Higher natural gas prices will be a "clear driver" for wholesale electricity prices this coming summer across the entire United States, FERC analysts said Thursday.

Stephen Harvey, deputy director of market oversight for the Federal Energy Regulatory Commission (FERC) spoke about FERC's Summer Energy Market Assessment for 2007, which was issued Thursday.

National generation additions "have not been adequate to keep up with load growth," said Harvey, but in many areas, "electric transmission and natural gas transportation investments appear to have added a little flexibility to meet load in regions that have faced some stress in the past, including Southern California, New England and Florida."

He called last summer "extraordinary" because it was the second only to the Dust Bowl summer of 1936 for high temperatures. More than 50 local all-time high temperature records were set in late July and early August, he noted. However, last summer is "not a typical comparison point" for FERC's 2007 summer outlook.

"Though many significant variables remain the same, the outlook is different," he said. "First, wholesale prices for electricity are likely to be higher this summer in all regions of the United States, regardless of regional market structure. The main reason is higher expected prices for natural gas...Second, generation additions over the past year have not been as robust as in the past years, leaving many regions with tight supply and demand balances."

In all, said Harvey, "markets are signaling double-digit electricity price increases this summer over last, with natural gas as a clear driver. Forward electric prices for summer 2007 are higher than those we actually saw in electricity spot markets last summer." FERC analysts "see a range of forward increases from almost 20% to more than 30%."

Harvey noted that summer 2007 futures prices from the New York Mercantile Exchange (Nymex) for natural gas at Henry Hub are up 21% over last summer's actual average prices traded on the IntercontinentalExchange (ICE).

"These Nymex and ICE prices are not assessments, but prices actually produced on those two trading systems," he said.

In FERC's regional forecast, Harvey said that with tighter hydroelectric supplies, Southern California "will be increasingly dependent on natural gas," this summer. While transmission improvements are likely to help the southern half of the state, "prices are likely to remain a concern."

FERC last year monitored transactions above the $400/MWh western soft cap due to scarcity at peak, Harvey noted. "Given the likelihood of higher-priced natural gas in the West this year, extreme weather could easily raise prices to the peak level again in summer 2007. In fact, California ISO [Independent System Operator] imbalance market prices briefly reached their $400 limit last week on hot weather."

Harvey said FERC also had concerns last year about the Northeast, particularly New England and New York. "As it turned out, extraordinarily good generator availability helped meet New England's extreme peaks last summer. It's hard to assume such a high level of availability in the future."

This summer New England "remains very tight, heavily dependent on imports to meet peaks, Harvey said. "Still, within the tightest locations in New England, recent transmission additions will help. A 345 kV loop added into Southwest Connecticut should allow additional transmission to meet needs. Additional transmission lines into Boston increase capacity by 1,000 MW.

Similarly, by July 1 the new Neptune line will increase capacity from eastern PJM into New York's tightest zone -- Long Island -- by 660 MW. The result in Long Island should be lower prices and another possible source of supply at peaks." FERC continues to see congestion in the eastern PJM market, "though resources appear adequate for 2007," said Harvey.

In the Southeast, generation still appears adequate, despite a drought that will reduce the availability of hydroelectric generation through the summer. For example, the Southern Co.'s hydropower resources have been reduced by 70%, Harvey noted. Hydro makes up less than 10% of the Southern Co.'s generating capacity. For Florida, which depends on natural gas for almost half of its generation needs, the newly operating Cypress Pipeline has already added about 220 MMcf/d from the Elba Island liquefied natural gas facility, he said.

"The additional supply may matter," Harvey said. "During the summer of 2006, Florida's wholesale price of gas was highest in the United States."

The Midwest ISO's generation load appears to be "sufficient," said Harvey. And in general, "SPP [Southwest Power Pool] supply appears adequate for the summer." For the Electric Reliability Council of Texas (ERCOT), FERC thinks capacity is adequate, but it is tightening.

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