On reflection, the most surprising aspect of the past two monthsof California’s roller coaster electricity prices is that thepeople who pieced together the state’s power deregulation plans —state legislators and regulators — are voicing the loudestconcern about the first real dose of free-market price volatilityfelt by retail mass consumers, who, it might be added, are alsovoters. In a free market, heavy demand butting heads withconstrained supplies will result in the blood of high pricessplattering everyone.

In the aftermath of the collision, what California policymakersnow are trying to figure out is whether they need the paramedics orthe undertaker for their four-year-old experiment with electricindustry restructuring.

Economically, nothing seems askew. So far in the summerpeak-electrical load season natural gas prices nationally aredouble, and, in some cases, triple what they were a year earlier.California depends on a high proportion of gas-fired powergeneration. That alone accounts for the bulk of the price spikes inthe state’s wholesale power supplies last month.

Add to the natural gas price hike an under-nourishedhydro-electric supply immediately before California’s June heatwaves and a series of unscheduled power plant outages throughoutthe West, and the fact that near-record demands caused price capsto melt should be of no surprise. The same combination of a majornuclear plant out of service (1,100 MW “WNP2” at Hanford, WA) andhydro-electric dams still filling is no longer a factor in thePacific Northwest, according to a Bonneville Power Administration(BPA) spokesperson in Portland, OR.

“We’re expecting normal operations for hydro and the othersources the rest of the summer,” said the spokesperson, noting that”everything is back up and running,” but drawing short ofspeculation at the Cal-PX that California will have increasedhydro-electric supplies available to it in August now that the damshave been filled.

Politically, the picture is far less straightforward. Start withthe fact that under California’s ongoing transition to fully openpower markets, the smallest of the state’s three majorinvestor-owned utilities, San Diego Gas & Electric Co., a yearago finished collecting its transition charges and unfroze itsretail rates so they could float with the market, with someprotective floor and ceiling mechanisms last summer that wereremoved this year. Meanwhile, the state’s other two huge IOUsserving more than half of the state’s electric consumers still arecollecting transition charges and have their rates frozen at June1996 levels.

Even the customers with rate protection, however, began to getworried when rolling blackouts and repeated curtailments hit —particularly in the San Francisco Bay Area — with some unusuallyhigh temperatures in June before the official start of summer.Elected officials from the governor who wasn’t in office when theelectricity law was passed unanimously in 1996 to the legislativeleaders who did help craft the law reacted by calling for a reviewand recommendations on the power system’s reliability questions andrate relief for the SDG&E utility customers in the southern endof the state.

The average SDG&E residential customer who paid $55 for 500kWh of power in May paid $101 for that same amount last month,which is almost proportional to what has happened to natural gasprices over the same period. Consumer leaders and San Diego newsmedia have taken notice of the skyrocketing electricity bills,unconcerned about what natural gas, weather and generation outagesmay have contributed. The legislators, regulators and utilitieshave responded with rate relief proposals totaling $500 million forSDG&E’s 1.1 million customers.

SDG&E, which sees itself as a more limited delivery servicecompany in the new environment, forewarned its retail customersthat high bills were coming, but took no further action to helplessen the shock. Non-utility energy service providers (ESPs),strapped by thin margins and regulatory protections for theincumbent IOUs, have been non-factors in helping customers ease therate pain.

“I think what has happened is pretty transparent to the market,”said a source with the California Power Exchange (Cal-PX), thestate-chartered non-profit through which IOUs like SDG&E mustbuy all of their supplies. “Traders are talking about it. Otherutilities are talking about it. And other players in the market aresaying, ‘What about the hedging?’

“SDG&E keeps trying to mask it by saying it is always tryingto balance good deals for the company and consumers. That ishogwash. They did not hedge for that period (June and July);otherwise those bills would not have doubled and tripled.”

Now in the middle of summer and the aftermath of the pricespikes, SDG&E is making numerous emergency filings to theCalifornia Public Utilities Commission to accelerate expanding itsauthority to participate in Cal-PX block-forward markets althoughit likely will not come in time to be applied much this summer, andto provide immediate rate relief through altering ratemakingprocesses within the regulated system.

At the same time, earlier this month SDG&E’s parent company,Sempra Energy, announced that its second quarter earnings willexceed expectations for the quarter, mainly because of veryprofitable energy trading, which is tied to Sempra’s newestmerchant power generation plant in Nevada that opened in May tosell into the California, Nevada and Arizona markets.

During the most recent supply crunch in California, however, theEl Dorado plant, owned and operated on a joint venture basis bysubsidiaries of Sempra and Houston-based Reliant Energy, never soldany electricity into the California market, choosing to sell intothe more lucrative Arizona market at the Palo Verde (nuclear plant)hub, according to Cal-PX sources. Palo Verde prices yesterday wereslightly higher than the Cal-PX for on-peak power, $82.27/MWh vs.$81.98/MWh.

By comparison, as part of nine bids SDG&E is reviewing thisweek for interim, fixed rate supplies of power, Enron reportedlyhas offered power at a fixed price of $55/MWh, according to Cal-PXsources. These same sources said the average price for allelectricity (on- and off-peak) sold through the Cal-PX over thepast 18 months is $48/MWh.

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