California Makes Long-Term Power Contracts Public

On orders from a state Superior Court judge, California officials Friday made public the 38 long-term electricity contracts it has signed this year with 18 suppliers and marketers. Along with the impact of conservation and favorable weather of late, the state's long-term contracts have cut its average cost of spot market power from $275/MWh in February to $121/MWh this month.

Earlier last week, Gov. Gray Davis indicated that the state's average daily cost of electricity in recent weeks has dropped below $30 million, compared with $50 to $60 million/day costs earlier in the year.

While noting that natural gas costs represent about 80% of the cost of wholesale power, the state's contracts are split 50-50 between ones that have a fixed electricity charge averaging 6.9 to 8 cents/kwh, and the other half that are tied to the price of gas.

"We've turned down a lot of offers in recent weeks because our strategy is to lock up about half of our power and leave the rest to deals that either fluctuate with the price of gas or with the spot market," said S. David Freeman, the state's chief energy adviser and the principal negotiator with suppliers. "We're not out of the woods yet, however. We still have lots more contracts to sign."

Some of the contracts carry provisions that allow parties to walk away if the state's bond sale is not completed this summer, but state officials downplayed this, saying even if the bonds are delayed, the suppliers are unlikely to abort the deals because they give them an assured revenue stream for new power plants that will be coming on line this year and next. Freeman said that 75% of the supplies negotiated by the state will come from new power plants, adding competitive pressure to existing generators, at least three of whom have no contracts with the state (Reliant Energy, Duke and Enron).

"They haven't made us a proposition that we feel is economically attractive enough, but there have been a lot of discussions with them (Reliant particularly)," Freeman said. "They just haven't responded rapidly enough. I think our strategy has unfolded a bit more rapidly than their ability to respond to it."

The state contracts break down into three categories: (1) around-the-clock 24/7 supplies, which carry the lowest charges; (2) so-called "6/16" (6 days, 16 hours/day), which are more expensive; and (3) dispatch-able peak-demand supplies, the most expensive power supplies.

"Our additional needs are primarily for dispatchable power; we have all the 24/7 power we can use," Freeman said. "We want to leave a healthy portion for the vibrant market that everyone assumes will take place at competitive prices."

As the state faces the prospect of hotter weather and soaring peaks, the long-term contracts now cover 45% of the peak-demand hours under fixed prices, so the impact of the hotter weather on the average spot price is going to be lessened somewhat, according to Ray Hart, head of the state water resources department's (DWR's) power buying operations.

"Due to the long-term contracts, we have now established a price (for power) that is within our existing (retail) rates and the quantities we have to buy is actually smaller than what's available (on the real-time and day-ahead spot markets)," Freeman said. "We're beginning to get competition again, so the prices are coming down."

In defending the deals that he helped negotiate, Freeman said the state should strive for half of its supplies from the spot market and the rest from long-term contracts. He noted that there are 23 other deals now being negotiated that eventually will add to the state's total.

Critics point to the fact that Enron and Duke, among others, last year were offering the state's major investor-owned utilities fixed-price contracts over multiple years at $50/MWh, which is twice or three times lower than some of the contracts the state later signed. The utilities were prevented from signing the earlier deals by state regulators' reluctance to get tied in to a fixed price for long periods.

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