Business: Wholesale electricity prices soar in California

Copyright © 2000 Nando Media

By CARRIE PEYTON, Sacramento Bee

SACRAMENTO, Calif. (December 12, 2000 1:38 p.m. EST http://www.nandotimes.com) - Some wholesale electricity prices on California's Power Exchange nearly tripled between Friday and Monday, while others nearly quadrupled. Officials, meanwhile, declared another electric emergency.

In the first full business day under new, sharply disputed trading rules aimed at averting blackouts, prices of electricity on the Power Exchange, where the bulk of California's electricity is bought and sold, surged far above Friday's $250 per megawatt hour.

The day's first PX auction produced average prices of $904 per megawatt hour. A second auction used to adjust transmission line use produced prices of $668.

One year ago, the average PX price was about $30, Power Exchange spokesman Jesus Arredondo said. "Prices were crazy yesterday and they're crazier today," he said. "This will be the most expensive month ever in California, I'm sure of it."

The California Independent System Operator blamed high natural gas costs and strong electric demand throughout the West for Monday's price run-up, but critics suggested it was early evidence that the new trading rules have backfired.

At the ISO's request, the Federal Energy Regulatory Commission late Friday gave permission to lift a $250 price cap and replace it with a requirement that power sellers who set prices higher than $250 must explain them later. The ISO said the changes would improve the grid's stability by attracting more power to California, repaying plant owners for high natural gas costs and reducing last-minute deals.

The rules were immediately attacked by Gov. Gray Davis and state regulators, who argued that the rules would drive up prices without solving the other problems.

That's just what happened Monday, said Steve Maviglio, spokesman for Davis. "Price gouging has reached a new level," he said. "It's not surprising. It's exactly what the governor predicted."

In addition, a "glitch" in the way the ISO and the PX use two-stage electricity auctions to ease congestion on transmission lines will temporarily spur more last-minute trading instead of less, according to power plant owners and the ISO.

ISO officials, who have long warned that last-minute deals can hurt the stability of the electric grid, said the effect will be minimal, but Power Exchange officials predict it could be massive. The test will come today.

In an effort to solve the problem, the PX late Monday asked FERC to make another emergency change in trading rules, lifting caps on the second round of power auctions, which are used to set "congestion" pricing.

The PX buys electricity from power plant owners and sells it to buyers, almost universally the utilities, which then turn around and supply Californians power. The ISO was created to control the transmission grid, but it has emerged as the buyer of about one-fourth of California's power when stability problems arise, and it then resells that power to utilities.

Meanwhile, the ISO declared another "stage two" electric emergency Monday afternoon - the 12th since Nov. 1 - and pleaded for continued conservation. Some big power users were told to reduce consumption, although the ISO said generally the outlook has improved slightly.

About 8,700 megawatts of power were off line Monday, compared with a high of more than 11,000 last week. A megawatt can supply about 300 to 1,000 households, depending on season and location.

The ISO blames the almost unheard of cold-weather emergencies on an unusual number of power plants down for repairs and growth in other regions that compete with California for electricity.

"It's a very tough problem right now," ISO spokesman Patrick Dorinson said. "I almost could look back and say summer was fun."

The governor, PUC president Loretta Lynch, consumer advocates and others blame the deregulated electric market for the cold-weather power crunches.

As that controversy raged on, state officials who are monitoring the increasingly chaotic electricity situation began toting up the costs of last week's runaway prices.

On Friday alone, according to the California Electricity Oversight Board, it cost $212 million to deliver power through the ISO-controlled grid, which serves about three-fourths of the state's electric consumers. That would be enough to fully pay for a new, cleaner-burning 500-megawatt power plant about every two days.

Monday's bill won't be fully computed for another few days, but it appears that it will be significantly higher, according to the oversight board.

"We have a huge transfer of wealth going on, and we're not getting anything for it," Pacific Gas and Electric Corp. spokesman Gregg Pruett said.

Meanwhile, financial analysts warned investors Monday that the state's two largest utilities are finding it increasingly difficult to bridge the gap between frozen rates and power costs that escalate nearly daily.

Credit rating agency Fitch Inc. on Monday lowered its long-term and short-term debt ratings for PG&E and Southern California Edison, as well as the latter's parent company, Edison International. Fitch cited "increased liquidity pressure" and uncertainty about the utilities' ability to recover the costs of their power purchases. The rating downgrades mean it will be more expensive for the utilities to borrow money in the future.

Also on Monday, Morgan Stanley Dean Witter & Co. and Banc of America Securities lowered their ratings on PG&E Corp.'s stock, which fell Monday to $21.94 a share, down $1.63, nearly 7 percent. The firm also lowered its rating for Edison International, whose stock closed at $18.63 a share, down $1.81, nearly 9 percent.

Moody's Investors Service put the securities of PG&E and its parent PG&E Corp. on watch for a downgrade.

PG&E estimates that at the end of November it had paid out $4.6 billion more for power than it has been able to collect, although consumer advocates disagree, pointing out that that number is significantly offset by utility revenues in other special accounts.

Before the December run-up in wholesale prices, PG&E had requested a 17.5 percent rate increase, which state regulators put on hold. Now the rate increase needed to cover its costs appears to be increasing daily, Pruett said, but he declined to say how much PG&E might seek.

Although consumer advocates oppose a rate increase, some are beginning to talk quietly about increases being inevitable if wholesale prices cannot be brought back down.

