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Markets indicate even higher prices for summer power

STATE'S COSTS CONTINUE TO MOUNT BY JOHN WOOLFOLK AND JENNIFER BJORHUS Mercury News

With severe power shortages predicted for the West, energy traders are already selling this summer's electricity at prices that far exceed previous years and put California's power bill on an alarming trajectory.

August contracts in Western markets are now trading for as much as $750 per megawatt-hour -- five times last August's average price of $147 and well above the August 1999 average price of $40.

``There's really no limit that I can see,'' said Stanford University economist Frank Wolak, chief market analyst for the state's main power grid, adding that without some price control, ``the sky's the limit this summer.''

No one knows just what an August day will cost California for power. But the arcane world of energy futures trading hints at what California may be paying on the spot market, where about 10 percent of the state's power is being bought to make up for daily shortfalls. If today's market activity is any indication, it suggests the bidding on electricity this summer, when demand surges, could get worse than during the most critical shortages this past winter.

``It's going to be an ugly summer,'' predicted Dan Pigeon, director of wholesale marketing for Calgary-based TransAlta Energy Marketing.

California's mounting daily power costs have been a growing concern since mid-January when the state stepped in to buy electricity for its ailing private utilities, Pacific Gas & Electric Co. and Southern California Edison. The two companies are unable to buy power because of the massive debt they built up buying power for more than they can charge their 9 million customers.

The state is buying more than a third of the utilities' electricity with no end in sight. PG&E has filed for bankruptcy and a proposed deal with Edison is months from final approval.

Higher bill certain

It's hard to say what California's power cost could be this year because state officials have refused to disclose what they are paying, citing concerns about negotiating advantage.

But with market prices spiraling, experts say this year's bill is sure to be higher than expected. Average spot prices today, in what is normally a cheap month, are already an astronomical $315 per megawatt-hour, more than 10 times the average over the past three years.

A megawatt-hour, the standard wholesale unit of electricity, powers about 1,000 homes for an hour. California consumes 18 million megawatt-hours in a summer month.

``The run-up in prices bodes poorly for the state in a big way,'' said Michael Shames, executive director of the Utility Consumers' Action Network in San Diego. ``The dollars we're talking about are huge.''

The total cost of power in California was $7 billion in 1999 and $27 billion last year. Shames expects the state to spend $50 billion this year, while Wolak says the tab will more likely be $70 billion.

State officials have put the cost at up to $27 billion for 18 months, but Severin Borenstein, director of the University of California Energy Institute, and other market watchers doubt state officials are including the growing costs of summer power contracts.

The state is believed to be paying about $50 million a day for power now, but if Shames or Wolak are right, that could put the average cost at $137 million to $192 million a day.

Last-minute purchases

State efforts to secure cheap power contracts for this summer and beyond have fallen short, covering just a third of the power it needs. The rest must be bought in expensive day-ahead and spot markets.

It's unclear whether the state's $50 million daily estimate even includes last-minute spot market buys, which are handled by the transmission grid operator. State officials refused to discuss the matter.

But experts say it's unlikely the state is counting those costs, which now are running about $20 million a day.

``This is additional money you're paying,'' Wolak said.

What has Wolak and other experts more worried, however, is the growing cost of electricity futures for this summer.

Futures are contracts reserving the right to buy a commodity such as electricity at a set price on a later date. Like stocks and bonds, they are traded on several exchanges, including the New York Mercantile Exchange.

``Futures prices reflect people's best estimate of what the spot price would be at that time,'' Wolak said.

Energy companies that trade electricity futures are loath to talk about the high summer prices because of accusations about price gouging.

Mark Palmer, spokesman for Texas-based Enron Corp., said his company is paying high prices, too. ``If we're buying for $750, we're going to turn around and try to sell at $751,'' he said. ``The spreads between the prices at which we're buying and we're selling are tiny.''

Experts, however, warn that prices could go higher.

In December, when California went to Stage 3 alerts, Pigeon of TransAlta Energy Marketing saw spot prices soar. ``There was a weekend when our coal plant tripped off, we were buying at $5,000 an hour,'' he said.

If California is on the brink of blackouts for days, as expected, prices will ``jump like crazy,'' said Marshall Clark, who manages natural gas contracts for the state. ``The market has just gotten more riskier, much more complex.''

The state's neighbors are facing the same high-priced contracts for summer deliveries.

``It's not just a California problem,'' said Tom Williams, spokesman for Duke Energy North America. ``This is a Western crisis.''

Blackout showdown

With federal regulators still resisting the regional wholesale price caps state leaders hope for, market experts and consumers suggest a more radical approach: refusing to pay the higher prices, even if it means blackouts.

``It would be a game of chicken,'' said Borenstein with the University of California Energy Institute. ``The question is, is the state willing to take the blackouts to make the point that we won't pay prices that are way above competitive levels?''

Contact John Woolfolk at jwoolfolk@sjmercury.com or (408) 278-3410.

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-- Martin Thompson (mthom1927@aol.com), April 12, 2001