Weather Masks Tight Market, But Stability Should Stay Awhile

For now, California and other parts of the nation can thank Mother Nature for saving consumers from severe and sustained summer energy price spikes, and perhaps bolstering the political resolve to keep pushing ahead with market-based energy solutions, said a Wall Street analyst with Commerzbank Securities. However, the market fundamentals are still present to sustain higher-than-historic prices and volatility, particularly for natural gas.

In most regions of the country, infrastructure and political problems seem to have abated with what is "on the ground" or already in the construction pipeline in terms of new power plants and transmission pipe and wire upgrades, according to Andre Meade, utility analyst at Commerzbank, responding to questions in a telephone interview Wednesday.

"I think it is in everyone's best interest that the weather has been mild, and it looks like California is going to get through the summer without a helluva lot of pain," Meade said. "It is good for markets everywhere that the deregulation continue and a real crisis be averted."

Along with the generally mild weather so far this summer, what he calls a "continuing softening of the economy" also has contributed to more stability in electricity prices and supplies by shaving peak demand. But the combination hides the fact that there is what Meade calls "tightness" in both the natural gas and power markets.

"We saw a quick return to high prices as soon as we got some hot weather (in the East) last week," Meade said. "Most electricity pools are still not in equilibrium, and they are not overbuilt yet, so they are still capacity-tight." By next year, he expects some of this tightness to be apparent. Even with the current calm, he said, the fundamentals in the gas market haven't changed much either, being fundamentally tight also.

"I expect gas prices to be relatively firm over the next three to five years, even though the current weakness will persist for the next four to six months," Meade said. "There is no new big slug of gas being produced, and there won't be until either a lot of LNG (liquefied natural gas) starts to come or Alaskan gas comes down -- and both of those won't be here until mid-decade.

"We see a huge increase in drilling with only a modest increase in delivered gas out of that drilling, but that has been overwhelmed by cool weather and a softening of the economy. I expected gas prices to firm up a couple of months down the road and to stay fairly firm and volatile by historical standards over the next couple of years."

Electricity will maintain strong markets, regardless of what happens to natural gas, he said. The market has been "responding to high prices," and new power plants are being built near the major load centers as a result.

"It is working quite well at the risk of being overbuilt," said Meade, noting that the right price signals are getting through. He predicts that eventually a lot of power plant developers will cut back their pace of new plant construction when they sense the market is getting overbuilt. He doesn't expect that to happen, however, for the next couple of years.

In assessing California, Meade thinks Southern California Edison Co. for the time being will be spared creditors taking it into bankruptcy until the federal regulatory case on refunds is completed early in the fall. He also is not expecting much initial impact from California's new state power authority, noting it doesn't have the immediate staff and resources to build new plants, and in the short run, getting new plants built is the only thing that counts.

Meade doesn't see "another California" deregulatory fiasco looming on the horizon, and he thinks it is extremely unlikely that any other state could have the convergence of the half-dozen major factors that descended on California a year ago: namely, "poor incentives, all purchases being made on the spot market, no hydro-electric supplies, historically high natural gas prices and a shortage of power."

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