- The Washington Times - Friday, January 26, 2001

Federal Reserve Chairman Alan Greenspan said California's electricity crisis is hurting the nation's economy and blamed the state's botched regulatory policies for creating the shortages that have led to rolling blackouts there.
"Clearly, California is a very important part of the American economy. It is roughly a sixth, and it's scarcely credible that you can have a major economic problem in California which does not feed to the rest of the 49 states," he told the Senate Budget Committee yesterday.
Mr. Greenspan agreed with President Bush that in California and elsewhere, the failure to develop energy sources in the last decade has led to shortages that have driven up prices for oil and natural gas to record levels and are hampering economic growth.
"The problems that we are now seeing in the energy area, specifically, obviously natural gas around the country and very obviously California's electric power production are not aberrations but … a significant problem that this country is going to have to address and address rather quickly."
California's problems developed because it went only halfway toward deregulating electricity prices, he said.
The state forced utilities to sell most of their generating assets and then buy power in the spot market driving wholesale prices to astronomical highs in the past year. But the utilities were not allowed to increase the rates they charge consumers and now are essentially bankrupt.
When the utilities were regulated, they were allowed to charge customers not only for their wholesale power costs, but also for the expense of investing in new plants, Mr. Greenspan said. Now they can no longer cover either.
The result was that investment in new power plants and facilities virtually stopped, despite rapidly growing demand for electricity. California's strict environmental laws and difficulty in getting communities to permit the location of plants nearby also stifled investment, he said.
"If you had a centrally planned economy, it may be inefficient, but it would produce power," he said. "If you have a free-market system, it will produce power." It's the "mix of the two" that's undesirable.
"The only way to resolve the issue is to get more capacity in place," he said. "Pending that, you … find a means of reducing demand ….
"At the end of the day, you ration through brownouts or through blackouts."

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