California signed another nine long-term power contracts for 900 MW in May and state-wide demand dropped by 11% (3,500 MW) compared to the same month a year earlier, Gov. Gray Davis administration energy officials announced over the weekend in a conference call with reporters. Overall peak demand for electricity dropped 10%, they said.

“Conservation is making a critical difference,” said Davis in a prepared statement. State officials also emphasized that the impact on the $0.03/kw retail rate increase and the new “20/20” state rebate programs were just now going into effect, and they expect them to spur additional conservation by the state’s residents and businesses.

State officials said prices were easing and the amount of net-short supplies the state must buy on the spot market had dropped to about 25%. However, they pointed out that with the outset of summer, the total volumes still needed to be purchased in the spot market were going up.

The FERC-mandated price mitigation caps during power alerts were effective last week for the first time, but appeared to have no downward pricing impact on the market, according to Ray Hart, an official with the state water resources department (DWR) in charge of the state’s electricity purchasing program. He said overall prices have “stabilized,” dropping in May by about 10% from April; 16% from February; and 45% below January levels.

The FERC price mitigation plan was easily circumvented last week, Hart and other state officials said. They noted that some of the power during last week’s 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, a former Balkans’ ambassador in the Clinton Administration and now an adviser to Davis for power plant development.

Sklar said that June and early July were critical to the state’s efforts to minimize rolling blackouts because a number of long-term supply contracts and the state’s $800 million conservation effort would begin to kick in this month. He said there were some 199 generation projects — most of them small, temporary peaking or expanded cogeneration plants — to get on line.

“Of the 2,200 MW, we were 95% confident we could bring on in May and June, we have 1,500 MW in that category, and the other 700 MW are still what we call ‘possible’, meaning we are doing more investigation and all the last requirements of the critical path are met,” Sklar said. “If that occurs we will get our 2,200 MW and then struggle on into August and September.”

He said that the governor’s jawboning of the state’s municipal utilities was having an impact and they are getting close to an agreement in which the munis will contract with DWR for all of its 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.

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.

California officials also confirmed that most of the state’s qualifying facilities (QFs) (4,800 MW) were back online and are being paid going forward, even though they still face sizable past-due payments from the utilities. There were about 3,800 MW of natural gas-fired QFs and another 2,100 MW various renewable energy sources.

“In the next week or so we’re going to be starting negotiations involving the investor-owned utilities about paying premiums for additional power that some of the QFs may be able to supply this summer,” Sklar said.

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