- The Washington Times - Wednesday, May 16, 2001

The extensive blackouts and soaring power prices that are plaguing California threaten to send the state's economy into recession and pose a danger to the still-fragile national economy.

Power outages two days last week, brought on by an early heat wave, gave a glimpse of the more than 30 days of rolling blackouts that California officials are predicting will occur this summer as generating capacity falls short of peak power demand amid soaring temperatures.

"A long, hot summer likely would trigger a renewed surge in energy prices that could be the last straw" for the state's deteriorating economy, said Richard Berner, economist with Morgan Stanley Dean Witter. He says the U.S. and California economy fell into recession in March partly under the weight of the energy woes.

The stultifying combination of high energy prices, bottlenecks that are precipitating blackouts, and a major slump in the information technology sector means the downturn in California will be more severe than the rest of the country, he said.

California's political leaders have sheltered most residents from major increases in electricity rates, a move that increases the likelihood of blackouts because it leaves consumers with little incentive to turn off electrical devices when they are not using them.

But the state's Public Utilities Commission last week proposed huge rate increases of 50 percent or more on businesses, manufacturers and farmers that could cripple the economy, Mr. Berner said.

"Higher electricity costs for businesses will squeeze profit margins and likely trigger cutbacks in capital spending and payrolls, hurting the very technology firms that are so important to the state's prosperity," he said.

Those companies are not immune from the blackouts, which also will hurt business. A study released by a consortium of California businesses last week estimated that the blackouts will cut output by $22 billion and result in the loss of 135,000 jobs this summer.

"The longer this continues the greater our risk of a job-killing recession gripping California," said Jack M. Stewart, president of the California Manufacturers and Technology Association. He called the rate increases "a body blow for businesses that employ Californians and are facing numerous power outages this summer."

The study, by AUS Consulting of New Jersey, assumes California residents and businesses will endure 110 hours of power interruptions over the next four or five months, or 20 hours per customer, cutting output by $6.8 billion.

The ripple effect would produce another $14.9 billion lost sales of goods and services and precipitate a $4.6 billion cut in household income.

Electricity rate increases may cause manufacturers to curtail or shut down operations, causing further economic damage. A 50 percent increase would result in a $500 million output loss in the San Francisco Bay area alone, the study said.

California's finances also have been hit by the energy crisis, since the state earlier this year stepped in to purchase power on behalf of its failing utilities. The state is spending $70 million a day on power purchases and has depleted $5 billion of its budget surplus, leading to a downgrade of its high credit rating by two major agencies.

The energy woes have tarnished the state's reputation among businesses, some of which are planning to move out of state.

Silicon Valley executives, whose companies must have reliable electricity, joke frequently about the "Third World power" system in the state and last week lashed out against politicians who targeted rate increases on business.

"They may think that by shielding residential customers from paying a proportionate share that they are doing everyone a favor," said Carl Guardino, president of the Silicon Valley Manufacturing Group. "But it's pretty hard to pay your bills when a disproportionate plan forces your employer out of business or out of California."

Nearly a dozen states have increased their efforts to lure California businesses, sending trinkets like glow-in-the-dark mouse pads and flashlights and promising ample energy and lower costs.

Standard & Poor's Corp., in slashing the state's credit ratings last month, noted that a business exodus prompted by the power problems could further depress the California economy.

While California's problems ordinarily would not be enough in themselves to drag the rest of the U.S. economy into recession, they do pose a danger because of the weak state of the economy after a year of dramatic slowdown, Mr. Berner said.

"It is certainly the kind of thing that could be catalytic in causing a more pronounced downturn," he said. "The U.S. economy in my view has slowed down to the point it is vulnerable to unexpected shocks." Economic growth slowed to a 2 percent annual rate in the first quarter of this year.

More important to health of the national economy are fast-rising gasoline prices, he said. The average price of a gallon of self-serve, regular jumped to $1.71 a gallon in the District this week. Pump prices are more than $2 a gallon in Chicago, California and some other areas.

High gas prices zap consumers' pocketbooks and leave them with less money to spend on other items as they raise the cost of living and dampen consumer confidence. The high cost of energy also puts further pressure on businesses already hurt by declining sales.

A poll last week by USA Today found that 60 percent of Americans plan to drive less this summer because of high gas prices.

"Gasoline prices going up a lot now comes against the setting of these potential energy problems in California," Mr. Berner said, raising the possibility of a "supply shock" that could throw the national economy into recession.

Neal Soss, economist with Credit Suisse First Boston, agreed that rising gasoline prices are a "downside risk" for the economy, having already drained $37 billion from consumers' purchasing power last year.

But he was optimistic that a $100 billion tax cut that Congress is rushing to pass this year will come in time to cushion the latest gasoline price shock and prevent the economy from falling into recession.


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