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Wholesale market, heat mean more revenue for City Utilities

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by Paul Flemming

SBJ Staff

High temperatures around the country and a changing marketplace have put about $7.3 million into City Utilities coffers for May, June and July, up from $2.4 million during the same period in 1997.

"In the past six weeks, the wholesale market has yielded prices higher than our retail market," said John Twitty, deputy general manager for CU. "What you're seeing are the growing pains of transition from a regulated environment to a deregulated environment."

The municipally owned CU projects it will sell about 61,000 megawatt hours on the wholesale market in July, generating about $3 million of revenue. CU will sell that wholesale energy at an average of $50.34 per megawatt hour in July, comparable to the price it gets at retail from local ratepayers.

In July of 1997 CU sold 48,150 megawatt hours on the wholesale market for an average price of $31.72. Twitty said this year's numbers represent a 59 percent increase in average price with a 25 percent increase in megawatt hours sold compared to last year.

The electric industry is moving toward a deregulated environment and wholesale electricity markets are this year more open than in the past, Twitty said. That, in combination with increased demand related to high temperatures, has led to more market forces bearing on prices. Twitty said he has heard in the last week of wholesale prices from $5,000 up to $10,000 per megawatt hour.

"The longer in advance (the purchase is made) the better price you're going to get," Twitty said. When purchases are made closer to the time it's needed a week or days prior "you are at the mercy of the market."

The changes in the market, namely higher prices, account for the bulk of the increased revenue for CU. Twitty said CU has provided electricity under three or four long-term, advance commitments in July. Those sales account for about a third of the amount of energy sold, but only about a sixth of the revenue.

Of the 60,000 megawatt hours sold wholesale, 22,000 megawatt hours were under ongoing, long-term commitments. But of the $3 million in July revenue, $515,000 came from those same sources, Twitty said.

Electricity was sold for as low as $20 per megawatt hour to a far-in-advance buyer, and as high as $144 per megawatt hour for more immediate purchases.

Selling excess capacity, Twitty said, is a good use of the utility's assets; he likened it to filling all 200 seats of an airplane instead of flying with only 100 passengers. Twitty said high demand for energy has recently put the utility's generators very near their capacity of 800 megawatts. Local retail customers of CU set a new peak for energy demand at 665 megawatts July 20.

The utility will sell at wholesale about 60,000 megawatt hours in July, Twitty said. With 31 days in July, CU has the capacity to generate 595,200 megawatt hours of electricity. If every hour of every day in the month were at the system's all-time peak of demand set July 20 a virtual impossibility local CU retail customers would require 494,760 megawatt hours.

In addition, he said, CU makes prudent sales with provisions that protect its first responsibility to provide local customers with electricity. All of the sales are interruptible, Twitty said, and are power-delivery transactions, as opposed to more speculative financial transactions.

"We're dealing with people we've dealt with for years and feel comfortable with," Twitty said. The sales are straightforward, he added, delivering directly on energy commitments.

He said liberalization of wholesale electricity markets has led others to practices that are riskier. Brokers and generators may sell already committed energy to a higher bidder and search on the open market for energy to fulfill earlier commitments.

With the volatile market for electricity, that has recently been the case, such practices can lead to big losses if generating capacity is scarce and brokered electricity costs from third parties spike. CU, Twitty said, has not undertaken such deals.

"We've done this in a way that insulates us from the horror stories you've heard about from around the country," Twitty said.

Associated Electric Cooperative Inc. has set new peak-demand records recently, as well. The cooperative, which serves 51 member distribution cooperatives in three states, set a peak demand record July 21 with 2,957 megawatts.

AECI has its own generating capacity of 2,466 megawatts and contract sources of another 970 megawatts for a total capacity of 3,435 megawatts, said spokesman David Burton.

AECI does not reveal the terms under which it purchases contracted electricity, but Burton did say recent wholesale increases have hit the Springfield-based cooperative.

INSET CHART:

City Utilities' wholesale electricity sales

July 1997 *July 1998

Megawatt hours48,150 60,633

Revenue $1.54 million $3 million

Average price/mwh $31.72 $50.34

*projected

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