http://www.sacbee.com/news/special/power/050401up.html

Expect prices to shoot up, analysts say

By Dale Kasler Bee Staff Writer (Published May 4, 2001)

Gov. Gray Davis' plan for solving the energy crisis relies partly on a striking assumption: that the state's power expenditures will drop dramatically this summer.

But energy-market analysts believe Davis is underestimating the cost of electricity and say the state should brace for a significant run-up in prices during what is likely to be a summer of chronic shortages.

In particular, analysts question Davis' prediction the state will pay an average of $195 a megawatt-hour on the spot market from July to September, a 44 percent reduction from the projected average price for April through June.

"One hundred and ninety-five dollars? Boy, I wish it were true," said Severin Borenstein of the University of California Energy Institute. "My estimate is substantially higher."

Yet Davis' advisers are sticking by their projection of the state's power costs, released Monday to a skeptical Legislature by private consultants to the governor. They say the lower cost estimates reflect expected increases in supplies, the projected impact of California's new conservation program and the state's growing ability to wean itself from the ultra-expensive spot market and buy much of its power through cheaper long-term contracts.

Prices may rise, but spending by the state will decline, starting this summer, they insist.

"This is a very credible plan," said Joseph Fichera, a Wall Street financier advising the governor. "We have done things to mitigate our exposure (to the spot market)."

The credibility of the projections is crucial to the state's plan to sell $10 billion worth of bonds -- a key element of Davis' rescue plan. The bonds would compensate the state for past and future power purchases made on behalf of moribund Southern California Edison and Pacific Gas and Electric Co., with ratepayers ultimately footing the bill. Davis expects the state to spend $18.7 billion on power by June 2002.

But if electricity costs go higher than Davis expects, the strain on the state's budget could worsen, complicating the bond sale. Republican lawmakers, wary of higher costs and distrustful of Davis' projections, have been threatening to block the sale.

Higher-than-expected costs also would increase the likelihood of blackouts; Davis acknowledged last week that the state might stop purchasing electricity at times when prices go out of sight.

And many private-sector experts believe prices will surely rise.

"I see no reason, given what's happened the past six months, that the next six months is going to be dramatically different," said Keith Bailey, chief executive of generator Williams Cos., which sells power to California.

One great unknown is the impact of a "price mitigation" plan approved last week by the Federal Energy Regulatory Commission. Price caps would kick in when California's power reserves are less than 7 percent of demand -- the so-called "power alert" days.

Bailey said the plan would have "a very real effect," but state officials called it inadequate. "More holes than Swiss cheese," Davis said this week.

In Washington, Sen. Dianne Feinstein, D-Calif., and other Western senators tore into FERC Chairman Curtis Hebert Jr. at a hearing on the price mitigation plan. Feinstein wondered aloud why the FERC didn't simply establish a firm ceiling on prices.

As it stands now, California officials have been spending upward of $50 million a day for Edison and PG&E; the tab can fluctuate wildly from day to day as prices shoot up and down. On Thursday, prices in California ranged between $214 and $240 a megawatt-hour, depending on location, for peak-time power, according to industry newsletter Enerfax Daily.

Because summertime demand is typically about 50 percent higher than it is in spring, most analysts expect prices to rise. California electricity futures prices, considered by many to be a decent gauge of where prices are going, are trading at $375 a megawatt-hour for July and $525 for August, Enerfax said.

"I would trust the traders," said Gary Ackerman of the Western Power Trading Forum, an association of power generators. "They've been right more often than the Davis administration."

The Northwest drought, robbing California of cheap hydropower, is a key reason many analysts believe costs won't drop.

"What it all adds up to is much less imported hydroelectric power than we're used to," said Arthur O'Donnell, editor of the California Energy Markets newsletter.

But Davis' consultants say new power is coming from other sources this summer, easing prices. New power plants, scheduled to begin operations this summer, will add 4,500 megawatts of power to California's energy-starved grid, Davis said.

O'Donnell, though, said the new plants won't provide immediate relief. "Power plants, in their start-up phase, frequently have problems," he said.

Another unknown quantity is the fate of hundreds of cogenerators, wind farms and other alternative-energy providers that deliver more than 20 percent of the state's electricity under contract to the utilities.

After going months without payment from PG&E and Edison, scores of these producers shut down in February and March, depriving the state of an estimated 3,000 megawatts of power and contributing mightily to two days of blackouts in March.

About 800 megawatts of power returned to service in April, after PG&E and Edison were ordered to resume paying the generators, the two utilities said.

And Fichera said more will come back starting June 1, when their contracts say they must operate or face financial penalties.

But some generators say they won't produce full throttle this summer. Angered at a new payment schedule that substantially cuts their income, they'll run "the absolute bare minimum" to fulfill their contracts, said Hal Dittmer of Wellhead Electric Co., a small generator that's been shut down.

Representatives of the small generators met with Davis on Thursday, with Davis agreeing to work with them on the possibility of increasing their payments, said generators' attorney Jerry Bloom.

Davis, meanwhile, also is betting that energy usage will fall. Recently approved rate hikes will create "sticker shock" that will cut demand 3 percent, Fichera said. The state's conservation program will contribute an additional 4 percent, he said.

"If we buy less than what (generators) expect, prices drop," Davis said.

Above all, the state has completed or is in final negotiations on a slew of long-term contracts with major generators -- deals that will substantially cut the state's dependence on the spot market and reduce its overall power bill, said Ron Nichols of Navigant Consulting Inc., which developed the power-cost estimates for Davis.

-- Helium (HeliumAvid@yahoo.com), May 05, 2001