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LADWP Market Participation Growing

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

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