- The Washington Times - Thursday, December 28, 2000

Cold weather pushed the price of natural gas used by most Americans to heat their homes to a record high yesterday in a shock economists say is taking a substantial bite out of consumers' pocketbooks and economic growth.
The price of gas surged to more than $10 per million British thermal units (BTUs) in trading on the New York Mercantile Exchange, more than four times above where it was a year ago. The jump in gas prices is expected to increase the average home heating bill by more than 50 percent this winter to more than $1,000. It also is driving up electricity prices.
Economists say the unprecedented jump in gas prices, which is being fueled by cold weather nationwide and increased demand for the fuel by utilities, more than offsets the impact of a recent decline in the price of crude oil on the economy and is hitting consumers where it hurts.
"We estimate that this shock will deliver a $20 billion blow to real income," while raising inflation by a half percent and cutting economic growth by a full percentage point in the months ahead, said Jan Hatzuis, economist with Goldman Sachs & Co. in New York.
Coming at a time when consumers already are financially stretched with a load of debt and spending growth is losing momentum, "the gas shock over the winter adds to the risks of a sharp economic slowdown," she said.
An economic report released yesterday predicted a major slowdown in the first half of next year. The Index of Leading Economic Indicators declined 0.2 percent in November and has increased in only one month since March, the Conference Board in New York said.
Ed Yardeni, economist with Deutsche Bank Alex. Brown in New York, said the indicator report will decline again this month and is signaling danger. "The Federal Reserve needs to ease [interest rates] to avoid a recession," he said.
The news about astronomically high gas prices came as President Clinton met with Gov. Gray Davis about the electricity crisis in California, which is due partly to the high gas prices. A big leap in California utilities' demand for gas has played a big role in raising prices.
Mr. Davis said he asked Mr. Clinton to extend an order the administration issued Dec. 14 requiring out-of-state power companies to supply California's power-thirsty utilities with electricity to avoid rolling blackouts.
Shortly after the meeting, the Energy Department announced it would extend the order, which was to expire at midnight, until Jan. 5.
"I remain concerned that the reliability of the grid in California may be endangered," Energy Secretary Bill Richardson said. But he added, "Electricity generators and marketers continue to express reluctance to sell power in the state given reports about the financial status of California's investor-owned utilities."
Mr. Richardson has cautioned that "we cannot continue this indefinitely it is not the true long-term solution, as market forces should dictate prices."
That is a message that Mr. Davis has gotten loud and clear in meetings with leaders in Washington this week. Before seeking out Mr. Clinton's advice and assistance, Mr. Davis on Tuesday met with Federal Reserve Chairman Alan Greenspan and Treasury Secretary Lawrence H. Summers.
The governor faces a tough decision next month whether to allow California's debt-strapped utilities to pass on the cost of their gas bills to consumers. That would raise California electricity bills to nearly twice the national average and is being fought by California consumer groups.
Washington policy-makers are counseling, however, that Mr. Davis must permit rate increases to prevent utilities from filing for bankruptcy and defaulting on their debt. Such a crisis would quickly envelop the rest of the country, analysts say.
Mr. Davis said he is moving to avoid an emergency in California that spills over and hurts the rest of the nation. "I'm confident with more conservation and more supply, we will see this problem through," he said.
But he said he wants the utilities and power generators to absorb some of the costs. "The consumers will have to pay some of the costs, not all of the costs," Mr. Davis told CNN's "Inside Politics" last night.
Also last night, two California utilities formally asked the state's Public Utilities Commission at a public hearing in San Francisco to lift a three-year rate freeze that was to have lasted until 2002.
Pacific Gas and Electric Co. and Southern California Edison Co. revealed that they want to raise electricity rates by 26 percent and 30 percent, respectively.
"We are out of credit and we are close to being out of cash. People will not lend us money to buy power. You need to understand that," PG&E; General Counsel Roger Peters told the panel.
The PUC ruled last week that electricity rates should rise and will decide on the amount of the rate increase on Jan. 4.
California's woes are a major reason economists predict the price of natural gas for all Americans will stay high. The state depends heavily on natural gas because its utilities must use the fuel to meet environmental rules.
"The required increase in natural gas usage is going to keep upward pressure on natural gas prices," said David A. Wyss, chief economist of Standard & Poor's DRI in Boston.
Even when the cold weather passes this spring, Mr. Wyss said, natural gas prices will stay above $5 per BTU more than double last year's rate.
Mr. Wyss agreed that gas and oil prices have raised next year's recession risk to 35 percent but said he expects the economy to muddle through without a downturn.

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