Features

Several factors coming together to create a  

projected crisis 

SACRAMENTO – In the coming months, California could see prices double or triple those of last summer, when soaring wholesale electricity costs drove three utilities to the brink of financial ruin. 

A drought in the Northwest has cut hydroelectric supplies, and that problem will worsen. Forecasters also predict a hotter than average summer, and competition from other states has already caused the price of summer power to hit new heights. 

These factors, analysts say, will drive up costs for electricity on the spot market, where the state already buys about one-third of the power for two cash-strapped utilities. Those costs will hit $1 per kilowatt hour and maybe $2, said Peter Navarro, a University of California, Irvine, economist. 

Navarro, who collaborated with the Utility Consumers’ Action Network for a report on summer power forecasts, looked at prices from last summer, those on the recent spot market and electricity-supply limits this year to calculate summer peak prices. 

With consumer rates capped at about a dime per kilowatt hour, that leaves a growing gap the state will have to fill with a dwindling power allowance. 

To cover the difference, the state could issue additional bonds or raise rates, but both options put ratepayers on the hook for the costs. 

Since January, the state has authorized $5.7 billion to buy power for customers of Pacific Gas and Electric Co. and Southern California Edison. The two utilities’ credit was cut off after high wholesale costs led them to amass nearly $14 billion in debt. The state’s 1996 deregulation law means they can’t pass those costs on to their customers. 

The state will be repaid by $10 billion in bonds expected to be issued in May. PG&E and Edison customers will pay off the bonds. 

Officials expected the $10 billion raised by the bonds to last until September, if the state spent less than 25 cents per kilowatt hour, state Treasurer Phil Angelides said. But the state has already paid more than that, as figures from March show the Department of Water Resources paid a 29-cent average. 

In a recent letter, Angelides told Davis the bonds wouldn’t last long with high prices. 

Although Davis hasn’t released details on the state’s power buys, Navarro said he’s determined that recent wholesale prices have ranged between 25-50 cents per kilowatt hour, a figure that electricity traders for Duke Energy and the defunct Power Exchange confirmed. 

Prices will rise even more when summer demand increases power use by about 50 percent, Navarro said. 

Even those planning ahead for summer are facing high costs, industry experts say. Power bought this week for delivery in June, July and August, cost between 48 cents per kilowatt hour from the Northwest to as high as 68 cents per kilowatt hour from Arizona. 

A report by the Western Systems Coordinating Council, which oversees grid operations in the West, says generation resources for California “are NOT expected” to meet projected peak demands and reserve requirements this summer without causing interruptions. 

The report, and California ISO, estimate the state could fall up to 3,500 megawatts short during peak hours. That’s enough power for roughly 2.6 million households. 

So, grid managers will have to depend on imports, which a drought in the Pacific Northwest may make hard to find. 

Because there’s less water to run through its hydroelectric dams, the Bonneville Power Administration reports it won’t be able to spare any power. That utility normally exports 1,000-2,000 megawatts of electricity to California during peak times. Instead, BPA spokesman Ed Mosely said, Northwestern utilities may import power too, especially in the late summer when water levels drop. 

Because California normally pays more for power, it attract imports, said Tom Williams, spokesman for Duke Energy. But higher prices outside the state may lead power there, which may force California to pay even more for imports. 

Those prices could hit records, unless the Federal Energy Regulatory Commission reverses its position and imposes regional price caps, Navarro said. 

Without price caps, Navarro said, “it’s civil war.” 

High power prices have stung all Western states, said Jesus Arredondo, spokesman for the Power Exchange, the group that formerly ran the state’s day-ahead power trading market but has filed bankruptcy. 

Generators will lean toward selling to utilities in states without California’s financial problems, Arredondo said. 

Despite speeding up the permitting and construction of power plants, Davis appears short of his goal of having 5,000 new megawatts available by summer. The California Energy Commission now estimates 3,000 megawatts of power from new plants will be online by July. 

Even that power, Arredondo said, may not stay in California. “If prices are higher outside the state, where is it going to go?” 

So far, the Davis administration believes the state will survive the summer through strategic buys, a strong conservation plan and increased supply, said Joseph Fichera, a Davis financial adviser. 

Few, however, seem to share his optimism. The WSCC report said projected energy use this summer is expected to be 4 percent higher in the West this year.  

Weather forecasters predict a hotter summer that will boost energy use.