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Who gets power when supply lags? Wire Service, Associated Press June 22, 2001

Western states fear California pricing will pinch others in times of electricity shortage SAN FRANCISCO (AP) - When power supplies stretch thin across the West this summer, who will decide whether Silicon Valley computers, Washington apple orchards or Las Vegas casinos get first dibs on what's left? It's a key question raised by the decision of federal energy regulators this week to cap electricity prices throughout the West, using a formula based on California's power costs.

Economists, energy industry executives and officials in all 11 states are just beginning to analyze the fit of this new piece in the energy puzzle.

Though most call the order a good step that could prevent price gouging, others worry the pricing system could lead to electricity shortages for California's neighbors, or prompt utilities to stock up on power contracts to fend off shortages, diminishing any leverage power buyers might have as they compete for the remaining megawatts available each day.

Tying the highest possible power price to California could cause a problem come winter, when power demand drops in the Golden State, said Gary Ackerman, director of the Western Power Trading Forum, which represents most sellers of energy.

States where consumers need electricity to heat furnaces through the winter would be unable to outbid each other above the price cap, which is usually determined by a formula based on the highest bid for last-minute power during the most recent energy supply emergency in California.

That may leave power wholesalers, and not a free market, to decide who gets the energy.

"There's no price signal to indicate who most wants the power; your prices are based on California demand and supply," Ackerman said. "If the Northwest has a cold winter day, then the price can't go above the California price."

"Certainly, California has a tremendous pull on our prices and has for probably the last year," said Claudia Rapkoch, spokeswoman for Montana Power Co., which supplies natural gas and electricity to two-thirds of the Big Sky state. "What it means for this winter, we're just going to have to wait and see."

California utilities had much more control over power supplies before deregulation in 1996 obligated them to sell off their power plants to encourage competition. This brought lower prices for a time, but gave control over power supplies to wholesalers that aren't obligated by state law to serve the serve the best interests of local customers.

Rather than appointing one power grid manager decide how to divide power in the West, Ackerman predicts utilities in nonderegulated states will simply sell their power within their borders. That would hurt California, which this week imported about 10 percent of its electricity and its remaining supply from local plants owned by out-of-state power companies.

"When California goes to rolling blackouts, they have searched the Western interconnected system for extra power," said Dennis Eyre, executive director with the Western Systems Coordinating Council in Salt Lake City. "There is not one body saying send it here or there."

Price cap or not, utilities in the region will watch out for each other as best they can, because they might need the favor returned, said Charles Reinhold, executive consultant for Electric Resources Strategies in Queen Creek, Ariz. He said sending power long-distance over transmission lines "is more an impediment to moving the power than really any conscious decision not to move power to another state."

One way for utilities to ensure their customers get the power they need is to buy most of their power ahead of time, on "forward" contracts. Nevada is already well-stocked with electricity through the end of the year in this way, said Reno-based Sierra Pacific utility spokeswoman Faye Anderson.

"Typically and historically, the utilities have always purchased long-term contracts to serve a certain portion of their load, until California deregulated and went entirely to the spot market," Eyre said.

Saddled with rising bills that threatened to exhaust the state's budget, California recently began to sign long-term contracts with generators. Gov. Gray Davis credits the change for helping to drastically reduce prices on the spot market, which earlier this month fell below $50 per megawatt hour for the first time in a year.

The long-term contracts, though, weren't cheap. California will pay an average of $70 per megawatt hour during the next decade under 38 different contracts signed so far.

http://www.zwire.com/site/news.cfm?newsid=1989588&BRD=1817&PAG=461&dept_id=68561&rfi=6

-- Martin Thompson (mthom1927@aol.com), June 23, 2001