Keeping the lights on: An ongoing report of local power conditions
Uploaded: Tuesday, February 20, 2001 2 p.m.

Protecting the future of power
Utilities director hopes to secure energy supply, despite debate

by Marv Snow

The cloud of controversy over authorizing Utilities Director John Ulrich and City Manager Frank Benest to sign long-term power contracts has likely blown by, now that the city's Utilities Advisory Commission concurred with the argument that the community's future power needs must be secured as soon as possible.

Ulrich was criticized at the City Council's Feb. 12 meeting when he sought authorization for the he and Benest to enter into long-term contracts to lock in the city's power supply and prices. Two commission members told the council that night that they were upset Ulrich had not discussed the issue with them before going to the council.

At last week's Utilities Advisory Commission meeting, held Feb. 14, however, Ulrich explained it would be better to sign a contract for power over a longer period, like 10 years, instead of trying to buy it on the open market as PG&E is doing at skyrocketing prices.

Apparently satisfied, the advisory commission signed off on Ulrich's proposals, with some changes.

The commission suggested signing contracts for up to 50 megawatts instead of 75 as Ulrich originally requested. Members also felt that purchases should not be conducted on a lump-sum basis, but instead be bought over a period of time in different amounts.

Commissioners also asked for the formation of an oversight committee made up of at least two City Council members and others to be picked by the council.

As the Weekly went to press, the matter was scheduled to go back to the City Council at their Tuesday meeting.

Ulrich said he considers the securing of energy contracts to be urgent because of PG&E's well-publicized financial woes. "These are not normal times," he said.

Although the city is currently locked into a power contract through the year 2004 that will keep rates lower than those charged by PG&E, that contract expires in four years. The new 20-year contract the city recently signed is only for hydroelectric power from the Western Area Power Administration, which purchases power itself from PG&E.

And that is why, according to Ulrich, the city could be in danger. If PG&E goes bankrupt, it will not be supplying power to anyone on the grid, including Palo Alto.

"If PG&E goes bankrupt, they won't honor their contracts with anyone. Then what do we do?" Ulrich asked. "The contract is with Western, not us."

Ulrich said the city has to hope PG&E's financial situation improves, but there is no guarantee.

"I have put together a defensive position in case this happens," he said.

Ulrich said that there was a risk of entering into a long-term contract at a set rate and having the market value fall below the contract's rate.

The other risk is if the federal government doesn't limit PG&E's ability to charge higher rates, it could mean Western could pass on soaring rates to the city.

"During the life of that 40-year contract, Palo Alto did pay higher rates during some periods of time," Ulrich said.

In his report to the Council on Feb. 12, Ulrich said "...if the Pacific Gas and Electric Company files for bankruptcy or if PG&E gains approval from the Federal Energy Regulatory Commission to increase the wholesale energy rate it charges Western, the cost of Western power to the City may soar to current market prices...

"A PG&E bankruptcy and other factors could reduce the availability of long-term power contracts in the region," Ulrich said. "In January 2000, electricity could be purchased for nearly 3 cents (per kilowatt hour) A year later, in January 2001, the same product was selling for nearly 20 cents/kWh--a 600 percent increase.

"California can expect high energy prices and continued market structure uncertainty for several years before the actions needed to stabilize the crisis--new power plants, increased conservation, upgrades to transmission lines, new rules for the market--are put in place," Ulrich's report stated.


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