In the News: Recent Developments

Tuesday, May 29, 2001

Gov. Davis’s Advisers Warn of Recession In California Without Electricity Price Caps

By John R. Emshwiller Staff Reporter of The Wall Street Journal

On the eve of a meeting today between President George Bush and California Gov. Gray Davis, top advisers to the governor said the state could be pushed into recession unless the federal government imposes temporary price caps to contain soaring wholesale electricity costs. President Bush has consistently opposed price caps.The governor’s team called a Memorial Day news conference to highlight what they saw as the dangers to the economy of the state, and possibly the nation, from the tens of billions of dollars being spent this year to purchase electricity. The governor’s aides estimated that statewide, wholesale electricity purchases this year could hit $50 billion compared with about $7 billion in 1999. Some estimates for this year’s power expenditures are even higher. If California were a separate nation, “an energy shock of that magnitude would be expected to cause a significant recession,” said Alan Blinder, a former vice chairman of the Federal Reserve, at the conference.

While being part of a broader national economy could somewhat mitigate the impact, the higher power costs are “a recipe for stagflation in California,” added Mr. Blinder. “Stagflation” is a term that refers to stagnant economic conditions and inflation — a condition that struck the nation when energy prices soared in the 1970s.Though the advisers painted perhaps the dreariest outlook yet to come from the governor’s office, they said that the Davis plan for financing the state’s electricity purchases remains intact. As reported, the state plans to sell about $12.5 billion in bonds later this year. The state has been purchasing electricity since January, when its failed utility-deregulation plan left California’s two biggest utilities financially unable to continue buying power.If price caps were instituted, the state might have to borrow less money than anticipated or at least face a decreased danger of having to borrow more if the power situation gets worse, said Joseph Fichera, chief executive of New York-based Saber Partners LLC and an adviser to Mr. Davis.

The governor plans to press his case for price caps over the next six to 18 months, as supplies are increased with new power plants due to come into operation, the advisers said. However, Mr. Bush and other federal officials have repeatedly said that they believe price caps would be counterproductive and discourage the building of new power plants.

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