Aquila taking cautious approach to California gas market

Aquila Inc. began winding down its California electricity position last year when it became apparent Pacific Gas & Electric Co. was paying more for wholesale power than it could collect in retail rates, said Aquila CEO Keith Stamm. The company is taking a prudent approach to the California gas market, Stamm said, but has not 'exited completely.'

By Kate Thomas
OGJ Online Staff

HOUSTON, May 14 -- About this time last year, Aquila Inc. was selling electricity to Pacific Gas & Electric Co. for $300-$350 Mw-hr, more than the California utility could recover in retail rates, the company's trading desk concluded.

At that point the energy marketing and trading company began winding down its California electricity position, Aquila CEO Keith Stamm said in an interview. In the interim, California gas prices have exhibited the same volatility.

Stamm said Aquila has not "exited completely" the California gas market, but its approach to volatility in that market is guided by by "prudence." Aquila, which recently completed an initial public offering (IPO) and partial spinoff from parent UtiliCorp United Inc., is among North America's top five gas and power marketing companies.

High energy prices raise the risk of a political backlash, but Stamm said the prospect of price caps or other price controls only increase uncertainty boosting volatility even more. Products with "high human value" such as energy equates to political risk, he said.

"That's why we don't think water will ever commoditize," Stamm said. Because water is necessary to sustain life, it is has very high human value, he said.

Stamm called the need to develop physical gas and power delivery capability "absolutely essential." Prior to the IPO, Aquila spent much of last year seeking a partner with generation assets to complement Aquila's trading and marketing expertise.

Stamm said Aquila is still interested in boosting its access to generation assets. "We think it will be easier to have those discussions," he said, now that Aquila's value has been "crystallized" by the market. Among Aquila's options are building generation, buying it, joint venturing, and engaging in tolling arrangements, Stamm said.

The company's preference is for fast injection and fast withdrawal gas storage and peaking power plants. "Those units have a lot of flexibility," Stamm said, serving as "call options to clip the peaks." However, generation assets are a "means to an end. We don't think we need 50,000 Mw. You won't see us getting into gas or coal reserves. We don't have an aversion to assets, but we don't cling to them."

Of equal importance to customers is the strength of a supplier's balance sheet, Stamm said, which provides the reassurance they can collect if they don't receive the product.

Today's energy price volatility "is way outside the norm," but it is creating considerable interest in the company's weather risk and guaranteed generation products, Stamm said. Because energy prices declined for almost a decade, many chief executives were not aware how exposed their companies were until high energy prices began to hurt earnings.

"The appetite for these products will last a lot longer than the volatility," Stamm said. Demand for Aquila's weather risk products has more than doubled and guaranteed generation demand was up 20% in the first quarter of 2001 over 2000.

Aquila has struck a complex deal with Alcoa Inc. that involves weather and energy at one of its Southeast plants that if it works could be expanded to other locations, Stamm said. In another weather deal, Aquila pays off if it rains in Japan on the weekends keeping that nation's avid golfers off the courses.

Stamm said the company has agreements with a number of reinsurers to lay off risk. At the same time the insurance industry has also become a competitor for energy weather risk.

The difference, Stamm said, is that the industry pays off with a check, compared to Aquila which delivers the energy. He spoke in Houston at a Energy & Risk Management conference.

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