Natural Gas, Power Prices Drop Sharply

WASHINGTON — The wholesale prices of electricity and natural gas in California have fallen sharply in recent weeks, and experts said Tuesday that the relief could be the harbinger of an energy turnaround.

Or it may be just a blip.

In the last couple of weeks, California power prices have plunged to the lowest levels since April 2000, traders say, with electricity selling on some days for less than $100 per megawatt-hour.

At night, when demand slackens, power sometimes sells for less than $20 per megawatt-hour. That is reminiscent of the days before prices went haywire last summer.

It is a drastically different scenario than the $500 to $800 the state paid during a spate of hot weather last month.

Meanwhile, wholesale natural gas prices at a bellwether pipeline junction on the Southern California-Arizona border dipped last week to their lowest levels since November, according to a publication that tracks the industry.

Separately, Southern California Gas Co. and Pacific Gas & Electric Co. reported June rate cuts for their residential gas customers of 16% and 38%, respectively.

Experts credited a combination of conservation, mild weather, a burst of increased hydroelectric generation and lower natural gas prices for the drop in electricity costs.

“Conservation is starting to worry the generators, which is nice to see,” said Severin Borenstein, director of the University of California Energy Institute in Berkeley. Californians used 11% less energy last month than in May 2000, according to the state Energy Commission.

“I’m worried that if we don’t push harder on conservation, [prices] won’t stay down,” Borenstein added.

On the natural gas side, experts said the price decline is due to replenished storage within California, a nationwide drop in the cost of the fuel and easing demand from power plants.

The number of shippers competing to get natural gas to the state has also increased, with the expiration of a controversial contract on the El Paso pipeline system last week.

But economists were reluctant to make sweeping predictions based on the latest indicators.

“It’s hard to draw specific conclusions,” said Bruce Henning, who tracks the natural gas markets for Energy and Environmental Analysis Inc., an Arlington, Va., consulting firm.

How the summer turns out depends on the weather in the state, Henning said, adding, “The weather represents the balance in the Southern California market.”

Natural gas fuels most California power plants. With wholesale prices recently averaging three to four times the rates charged elsewhere in the country, state and federal officials have despaired of chances for controlling electricity costs.

Last Friday, however, the daily price for immediate delivery of natural gas in Topock, Ariz., a pipeline junction near the California border, dipped to $7.85 per million British thermal units.

According to Natural Gas Week, it was the first time since mid-November that the price at that location had fallen below $8 per million BTUs. One million BTUs is what a typical Southern California home uses in five or six days.

Considered a bellwether for other pipeline systems serving California, the Topock price reached a record $56.54 per million BTUs on Dec. 8. It stood at $9.36 per million BTUs at the close of business Tuesday, still below recent weekly averages.

Other industry publications have also picked up signals of price declines.

Platts, the energy information division of McGraw-Hill Cos., reported Tuesday that the price for monthly gas delivery contracts to California fell 22% in June, following a nationwide trend.

But Henning said the drop in California prices is attributable to both lower prices around the country and a decline in the high markups for shipping gas to California. Those markups, which far exceed the cost of transporting gas, have drawn the attention of state and federal investigators.

Henning said the markups are declining as depleted storage levels in California are replenished. “Storage levels have been filling very rapidly, and that fact is reflected in prices coming down,” he said.

The link between natural gas and electricity prices is a hotly debated subject. Some experts say high-priced natural gas is driving up the cost of electricity. Others believe that record prices for power are raising the prices that generators are willing to pay for their fuel.

Electricity prices that range from $20 to $200 per megawatt-hour--instead of the $150 to $500 per megawatt-hour paid in recent months--are great news for Gov. Gray Davis.

Average daily power prices in California for transactions through the Automated Power Exchange have dropped from $149 per megawatt-hour last Friday to $110 per megawatt-hour Tuesday. The exchange is a private company that brings together electricity buyers and sellers and accounts for less than 10% of the state’s market.

Davis spokesman Steve Maviglio said Tuesday that average daily power purchases by the state have recently dipped below $50 million.

The state has sometimes had to pay more than $100 million a day since it started buying power in January through the Department of Water Resources. The state stepped in because California’s two biggest utilities became too financially crippled to withstand the prices being charged by generators.

Davis’ plan to pay for past and future energy purchases with a $12.4-billion bond issue hinges on an assumption that power prices will be driven down this summer through long-term contracts, conservation and the construction of new power plants.

UC Berkeley’s Borenstein said conservation efforts have not gone far enough.

“You walk into most buildings and you still need a sweater,” he said. “That ain’t the way to hit the target.”

If Californians conserved an additional 10% off their peak usage on hot afternoons, he said, “we could really break the backs of the generators, we could really collapse the price.”

Prices tend to skyrocket in California’s electricity market on hot afternoons, when demand soars and grid operators must scramble to purchase enough electricity. Cool weather, which reduces demand for air conditioning, and conservation help keep the state from reaching such crisis situations.

Borenstein said he believes generators are also asking less money for their electricity in part because of a federal order that took effect last month. The order limits the price power plant owners can charge when California’s supplies are strained.

Power sellers say there are more fundamental forces at work.

“There’s more supply relative to demand, which is softening prices,” said Gary Ackerman, executive director of the Western Power Trading Forum. “The market is working, and it’s providing cheaper wholesale power more quickly than any regulatory scheme could ever do.”

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Times staff writer Dan Morain in Sacramento contributed to this story.

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A Blip or a Trend?

Daily natural gas prices at the California border with Arizona--considered a bellwether of the state’s costs--have been declining in the last two weeks.

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Natural gas price per 1 million Btu

$9.36

Source: Natural Gas Week