UCLA Forecast Predicts CA Recession; Blames Power Crisis

With politicians and economists pointing fingers in various directions to attach responsibility for California's electricity problems, the quarterly UCLA business school economic forecast last Thursday predicted a recession for the state, particularly in the north, driven largely by the electricity crisis. A separate analysis by the university and Cambridge Energy Research Associates (CERA) looked at two scenarios, advocating perhaps a different course than the one charted currently by the state.

Along with the end of "the Internet rush" that drove the state's economic growth for five years prior to late last year, the electricity problems have caused the state's economy to wind down, according to Dr. Edward Leamer, an economics professor and head of the UCLA forecast. "We still expect sluggish growth through the rest of the year, and two quarters of negative growth beginning no later than the first quarter of 2002," Leamer said. "Although the interest and tax-rate cuts may help the train move faster, there is no light at the end of the tunnel."

Former Gov. Pete Wilson, whose administration pushed through the 1996 electricity industry restructuring law; current state Controller Kathleen Connell, a relentless critic of Gov. Gray Davis's handling of the electricity situation; and a maverick economist from a neighboring University of California campus in Irvine, Peter Navarro, all had different criticisms and potential solutions to the negative economic impact from the power crisis.

Wilson said Davis has made a "problem into a crisis," and the continuing threats from elected officials in Sacramento are having a "chilling effect" on the economy and prospect for future private investment in energy infrastructure. Wilson strongly argued that the 1996 electricity law and the subsequent 1998 defeat of an anti-restructuring ballot initiative sparked all of the power plant development that is now driving 16 separate proposals for new power plants that totals about 10,000 MW.

State Controller Connell, supported by another speaker from the Federal Reserve Board, San Francisco, Fred Furlong, said the long-term power deals impose "a long-term penalty" on state residents to spare them the short-term pain of the wholesale price spikes.

"State power buying will haunt taxpayers for years to come," Connell said, noting that the contracts are "mortgaging the state's future under a mountain of debt." With a state Superior Court judge's order that the full content of the contracts now be made public, Connell said they will be displayed in full detail on the Controller's web site starting Thursday, July 5. "All of this tells me that the problem is not going to be resolved in the near future," she said. "It is a problem of supply shortage, and is further compounded now because we have indebted the general fund to continue to make energy purchases."

As a probable opponent of Davis for the Democratic nomination for governor, Connell expressed concern about California's economy losing its momentum and that a "tremendous revenue shortfall" will hit the state budget next year.

Longer term, she said natural gas is likely to be "the next energy crisis," and she said the state needs to aggressively permit proposed new pipeline extensions, such as Kern River and what she called the "extension of the (proposed) Alaskan gas pipeline."

The Federal Reserve Board's Furlong said the gap between wholesale and retail energy prices should widen again this summer. He thinks the impact on natural gas prices for this year overall probably will be what it was for the electricity last year.

Economist Navarro criticized both governors, Wilson and Davis, for flaws in the state restructuring plan and then missteps by the current governor in responding to those flaws. At the heart of the problem, he said, is the "systematic withholding from the market of supplies" by merchant generators-particularly this past winter when the state experienced rolling blackouts with peak demand far below the summer 45,000 MW levels. Navarro strongly criticized the proposals from Wilson, Furlong and the CERA analysis that advocate raising rates to give retail customers true price signals.

"Gov. Davis knows that that is bad politics, but I maintain to you that it is bad economics," he said. "The cost of generating power in the most efficient plants is 3 to 4 cents (per kilowatt-hour), and in plants generally between a nickel and a dime, and right now the average price in the spot market is 35 to 40 cents, and it goes up above a dollar every time we have rolling blackouts.

"If the policy is to raise (retail) rates to the 40-cent level, you are ratifying a huge transfer of wealth from the consumers to the few shareholders in these companies, or should you have a government policy to bring those prices down closer to the cost of producing power? The answer to this crisis all along has been making sure that the (wholesale) market delivers a competitive price. What the 1996 (California electricity) law did was simply turn a regulated monopoly into an unregulated cartel."

The UCLA-CERA report, "Will the California Energy Crisis Derail the State's Economy," doesn't answer the rhetorical question as much as offering alternative views of the state's economy as a result of the energy crisis. It looks at market-based and government-based solutions, and leaves the impression that the market-based one is the better, but the less likely, path because it would remove retail rate caps.

Theoretically, however, it notes that next year and beyond, the ongoing path of state power purchasing and greater ownership of the energy infrastructure will lead to much higher retail electricity prices because of the long-term period during which consumer/taxpayers will being paying for the huge public bond offering.

Again on a theoretical basis, the CERA analysis indicates that market-based approaches would lower this year's estimated blackout hours from 112 to 12. "The choice is between paying now or paying much more later (state-takes-charge approach)," said the UCLA-CERA researchers. "If the state takes over, the energy crisis lowers the California rate of growth in 2001 by .7%, compared to 1.5% under market-based electricity prices."

©Copyright 2001 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.