

And this time you couldn’t blame the dot-coms.

A looming energy crisis that gained momentum over the Christmas holidays has become a very public, high-stakes haggling match and has triggered fears that a local economic slowdown could mitigate the positive effects of the rate’s easing.

That would be a bitter pill for banks big and small here, most of which have benefited from the state’s seemingly unstoppable growth. And unlike another recent cause for worry — the proliferation of young tech companies with quickly disappearing Nasdaq wealth — interest rate actions play only a minor role in the outcome of the state’s energy dilemma.

“If you look at all the economic indicators, the economy is slowing down,” and the slowdown in California “will be compounded by the energy cost rise, particularly in agriculture,” said Iris Chan, executive vice president and head of Wells Fargo & Co.’s commercial banking activities in northern California and the Pacific Northwest.

California’s situation underlines the currently precarious situation banks across the nation face as the Fed tries to engineer a soft landing: Even with positive changes on the national level, regional events can still cause pain.

The state’s growing energy problem “raises costs for both consumers and businesses,” said Jeff Thredgold, an economic consultant to Zions Bancorp of Salt Lake City, which has subsidiaries in several western states, including California. “For those companies with expansion plans, some will ask whether it is a good idea [to do that] in California, given the increased energy costs.”

California’s two largest electric companies, PG&E Corp. and Southern California Edison Co., are lobbying lawmakers to close the gap between what they charge customers and what they pay for wholesale energy by approving a rate increase for consumers and businesses. On Thursday state legislators approved an emergency 90-day hike of 7%-15% for business customers and 9% for residential customers.

But the utilities want more, much more — a 30% price hike. And Thursday’s action gave them another bargaining chip as they argue that they would face bankruptcy without the 30% hike: The credit rating agency Fitch downgraded the utilities’ debts to junk bond status Thursday. Standard & Poor’s dropped them to one rating above non-investment grade Thursday, and Moody’s did the same a day later.

Despite the proliferation of front-page headlines in recent days, the growing problem was hardly a surprise to bankers watching the situation.

Ms. Chan, for one, said that since Wells is a big lender to the energy-hungry agricultural industry, a situation similar to the one the state is facing now is “something we’ve been anticipating since deregulation” of the state’s energy industry and have factored this into credit arrangements with agricultural companies.

Russell Goldsmith, chairman and chief executive officer of $8.8 billion-asset City National Corp. in Los Angeles, said there will “obviously be an impact on consumers and consumer spending as they divert dollars to rising utility bills.” But what is unclear to the bank and its customers alike is the more potentially disruptive issue of whether and how the supply of energy will be impacted, he said.

Even given their advantage in playing up the economic well-being of the state, bankers in California have reason to avoid hitting the panic button.

Yes, anecdotal evidence abounds — starting with the list of Internet start-ups that have folded or significantly pared back their staff — that the economy has veered from its highflying pace.

But the state’s unemployment rate, a key economic indicator, was 4.8% in November, unchanged from the previous month. Payroll employment in nonfarm industries rose by 29,200 jobs in November, to 14,564,200, according to California’s Employment Development Department.

Those numbers have even caused some to question the benefits of the Fed’s rate action on Tuesday, when it lopped 50 basis points off the federal funds rate.

“One concern is that while the rest of the country may have needed a boost, here we have to watch for capacity constraints,” such as high rents and high wages that make job growth more difficult, said Keitaro Matsuda, a senior vice president in economic research at Union Bank of California, the flagship for Unionbancal Corp. of San Francisco.

“We tend to get distracted by short-term fluctuations, but we really shouldn’t lose sight of problems we’ve been dealing with,” such as a skilled labor shortage that is constraining job growth, he said.