Mark Golden is an excellent reporter covering the Power Scene.

OUR TAKEAWAYS:
* Power prices are declining in California as the "destruction of demand"
effect of higher retail power prices kicks in.
* The long-term power contracts signed by the various Power Producers and
Energy Merchants are looking like sweetheart deals for them, as evidence of
price weakness (from a base of extremely high prices) is beginning to
develop.
* The movement in prices in California is reflective of the message in our
Power Curve 4 report, where we show that forward prices are peaking this
summer.  Year/year power price comparisons are now projected to be flat
4Q:01, and declining afterwards.

****************************************************************************
***********************************

POWER POINTS:Great News! Long-Term Contracts Jeopardized

   By Mark Golden
   A Dow Jones Newswires Column

  NEW YORK (Dow Jones)--Those looking for even the slightest bit of good
news
for the state of California can find it in Friday's San Jose Mercury News.
"California is in danger of losing more than 40% of the power it has lined
up in
long-term contracts," says the lead of a major article, because Republicans
in
the state legislature didn't back the $12.5 billion bond deal last week.
  Getting out of most of those contracts would be the best thing to happen
to
California in a long time.
  Since the state went on its long-term buying binge, forward prices for
power
in the western U.S. have been falling steadily. Gov. Gray Davis announced
$43
billion in purchases lasting up to 20 years on March 5. Contracts for summer
power at Palo Verde, Ariz., a key western trading hub that feeds a lot of
power
into California, have fallen to $390 a megawatt-hour from a high of $600/MWh
in
late March. Further out, power for 2004-2006 at mid-Columbia River, a key
trading hub north of California, has fallen from $58/MWh in February to
$49/MWh
today.
  Companies like Calpine Corp. (CPN) and Dynegy (DYN) that took advantage of
the
state's buying binge are looking pretty fat and happy. In fact, they have
affectionately started calling the governor Gravy Days. Enron Corp. (ENE),
which
has been selling aggressively for two months, according to traders, is
looking
like a genius as usual. Generators that held out, like Reliant Energy (REI)
and
Duke Energy (DUK), may be sorry that they did.
  It's been a long time since those long on western power have felt serious
pain
in the markets, but that time has come. Power generators may not make as
much
profit this summer as last, and power traders that have taken long
speculative
positions may liquidate supplies for far less than they bought them. As was
seen
in the eastern U.S. power markets last summer, long positions can turn out
just
as painful as short positions.
  For California, the good news is that maybe spot purchasing costs this
summer
won't be as bad as once expected. The bad news is that the state government
is
by far the biggest "long" in the bearish forward market. It's safe to say
that
the $43 billion in contracts signed in March have declined in value by 15%,
or
$6.5 billion. That's almost as big of a financial disaster going forward as
everything that has gone on since last summer until now.
  Granted, this is a sort of damned-if-you-do-damned-if-you-don't situation.
Barring the utilities from the forward market during the first three years
of
deregulation was one of the most expensive public policy mistakes in U.S.
history. California should do some forward purchasing now, and it's such a
behemoth that it will move the market up when it does so. And, when it gets
done
buying, prices will come down simply because it stopped.
  But that's a footnote to the mismanagement of the financial side of the
energy
crisis. Early this year, when the state started down the path of
mega-purchasing, there was no shortage of advice not to do so. Long-term
prices
were embedded with too much of today's supply-demand imbalance. The state
would
have been much better off dealing with the imbalance first - since it would
have
to do that anyway - and gradually securing forward power as declining prices
reflected the improving situation.
  Since then, the state has done a great job of crushing demand. Electric
usage
is already down 9% from where it was expected to be thanks to a conservation
efforts and a slowing economy, and people haven't even seen their 30% higher
bills yet. Similar reduction has been seen in power consumption in other
western
states and in natural gas usage nationally. This is likely what has been
behind
much of the downturn in forward power prices in the West.
  This column started with a false "good news" lead. It would be great for
the
state if, after the state's credit rating sinks further, sellers exercised
their
option to tear up the five- and ten-year contracts. But they won't do that.
The
prices are too good from the sellers' perspective. Calpine, which has signed
three such contracts for the state, said immediately that it has no
intention of
reneging on its agreements. And Gary Ackerman, director of the sellers'
association, told the Mercury News that he didn't expect power companies in
general to back out of the deals.
  But there may be some real good news for California. The Davis
administration
hired dozens of people that have little or no experience in energy trading
to
purchase billions of dollars of power. Perhaps they are quick learners. This
week presented an excellent opportunity for the state to pick up what it
needs -
summer power for this year only - on sale. Low prices in the daily market
Monday
and Tuesday drove the summer contract prices down to $325/MWh, which is
cheap by
recent standards. The contract price moved up to $390/MWh, but the state
took
advantage of the opportunity while the window was open.
  "The week's condition in the market place helped. We were able to procure
some
energy for June through September," said state spokesman Oscar Hidalgo.
  And, hey, there were no blackouts this week.
  -By Mark Golden, Dow Jones Newswires; 201-938-4604;
mark.golden@dowjones.com

  (END) Dow Jones Newswires  18-05-01
  1952GMT(AP-DJ-05-18-01 1952GMT)



Raymond C. Niles
Power/Natural Gas Research
Salomon Smith Barney
(212) 816-2807
ray.niles@ssmb.com

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