The nation’s largest municipal electric utility is rapidlyincreasing its participation in robust wholesale energycompetition, although as a government-run entity it is not directlya part of California’s ongoing restructuring of electricity andnatural gas. In the fiscal year just ended, the Los AngelesDepartment of Water and Power did about $110 million in wholesaleenergy deals, according to department sources, including one of itsbiggest natural gas contracts ever for more than 6 Bcf of suppliescovering the next six months.
“LADWP is well positioned in terms of our assets to do well inthis wholesale market,” said Bruce Hamer, LADWP’s wholesalemarketing manager, noting the muni is moving ahead on its own aftera proposed alliance with a private sector trader, Duke-LouisDreyfus, was dropped last year.
The $2-billion-plus proprietary department that is wrestlingwith major debt on its large out-of-state generation andtransmission assets and substantial excess capacity is also cuttingdeals with large marketers, such an Enron, for “gas tolling” inwhich it gives the marketer some of it excess power in return forcomparable gas supplies used to fuel its peak-shaving plants in theLos Angeles basin.
“We are a utility with sizable physical assets, including 6,000MW of generation and some wonderful transmission facilitiesthroughout the West,” Hamer said.
“We base all of our transactions on our marginal unit, which isa basin, gas-fired generating plant. In other words, if we had tobuy gas to run a unit in the LA basin, each transaction looks atwhether we can buy (wholesale power) cheaper than that and thencalculate the savings. If we can sell higher than that marginalunit, then that is the net revenue from each transaction.”
LADWP voluntarily adopted a FERC-authorized open accesstransmission tariff, and it is separating its marketing effortsfrom its control function, although the two operate from the samehigh-security, remote location.
Unlike traditional traders and marketers who offer buy-sellagreements at one of seven major western hubs for electricity,LADWP makes its buy-sell wholesale decisions centered around itsphysical ability to generate and transport power from numerousin-state and out-of-state locations.
“So we take a much more conservative approach than Enron or anyof the other marketers,” said Hamer, a 23-year DWP engineeringveteran. “We have this wonderful portfolio ofgeneration/transmission assets, which has lots of value. I’mlearning a lot about ‘optionality value’ of power plants.”
Would Duke/Louis Dreyfus be doing better? “Probably,” Hamersaid. “But our gas tolling deal with Enron is a good example ofwhat we’ve done on our own. Enron pays for a call option orcapacity option on power supplies. When it calls on it, they giveus gas and we in turn give them electricity. That’s a gas tollingopportunity, and we’ve extracted some pretty good value for thatoptionality that we sold to Enron.”
In short, Enron pays for a call on some of LADWP’s substantialexcess generation and transmission capacity, and if it exercisesthe 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 marketin the West- some 180 pre-authorized to trade in the Western SystemPower Pool, Hamer said, LADWP is developing small alliances onshort-term deals to get some experience with different marketersfor a future time when they may be a full participant in bothretail and wholesale energy competition. The municipal utility isnot yet authorized to trade in California’s state-chartered powerexchange (PX), but a proposed ordinance to give it that authorityis now before the LA city council.
Given its current success in the wholesale market, LADWP isconsidering selling its transmission and generation assets. “Thatis 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 themarketplace. 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 overtime, but as the debt on some of the most capital-intensive plantsis paid down, there is less incentive to sell if they can producepower at competitive prices, Hamer noted.
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