Power switch -- contracts now in limbo

Nosedive in electricity prices will let state deal from strength

David Lazarus, Chronicle Staff Writer

Thursday, June 7, 2001, ©2001 San Francisco Chronicle

URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/06/07/MN177308.DTL&type=news

Emboldened by an unexpected plunge in electricity prices, state officials said yesterday that they are prepared to press their advantage and walk away from nearly two dozen long-term power contracts that now are at above-market rates.

This represents a complete reversal from the state's position of just a few weeks ago, when officials were at the mercy of power companies and were all but begging for any available megawatts.

The state Department of Water Resources already has signed 38 contracts to purchase electricity at fixed prices over the next decade. But 23 other contracts, or about 40 percent of the total, remain in negotiations.

"We may not need all 23," said Ray Hart, deputy director of the state Department of Water Resources. The department so far has spent about $8 billion for electricity on behalf of California's cash-strapped utilities.

If power companies are unwilling to meet the state's demands for more favorable prices, he said, "I don't think all those contracts will come to term." Steve Maviglio, a spokesman for Gov. Gray Davis, was quick to underline California's changed fortunes as an electricity buyer. "We're in the driver's seat now," he said. "There's no question about that."

Other officials were feeling similarly encouraged by California's stronger position to press their attack on power companies that they suspect of having pushed electricity prices higher.

Larry Drivon, special counsel to a state Senate committee investigating alleged price manipulation, said the sudden drop in power costs will not derail attempts to determine if power companies illegally gouged customers. "Prices have gone down, but they're also capable of going back up again in a hurry," he said.

Electricity prices have tumbled to the lowest levels since April 2000 -- as low as $50 per megawatt hour yesterday, compared with more than $500 earlier this year.

Experts attributed the drop to a decline in the price of natural gas, which is the fuel that runs most power plants. Milder weather has cut power demand by reducing use of air conditioners, which in turn slashes the amount of gas required by generators.

Experts also cited increased electricity production at plants and dams, as well as greater conservation by consumers and businesses.

"The Armageddon we thought we were facing this summer has backed away a bit, " said Severin Borenstein, director of the University of California Energy Institute in Berkeley. "These lower prices are saying that the market is not going to be as tight as expected," he said. "That means fewer blackouts."

It also means California's long-term contracts increasingly appear to be a raw deal if power prices continue to fall. A state report to be released today says the average contract price is about $70 per megawatt hour over 10 years and that the average price over the next five years is $84 -- well above current market rates. The average contract price in the third quarter of 2001 is $138, rising to $142 in the fourth quarter, the report says.

LOOKING FOR BETTER DEALS

"I want to work for more favorable deals," said Hart at the Department of Water Resources. However, he said, details of the accords will not be made available for the foreseeable future because that could jeopardize the state's bargaining position in any subsequent talks with generators.

This contradicted a pledge from the governor last week that details of the contracts would be revealed within 30 days. The Chronicle and other media outlets are suing for access to the accords, arguing that the public has a right to know how $40 billion in tax dollars is being spent.

Senate President Pro Tem John Burton, D-San Francisco, said he plans to discuss with colleagues how the drop in power prices can be used to accelerate the release of the contracts. "We can't know if the contracts show whether the state is being smart or stupid until we see them," he said.

PRICE DROP OUT OF BLUE

This much at least is clear: Almost no one could have forecast just weeks ago that wholesale electricity prices would drop below $100 this summer. A few months ago, June electricity prices on the forward power market were running close to $400.

One reason for the changed outlook, ironically, is last week's heat wave, which left Northern California sizzling and would have been expected to cause electricity prices to soar as millions of air conditioners kicked into gear.

Instead, power prices remained steady, "and that really changed the psychology of the market," said Brian Jordan, who monitors electricity trading at energy market researcher Platts. Michael Wilczek, another Platts analyst, said that price stability was bolstered by an increased number of generating plants returning to service after spring repairs.

He also cited a surge in electricity output from regional dams as the high temperatures caused mountain snow to melt.

NIGHTMARE HAS ABATED

"Now, things aren't looking like the nightmare scenario some people were expecting," Wilczek said. "But it still could be a volatile summer." Jeff Brown, a member of the state Public Utilities Commission, said the situation could change "in a New York minute." "It's only June," Brown said. "We've got to go through July, August and September."

Paul Clanon, the head of PUC's energy division, agreed with Brown that natural gas costs could spike again. "I wouldn't hold out big hope for anyone that those decreases are going to be permanent," Clanon said.

Indeed, if there is one thing Californians have learned, it is that trying to guess where energy prices are headed is a sucker's game. In April, for example, the August electricity price on forward markets was about $700. Yesterday it was closer to $200.

This summer's weather will be the deciding factor in determining whether the actual August price on daily markets will be as low as $30 or back up at the $1,900 level seen earlier this year. "The battle isn't over," said Borenstein at the UC Energy Institute. "But we've seen real progress."

Chronicle staff writer Bernadette Tansey contributed to this report. / E-mail David Lazarus at dlazarus@sfchronicle.com.

©2001 San Francisco Chronicle Page A - 1

-- Swissrose (cellier3@mindspring.com), June 07, 2001