CA Power Prices Dropping; Long-Term Contracts Increase

As gas prices plummeted more than $5/MMBtu last week at the Southern California border, conservation, cool temperatures and more long-term contracts pressured power prices lower in the state to the point where generators "are having to compete for first time in months to sell us energy," Ray Hart, deputy director of the California Department of Water Resources (DWR) said last Thursday.

"There is liquidity in the market now. We've been able to push back, and prices have taken quite a tumble." Hart, in a teleconference briefing, said DWR has improved its long-term contract position to the point where it now has signed contracts covering nearly 50% of its net short requirements in the peak market. The chief power buyer for much of the state, as of May 31, had 38 signed contracts, up from the 24 announced in its last update, April 18. It also now has 23 agreements in principle, although Hart said he did not expect all of those to result in final contracts. The contracts (including tentative ones) represent 10,950 MW of average annual capacity through 2010, up from 9,725 MW in the last report.

And the price has gone down. The average purchase price under the combined contracts for the remainder of 2001 dropped from $284/MWh in the last report to $138/MWh at the end of May. The average cost over the 10-year life of the contracts stands at $70/MWh.

Also, adding to the price downturn is the return to operation of two nuclear power plants, which are contributing 2,200 MW and additional power from qualifying facilities. The QF outages, which took 2,000 MW offline during April, currently have only 600 MW out, which Hart said "is about normal." The QFs are being paid going forward, even though they still face sizable past-due payments from the utilities. There are about 3,800 MW of natural gas-fired QFs and another 2,100 MW various renewable energy sources.

Conservation is cutting demand by about 11%, Hart advised, saying all those factors "are taking a significant chunk out of the spot market that we used to have to buy on a daily basis."

Nancy McFadden, an assistant to Gov. Gray Davis, also credited "increased scrutiny of the behavior of generators," and "turning up the public heat," for deflating power prices. Both Hart and McFadden, however, said the current prices do not mean the problems are over. If the state has a stretch of "super hot days, I fully expect prices will be much higher. We still need a price cap," Hart said.

Although the FERC-mandated price mitigation caps during power alerts were effective since the beginning of June, state officials gave them no credit for actually mitigating prices. They noted that some of the power during the early June emergency alerts was simply exported and then re-sold through a marketer back into California, avoiding any price limitation because the second transaction was considered a bilateral wholesale deal.

"When you can get around it (the FERC rule) by simply taking your power and exporting and allowing it to come back into the state uncontrolled through a marketer, it points out the inadequacy of the FERC rule, which is something the governor and the rest of us have been saying since the order came out," said Richard Sklar, an adviser to Davis for power plant development.

He did give credit to the governor's jawboning of the state's municipal utilities, saying they are getting close to an agreement in which the munis will contract with DWR for all of their excess power.

"I think we are beginning to get their (the munis') attention and let them know they are 'public' agencies, not for-profit agencies, so a cost-based pricing system has to be part of the process," said Sklar, noting he couldn't go beyond that right now. Some of the municipal utilities reacted publicly against what they viewed as threats from the state that their power plants might be confiscated, if they fail to cooperate for the summer crunch. The Sacramento-based California Municipal Utilities Association (CMUA), which represents the state's 31 munis, including the Los Angeles Dept. of Water and Power (LADWP), reacted angrily last week to the governor's intimation that he might seize public sector power plants if they didn't provide all of their excess capacity to the state at cost-based prices.

CMUA executive director Jerry Jordan said the state in times of power emergency alerts already is confiscating public-sector utility customers' power.

"Every time there is a rolling blackout in California, power is taken from publicly-owned consumers, who paid for reliability, and given to investor-owned utilities that have failed to provide that same security to their customers," Jordan said. "You're taking power from some Californians and giving it to others. I'm not sure how you respond to that other than doing all we can in conservation and everything we can to build new power plants, because we do have several new plants in the offing."

Like the merchant power generators, some of the municipals --- mostly LADWP ($180 million) --- are owed more than $300 million in past-due power bills, however, unlike the private sector generators, Jordan said the munis have not been asked by the governor to take "haircuts," or partial payments for what they are owed.

"I think that would be somewhat difficult for public agencies to agree to," Jordan said. "With the exception of Los Angeles, almost everyone else is sometimes selling into the market, but more frequently buying out. If they agree to take less than what they are owed when they sell, do they pay less when they buy?"

Following on the governor's threats, the California senate rules committee chairman indicated last week he was going to subpoena eight major merchant generators along with LADWP, and the state power-buying entity, the water resources department (DWR). Both private and public sector energy titans were singled out for criticism and scrutiny by California state officials.

The state senate listed the usual private sector suspects: Dynegy, Williams, Enron, NRG Energy, Reliant, Mirant, Duke and AES. The inclusion of LADWP and the state DWR was at the request of the ranking Republican member of the rules committee. The legislature and other state entities for some time have been asking why the DWR does not make clear how much and how it is spending state surplus funds to buy what is estimated to be more than $7 billion of bulk electricity supplies.

Regarding Mirant's announcement that it would delay an expansion of an existing power plant in the San Francisco East Bay to assess market development, Steve Larson of the California Energy Commission, which only a few days earlier had given an okay to the plant expansion, said the power plant-siting agency has not heard from any other plant developers who have approvals to move ahead with new generation facilities, and he fully expected the Mirant expansion to move ahead on schedule.

Mirant Corp. had said it would delay construction on its approved 530 MW expansion at its Contra Costa power plant, which received a permit May 29. "We have to be able to determine that this will be a viable investment before we can put a quarter of a billion dollars worth of steel on the ground," said Randy Harrison, CEO of Mirant's western operations. "We know, however, California needs this power and we want very much to get these turbines generating electricity by the scheduled 2003 start-up date." Mirant may begin site clearing operations so the turbines can be installed quickly once the market situation becomes more clear.

Other actions to deal with the state's energy crisis were non-starters, as the California Public Utilities Commission failed to act at its meeting Thursday on a plan to add to current gas supplies by tapping cushion gas at the Montebello storage. Nor did it act on the governor's plan to buyout Southern California Edison's power transmission lines. The CPUC's inaction on the Memorandum of Understanding between the utility and the governor, matched that of the legislature.

Market watchers were questioning whether SoCal Ed at this point, might be forced to join Pacific Gas & Electric in bankruptcy court because of the stalemate. The utility defaulted on another $200 million in debt that came due June 1. (It will continue to pay interest on the notes.)

Early last week, Ted Craver, Edison International's CFO, responded to questions, saying there was no indication a bankruptcy filing by the utility would immediately follow any final breakdown in regulatory and legislative activity on the MOU. "Exactly what comes out of the legislative process is fluid, but any of the proposals have as their core the objective of restoring the utility's creditworthiness," Craver said. Edison officials said they were not surprised by the legislative delays and the various proposals, but they were surprised that the CPUC has not moved ahead, at least on some issues they characterize as relatively "easy."

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