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Power Crisis Puts Spotlight on Middlemen

Deregulation: Federal officials seek to minimize the role of energy brokers.


SACRAMENTO — The utilities are billions of dollars in debt, power supplies have become so fickle that businesses risk losing millions, Christmas light displays have become a symbolic casualty, and higher rates loom for all consumers as the region copes with the most significant energy crisis in two decades.

But in between California's big three utilities and their millions of customers is a multilayered, subterranean world of market traders, middlemen and hedged bets.

It's comparable to the trading that goes on in the stock market, and it comes down to this: A single electron might be traded a dozen times before it reaches a computer or toaster--and the price may go up with every trade.

"This is legitimized gambling," said Gary Ackerman, executive director of Western Power Trading Forum, an association of players in California's electricity market.

The marketplace trading is at the heart of the deregulation system that state and federal officials are now struggling to correct in an effort to guarantee reliable power supplies at reasonable prices.

By insulating utilities from a tangle of middlemen, federal energy regulators hope to reassure the country that California's experiment in competition will actually lead to cheaper electricity.

An order Friday by the Federal Energy Regulatory Commission frees the state's biggest buyers of electricity--the three giant utilities --to go cut deals outside the market. It encourages them to sign long-term contracts at fixed prices to avoid a market where a megawatt-hour cost $30 last December, $150 in June and $1,500 last week.

Such deals would shrink the volume of electricity traded in the "day-ahead" market and minimize the role of the more than 100 electricity marketers and traders operating in California--a virtual industry that sprang up in the competitive marketplace unleashed by the 1996 deregulation law.

Federal Order Criticized

The commission's order was criticized by California politicians and utility officials for not going far enough to cap rates, while consumer advocates cautioned that long-term contracts signed at a time of panic could lock in higher-than-justified rates. The Federal Energy Regulatory Commission has convened a summit in Washington tomorrow to hash out problems that are increasingly affecting energy supplies throughout the West.

But one impact of the federal order would be to curtail activities by the traders, who range from subsidiaries of power suppliers to independent entrepreneurs.

Some middlemen are connected to firms that own power plants, such as Duke Energy Trading & Marketing, or Powerex, an arm of British Columbia's provincial utility. In those cases, the trading arms try to get the best possible price for the firms' electricity, perhaps locking up some in contracts and selling the rest on the spot market.

Others own no power plants, but simply seek to buy low and sell high, such as the Morgan Stanley Capital Group. They may buy a block of electricity in the market a day, month or year ahead and resell it to the market, another broker, a city or a utility.

Frank Wolak, a Stanford University economist who monitors the market for the agency overseeing California's electrical grid, said marketers play an important role by equalizing prices. They are a problem, he said, only to the extent that they have tied up access to power through contracts, and then withhold that electricity from the market to raise prices.

This winter for weeks at a time, grid operators have struggled to find enough electricity to meet each evening's peak demand--even though that peak is just three-quarters of the summer's high point of consumption. Grid operators blame the problem on many power plants shutting down at the same time for maintenance and installation of air pollution control equipment--work, they say, that was put off during the summer to avoid blackouts. But Wolak and others point out that generators and marketers could easily create scarcity--and thus trigger high prices. The Federal Energy Regulatory Commission has authority to investigate and punish such behavior, but their Friday order called simply for monitoring.

Here's a hypothetical example of how the market works, according to Ackerman, whose group represents 29 trading firms:

A Virginia-based company that owns a gas-fired plant in Huntington Beach has a contract to sell all the power it produces for the next 15 years to Williams Companies, an international energy company, based in Tulsa.

Williams Companies supplies the plant with natural gas, buys the power at a price set in a 1998 contract, then turns around and sells it on California's digital electricity marketplace, called the Power Exchange. Williams could, for example, offer in December to sell 100 megawatts--enough electricity to supply 100,000 homes--for delivery in January, at a price, say, of $130 per megawatt-hour.

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