LADWP Market Participation Growing
The nation's largest municipal electric utility is rapidly
increasing its participation in robust wholesale energy
competition, although as a government-run entity it is not directly
a part of California's ongoing restructuring of electricity and
natural gas. In the fiscal year just ended, the Los Angeles
Department of Water and Power did about $110 million in wholesale
energy deals, according to department sources, including one of its
biggest natural gas contracts ever for more than 6 Bcf of supplies
covering the next six months.
"LADWP is well positioned in terms of our assets to do well in
this wholesale market," said Bruce Hamer, LADWP's wholesale
marketing manager, noting the muni is moving ahead on its own after
a proposed alliance with a private sector trader, Duke-Louis
Dreyfus, was dropped last year.
The $2-billion-plus proprietary department that is wrestling
with major debt on its large out-of-state generation and
transmission assets and substantial excess capacity is also cutting
deals with large marketers, such as Enron, for "gas tolling" in
which it gives the marketer some of it excess power in return for
comparable gas supplies used to fuel its peak-shaving plants in the
Los Angeles basin.
"We are a utility with sizable physical assets, including 6,000
MW of generation and some wonderful transmission facilities
throughout the West," Hamer said.
"We base all of our transactions on our marginal unit, which is
a basin, gas-fired generating plant. In other words, if we had to
buy gas to run a unit in the LA basin, each transaction looks at
whether we can buy (wholesale power) cheaper than that and then
calculate the savings. If we can sell higher than that marginal
unit, then that is the net revenue from each transaction."
LADWP voluntarily adopted a FERC-authorized open access
transmission tariff, and it is separating its marketing efforts
from its control function, although the two operate from the same
high-security, remote location.
Unlike traditional traders and marketers who offer buy-sell
agreements at one of seven major western hubs for electricity,
LADWP makes its buy-sell wholesale decisions centered around its
physical ability to generate and transport power from numerous
in-state and out-of-state locations.
"So we take a much more conservative approach than Enron or any
of the other marketers," said Hamer, a 23-year DWP engineering
veteran. "We have this wonderful portfolio of
generation/transmission assets, which has lots of value. I'm
learning a lot about 'optionality value' of power plants."
Would Duke/Louis Dreyfus be doing better? "Probably," Hamer
said. "But our gas tolling deal with Enron is a good example of
what we've done on our own. Enron pays for a call option or
capacity option on power supplies. When it calls on it, they give
us gas and we in turn give them electricity. That's a gas tolling
opportunity, and we've extracted some pretty good value for that
optionality that we sold to Enron."
In short, Enron pays for a call on some of LADWP's substantial
excess generation and transmission capacity, and if it exercises
the option, it pays for the power with natural gas. LADWP, in turn,
either burns the gas in its fossil fuel LA basin generating plants,
or sells the gas at the California border.
With a large number of active marketers in the wholesale market
in the West -- some 180 pre-authorized to trade in the Western
System Power Pool -- Hamer said, LADWP is developing small
alliances on short-term deals to get some experience with different
marketers for a future time when they may be a full participant in
both retail and wholesale energy competition. The municipal utility
is not yet authorized to trade in California's state-chartered
power exchange (PX), but a proposed ordinance to give it that
authority is now before the LA city council.
Given its current success in the wholesale market, LADWP is
considering selling its transmission and generation assets. "That
is being considered in longer term strategies by Dave Freeman
(LADWP general manager) and others at headquarters," Hamer said.
"We could sell part of our system and buy more supplies from the
marketplace. It is a strategic decision with heavy implications.
The city council will have to be involved."
One option is to sell some generation on a phased basis over
time, but as the debt on some of the most capital-intensive plants
is paid down, there is less incentive to sell if they can produce
power at competitive prices, Hamer noted.
Richard Nemec, Los Angeles