Vegas casinos vulnerable to Calif. energy shortage

David Strow

Monday, Jan. 22, 2001 | 11:25 a.m.

If the lights keep going out in California, will anyone come to Las Vegas?

It's a question that's increasingly starting to concern gaming operators and analysts alike. As Californians suffer through forced blackouts as electricity goes scarce -- and huge rate hikes grow increasingly likely -- it's feared Nevada's gaming industry could feel the pinch, though casino operators say no impact has been felt yet.

"We know that California is our No. 1 feeder market, supplying 30 percent of our visitors," said Terry Jicinsky, manager of research at the Las Vegas Convention and Visitors Authority. "There's no empirical data that can indicate a specific impact, but any environmental or economic challenge in California has the potential to affect our visitation."

The LVCVA is predicting a 2 percent increase in Las Vegas visitation in 2001, down from 6 percent in 2000. If the California energy crisis lasts long enough and is severe enough, Jickinsky said it is possible Las Vegas could actually post a visitor decline in 2001.

Investors have already grown edgy about Las Vegas' prospects going into 2001, primarily because of fears of an economic slowdown and the emergence of Indian gaming in California. No one's ready to predict how much California's energy problems could compound that problem.

"It's one more layer on the cake here," said Todd Jordan, gaming analyst with Wasserstein Perella Securities. "There are a lot of things to be concerned about, if you're a Las Vegas operator at this point. This is not the most significant.

"I wouldn't necessarily call this a disaster for Las Vegas, but I don't think it's a positive."

Two issues are of primary concern right now. The first are rate hikes. If rates escalate drastically in California, the discretionary income of California residents would fall -- and that would mean less dollars that could be spent on things like a Las Vegas vacation.

Rate hikes can also have a ripple effect. If businesses are charged higher rates for electricity, prices have a tendency to rise, and that can cut discretionary income further.

"All other factors being equal, if power charges (for a homeowner) go from $250 to $600 a month, you'll have less disposable income," said Dave Ehlers, chairman of Las Vegas Investment Advisors. "It's not going to eliminate disposable income, but California will have less disposable income. Align that with the fact that (Californians) have other choices with Indian casinos there, combine that with the fact that this (Interstate 15) isn't a very good road they're traveling on, and the fact (bankrupt) National (Airlines) may leave us, and the outlook for these companies isn't very good."

A second concern centers around the possibility of continuing blackouts. If the power goes out at a home in California, will that homeowner be willing to leave to come to Las Vegas? An executive with Mandalay Resort Group said his company is watching that issue with concern.

"If you know there's going to be a scheduled blackout, most prudent people wouldn't want to leave their home for any extended length of time," said John Marz, vice president of marketing for Mandalay Resort Group. "The (increased electricity) costs aren't as concerning as the blackouts.

"If they are concerned about energy costs, then there are marketing initiatives you can put into place to alleviate that concern and bring them here. But if they're concerned about a blackout, there isn't much you can do."

A counter-theory is that Californians may actually be encouraged to leave if there are blackouts, though no one's seen evidence of that yet.

"If the power's off at home, you may want to go where there is power," said Alan Feldman, spokesman for MGM MIRAGE, who said he didn't know which theory is more likely.

No matter which theory is true, Feldman believes Las Vegas stands to fare better than Reno if the California power crisis becomes a factor affecting vacations. Most of the blackouts have been occurring in Northern California, not Southern California, he noted. Southern California is the largest single market for Las Vegas.

"(If blackouts continue), Reno has a very strong chance to be affected," Feldman said. "Combined with Indian gaming and the weather this time of year ... this doesn't help (Reno's) case."

But market diversification should help Las Vegas weather this problem, he said.

"I don't see it having as big an impact (on Las Vegas)," Feldman said. "Our market is spread among so many other places. The impact (of California) on Las Vegas has been on a continuous decline over the last 10 years. That was done specifically so we wouldn't be so reliant on Southern California."

Las Vegas' competitive advantage now is that most of its California business comes from the southern part of the state, and that area hasn't been hit by the blackouts. The state's distribution system makes it easier to deliver electricity to Southern California, and Los Angeles is served by a municipal power system that has a surplus of electricity.

"Considering Los Angeles is a dominant feeder market, that's a net positive for Las Vegas," said Andrew Zarnett, gaming analyst with Deutsche Banc Alex. Brown.

"The effect (on Las Vegas) will be nominal, unless this problem gets worse than it is today," Zarnett added. "It is a very serious problem investors need to be aware of, but for now, the impact to Las Vegas should be very small."

But there's a final problem Las Vegas needs to be aware of -- the possibility that the crisis could result in gasoline shortages both in Nevada and California.

"(Californians) have to have enough gas to get home," Marz said. "That's a concern. Your guess is as good as mine ... I don't think there's a way of determining how this could impact us."