"It's not sustainable," said Mike Florio, an attorney for The Utility Reform Network and a member of the ISO board. "It has to stop."

Bee staff writer Andrew LePage contributed to this report.

http://www.nandotimes.com/no_frames/business/story/0,4461,500289326-500458158-503024153-0,00.html

-- Martin Thompson (mthom1927@aol.com), December 12, 2000

Answers

Energy costs rocket, handing consumers biggest shock yet By Craig D. Rose UNION-TRIBUNE STAFF WRITER December 12, 2000

Power prices in California keep hitting new heights, with prices in the state's main electricity market rising today to nearly $900 per megawatt hour.

The rise continues a stunning ascent from a price of about $50 per megawatt hour as recently as last spring. In retail terms, today's prices -- if sustained for a month -- would result in an average residential power bill of more than $450.

San Diego ratepayers are temporarily shielded from such high bills by a rate-deferral plan in effect at least until 2002.

Power crunch eases slightly, officials warn of looming debt ---------------------------------------------------------------------- ----------

California's Power Crisis: More recent stories about California's electricity shortage

The latest prices represent a more than tripling in posted prices on the California Power Exchange since Friday, when the operator of the state power grid removed a state-mandated price cap of $250.

The latest escalation -- which comes despite improvements yesterday in state power supplies -- is deepening the sense of crisis among state officials, consumer advocates and utility companies.

Nonetheless, a spokesman for Gov. Gray Davis, who met yesterday with top energy advisers in Los Angeles, said it was unlikely there would be action to address the crisis at the state level until after federal regulators release their plan for California.

The Federal Energy Regulatory Commission is scheduled to issue a final order regarding California's market at its meeting tomorrow. But yesterday the commission made plans for a second meeting Friday to deal with the state's problems, and did not clarify at which session it would issue the California order.

Davis and others in the state have been critical of FERC's refusal to halt what they describe as a devastating rise in power prices here or to order refunds for payments made by consumers over the past summer.

The governor also has been severely critical of the California Independent System Operator's decision to lift the state price cap last week. The ISO manages most of the state's power supply.

Privately, most at the state level remain skeptical that federal action will ease the crisis, saying it will be up to California to fix the problem. Last Friday, FERC quickly approved the ISO's plan to end the price cap.

Increasingly, state officials and consumer activists are talking about state-owned power systems, utility takeovers and a likely initiative seeking to overturn deregulation. SDG&E and others also emphasize the need for a price cap for the Western region of the United States, in order to prevent suppliers from migrating to the highest prices and driving prices upward everywhere.

The new highs in electricity prices came even as the ISO said the state's supplies had improved, with the start-up of production from a formerly closed nuclear power plant unit.

The apparent contradiction between the increase in available power and the continued price escalation was blamed on a number of factors:

High prices for natural gas -- which fuels power plants -- continued to drive up the cost of generating electricity. Cold conditions in the Midwest helped push natural gas prices to record highs yesterday.

Allegations also persist that energy companies have manipulated the market. Consumers Union and other advocacy groups say deregulating electricity prices has proven to be a costly error for California consumers.

At the same time, the controversial removal of price caps in California is allowing prices to rise to levels approaching those in other Western states.

"We've now had three days of the Hebert experiment," said state Sen. Steve Peace, D-El Cajon. Peace was referring to Curt Hebert, a FERC commissioner who opposes price caps for wholesale electricity.

Peace, who played a prime role in California's deregulation legislation, likened the run-up in electricity prices to the oil embargo of the 1970s and warned that it could devastate the economy.

"Someone from (former Gov. Pete) Wilson's administration told me, 'Somebody in the energy business decided it's time for a depression,' " said Peace, who has also been critical of FERC's failure to rein in prices. "This is not about electricity. It's about the economy."

In a letter to FERC yesterday, Peace repeated earlier calls for a federal order returning the state to regulated power prices based on the cost of production.

Market watchers said little could help the state over the next few days, except Mother Nature.

"The prices will remain at these levels, unless you get a warming trend," said Alex Galatic of Strategic Energy, a Pittsburgh-based energy company with offices in Carlsbad.

Market speculators appear to be betting against a break in price any time soon. For example, electricity is selling for $800 per megawatt hour in the Pacific Northwest for delivery in January, Galatic said.

"I see no break in the pricing," agreed Arthur O'Donnell, editor of California Energy Markets, a publication based in San Francisco.

A spokesman for Enron Corp., the largest electricity trader in the United States, said the raising of prices in California had improved supplies available to the state. And he added that there was another positive aspect to the higher commodity prices.

"You are starting to see some demand response," said Mark Palmer, the Enron spokesman, referring to cutbacks in power use as prices soar. "Some companies are shutting down because it makes more sense to sell their gas (rather than using it as fuel to continue their manufacturing operations)."

That's not an option for the state's utility companies, which continue to report growing losses from buying electricity at higher costs than they can collect from their customers. They have covered the shortfall by borrowing money.

Dow Jones Newswires reported that Pacific Gas & Electric was only "weeks" away from being unable to cover its power costs if prices continue at recent levels.

A spokesman for the Bay Area utility's parent company declined to comment directly on the report.

"It's up to the decision of creditors to make that call," said Greg Pruett, vice president of communications for PG&E. "We have already borrowed $2.6 billion to cover undercollections that have totaled $4.6 billion.

"It can't continue forever."

http://www.signonsandiego.com/news/state/20001212-9999_1n12power.html

-- Martin Thompson (mthom1927@aol.com), December 12, 2000.