Initial Legislation in CA Gets Low Marks
California Gov. Gray Davis on Friday signed a short-term measure
(AB 7X) to allow the state to get into the bulk power spot
purchasing business immediately. He also ordered the state water
resources department to begin setting up a power auction process
anticipating it will be authorized by another new state law that
will be finalized this week to seek long-term electricity
contracts. Observers and market participants, however, say the
measures probably are inadequate to solve the state's current
In its current form, Assembly Bill 1-X bars the Department of
Water Resources from buying power for a price of greater than 5.5
cents/kWh ($55/MWh). The DWR would sell the power for the same rate
to the utilities and they in turn would sell it to their customers
at rates fixed a penny and a half or so higher. The difference in
wholesale and retail prices supposedly would be used to slowly
paydown the utilities mounting $12 billion in unrecovered costs.
The governor expects "a great deal of interest" among suppliers
in doing business with the state, which he characterized as much
more credit-worthy than the state's two principal investor-owned
utilities. He expects suppliers to be more than willing to sell
power at prices in the 5 to 5.5 cent/kWh range.
"I can assure you the prices will come down and reliance on the
spot market will drop dramatically," said Gov. Davis. Observers,
however, were not so sure. In fact few expressed much confidence in
the state's plan in its current form.
Many power generators argue 5.5 cents/kWh ($55/MWh) is far too
little unless contracts have significant terms of greater than 10
years. Short-term power supplies have been going for $35/kWh. "The
$55/MWh threshold for power contracts and absence of any near-term
credit support make AB 1-X unviable," said Merrill Lynch analysts
in a research note on Friday.
"We haven't said that we would" sell power at that price, said
Duke Energy spokesman Tom Williams. "What we've said is we would
participate in an auction process... But if it comes out that the
auction process is not a good thing for us to do, [we will just say
no]. We have our own bills to pay. You don't just say 'I want power
and I'll pay only this much' and have it appear miraculously.
That's not the way things work."
Williams noted that about 90% of the cost of producing power is
the fuel, and right now the five-year strip for natural gas in
California would make the price of power between 8 and 8.5
cents/kWh. The price goes down if the term is longer.
"We offered 5-cent power in August," he added, "but due to the
price of natural gas that went up to 6 cents/kWh in mid-November."
Currently Duke has little or no power left to sell in the short
term. It has sold 90% of its power in the forward market and left
10% in reserve to compensate for outages. Duke, with 3,351 MW at
four power plants, represents 5% of the state generation market.
Reliant Energy offered to the state last week five- to 10-year
contracts in which it would supply power at 2 cents/kWh. There's a
catch, however: the state or the utilities would have to supply the
natural gas, which as Duke's Williams noted makes up the majority
of the cost of the power. Spot gas prices at the Southern
California border are about $11/MMBtu.
"We've got a couple of other proposals that we are discussing
confidentially with the state officials today for long term
contracts under different price structures," said Reliant's Richard
Wheatley. "The best thing I can tell you is one of the most
workable solutions is the 2 cent/kWh charge; that's if they bring
the gas to our plants. [The gas cost] is a heck of a price
escalator. No it [won't come out under their 5.5 cent/kWh cap
unless] they supply the gas. In effect it would get around that
[price cap] requirement. Whether or not they want to bring the gas
to the table or not is another matter."
Wheatley said Reliant was spending $5 million to $15 million a
day on gas to fuel its own California power plants, which produce
3,800 MW in-state. He predicted the $400 million allocated to the
DWR to buy power would last only about seven days under recent
demand scenarios. "You have to question the ability of the DWR
subsequently to go out and try to sell $8 billion to $10 billion in
revenue bonds given the uncertainty of the marketplace and the
instability and volatility out there. There are a lot of questions
out there and very few answers."
The utilities should continue to have the gas required thanks to
an order by Energy Secretary Bill Richardson on Friday that forces
gas suppliers, many of whom have cut off or are about to cut off
supplies to Pacific Gas & Electric, to continue supplying gas
to the state's utilities (see related story this issue). He
indicated Reliant might not be subject to Richardson's order
because it cut off PG&E weeks ago. Reliant already has
"hundreds of millions" of unrecovered costs of its own in
California, he said.
Merrill Lynch analysts expressed hope that the state Senate
Energy Committee may make "constructive enhancements" to its plan
this week to garner at least a little more support from generators.
"First we expect support for more contract price flexibility and a
near-term auction process," Merrill Lynch said.
Susan D. Abbott, Moody's managing director of corporate finance,
said just because the legislature passes a bill doesn't mean that
the state's power generators are going to be willing to sign on the
dotted line, "and that's crucial." The state's plan as it stands
does little to fix the short power supply situation if generators
aren't on board. She said Assembly Bill 1-X probably will not
trigger an upgrade in the utilities' credit ratings because too
many questions remain unanswered. The utilities still could be
forced into bankruptcy and that could make matters significantly