Dramatic drop in cost of electricity

LOWER BILLS: Cheaper fuel, milder weather credited

David Lazarus, Chronicle Staff Writer

Wednesday, June 6, 2001, ©2001 San Francisco Chronicle

URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/06/06/MN199202.DTL&type=news

California electricity prices have plunged unexpectedly to their lowest level in more than a year, partly as the result of a simultaneous drop in prices for natural gas, which fuels most power plants.

Make no mistake: Gas and electricity prices could surge upward again in months ahead. But for the first time since California's energy markets went haywire last summer, industry experts are beginning to ask whether the state finally may have turned a corner in its battle with runaway power costs.

"California is not yet out of the woods," said Kelley Doolan, who tracks natural gas prices for energy market researcher Platts. "But this is a very significant decrease in costs."

Along with lower gas prices, the decline in electricity costs was attributed by state and industry officials to milder weather, which reduces demand for power. They also credited recent conservation efforts by consumers and better-than-expected runoff at dams for hydroelectric plants.

Gary Ackerman, executive director of the Western Power Trading Forum, an energy-industry association, said these factors came together to produce the lowest wholesale electricity prices since April 2000.

Electricity on the spot market could have been purchased yesterday for as little as $50 per megawatt hour, he noted, compared with more than $500 earlier this year. "If the weather stays this way, we could have reasonable prices all summer, " Ackerman said. "We may also have fewer blackouts."

It is tempting for Californians to be suspicious of virtually any swing in energy prices. If power companies manipulated prices on the way up, as critics have alleged, might they not be up to some trick as prices head in the opposite direction?

Nettie Hoge, executive director of The Utility Reform Network in San Francisco, speculated that generators are allowing electricity prices to fall so they can discourage federal regulators from taking a more active role in the dysfunctional California market. "They're trying to take the heat off," she said.

Others cautioned that the lower prices may be nothing more than a statistical blip. "This was just one month's decline," said Michael Shames, executive director of the Utility Consumers' Action Network in San Diego. "We really have to see how this plays out in the future."

Steve Maviglio, a spokesman for Gov. Gray Davis, said the governor was very encouraged by the lower energy prices. Davis announced Sunday that California's power use was down 11 percent last month from a year before. "We're not there yet," Maviglio said of whether an end to the state's power woes is in sight. "But the trend is pointing in the right direction."

WHITE ELEPHANT

Yet this sudden drop in energy prices does have a dark side: California could end up with a huge white elephant after spending about $40 billion in public funds on long-term power contracts.

The logic behind the contracts, which are at an average price of $69 per megawatt hour over 10 years, is that the state expected to pay below-market rates for electricity for a number of years before prices came down and California found itself paying above-market rates.

If current trends continue, though, California will find itself paying consistently above-market rates much sooner than expected, making the long- term contracts a sweet deal for the same power companies that profited so handsomely during the state's darkest hours. "The contracts look really ugly right now," said Shames at the Utility Consumers' Action Network. "They may be way overpriced."

Maviglio, the governor's spokesman, said it is too early to conclude that the state did poorly negotiating dozens of long-term power contracts. "No one has a crystal ball on this," he said.

CUSTOMERS' BILLS TO DROP

In any case, Pacific Gas and Electric Co. said yesterday that customers' average gas bills will drop 26 percent this month to $26 and should stay near that level all summer.

Platts, which monitors average monthly spot prices, found that the wholesale price of gas at the California-Oregon border has tumbled nearly 42 percent since the beginning of May -- from $9.98 per million British thermal units to $5.81.

The wholesale gas price at the California-Arizona border fell 45 percent, from $11.91 to $6.50. This compares with a 25 percent monthly decline in average natural gas prices nationwide. However, California gas prices are still about 50 percent higher than they were a year ago, whereas national prices are now below year-ago levels for the first time since last spring.

While cooler weather nationwide helped push gas prices down overall, Doolan attributed the especially steep drop in California to a commensurate surge in prices last month related to fears of a long, hot summer of rolling blackouts.

"You had state officials all but promising rolling blackouts this summer," he said. "That created enormous demand for electricity generation. "What has changed is that we've had weeks of mild weather," Doolan observed. "The electricity generators have not come out of the woodwork buying up all the gas." This allowed utilities like PG&E to beef up gas inventories, which eased demand and resulted in substantially lower prices, he said.

'BACK ON TRACK'

"We're back on track to be completely full for winter," said Staci Homrig, a PG&E spokeswoman. "That's a very good thing." Gas prices historically dip in the spring and summer and then rise again in the winter. PG&E is forecasting that customers' average gas bills could rise to as high as $75 in December if current trends continue.

However, the precipitous drop in gas prices in recent weeks suggests that California's unusually high costs at last may be abating. Individual power companies so far are reluctant to speculate on whether the drop in gas prices will have a lasting effect on electricity costs.

E-mail David Lazarus at dlazarus@sfchronicle.com.

©2001 San Francisco Chronicle Page A - 1

-- Swissrose (cellier3@mindspring.com), June 06, 2001

Answers

I hope this is the lull....before the lull.

-- R2D2 (r2d2@earthend.net), June 06, 2001.

I'm a bit confused by how this energy analyst explained the price hikes in NG:

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While cooler weather nationwide helped push gas prices down overall, Doolan attributed the especially steep drop in California to a commensurate surge in prices last month related to fears of a long, hot summer of rolling blackouts.

"You had state officials all but promising rolling blackouts this summer," he said. "That created enormous demand for electricity generation. "What has changed is that we've had weeks of mild weather," Doolan observed. "The electricity generators have not come out of the woodwork buying up all the gas." This allowed utilities like PG&E to beef up gas inventories, which eased demand and resulted in substantially lower prices, he said.

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When the state was threatening blackouts, my demand for electricity went down, not up. I was conserving like crazy. Seems I was not alone; statewide demand dropped between 9 and 11 percent year-to-year in May, even though it was the hottest May on record. We had numerous days over 100, or about 20 degrees over normal for the Central Valley. When was the mild weather? We didn't get that back until June.

This sounds like the quote was an out of context cut-and-paste job, because it sure doesn't make sense. We are afraid of blackouts, so the prices go up? Our demand was down. We didn't come close to last summer's demand, despite the awful weather.

If he is talking about demand at the generator level, well, we had a huge amount of generating capacity offline due to "unplanned" shutdowns, not even counting the fire and shutdown at San Onofre (nuke). Wouldn't the demand for natural gas be less for those offline plants?

Just wondering.

-- Margaret J (mjans01@yahoo.com), June 06, 2001.

If Y2K computer date Bugs in electrical grid infrastructure have been causing failures and resultant bottlenecks and shortages; then the electricity crisis will slowly fade away, just as mysteriously as it started and worsened.

Is this starting to happen, as the errant Y2K Bug infested embedded chips slowly get identified and replaced? And, if so, will it be in time to avert California's bankruptcy? Most of the summer still lies ahead.

But if good news like this continues, there's hope the Y2K Bug "Flood" may be "cresting" --- just short of hitting that "critical mass" threshold for severe cascading effects.

-- Robert Riggs (rxr.999@worldnet.att.net), June 07, 2001.