Lohe, yeah I did try that but it didn't help
So I have an update. I had given up and when I started the refurb on the 2nd unit I decided to use the power supply it came with (an original) rather than one of my new ones which I had ordered from china. Since 2600 #1 was still on the bench I decided to check it out with this power supply and it actually looked clean. At one point I had tried the power supply I use in my living room on the 2600 I keep and play with ... still fuzzy. That one is also new but a different brand and a bit more expensive.
I measured the voltage coming out of the Chinese ps's and it was a bit over 9volts, pretty steady. Then I measured the voltage coming out of the original power supply and it was like 14! It's labeled as a 9 volt power supply though. The voltage coming out of the voltage regular is unchanged but the voltage going into it is higher. I suspect a capacitor (or something) which is in circuit somewhere before the voltage regulator may be bad but if you pump up the voltage enough the fuzziness goes away.
However I may still end up using this as a parts board because the composite mod is really dark. I've read some posts that say to remove one of the resistors and I did which lightened it up a bit but it's still too dark, in fact so dark that if you go into b&w mode you can't see a thing. If I removed both resistors then it's way too bright (and washed out). The strange thing is before, when I was trying to get rid of the fuzziness I noticed it was dark, removed the one resistor, and it looked fine. I can't explain that.
Anyway, I don't know if I can blame the power supply 100%, since it is putting out the voltage it says it is but the fact remains that if I use an original Atari power supply the fuzziness is gone.