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Enron Mail |
FYI.
California Struggles in Role Of a Large Buyer of Power By REBECCA SMITH Staff Reporter of THE WALL STREET JOURNAL Despite proclamations by Gov. Gray Davis that California finally has gotten the upper hand over its electricity crisis, there are new signs that the state is struggling in its role as an enormous power buyer. For the first five months of this year, the state Department of Water Resources, in charge of purchasing electricity on behalf of two big, financially ailing California utilities, bought too little power to meet the state's needs and, as a result, risks triggering $1 billion in federal fines. Then, for the past few weeks, the DWR, as the agency is known, has been buying too much electricity, potentially saddling rate payers with the cost of juice they won't ever actually use. Finally, a slew of long-term contracts the state signed with suppliers, intended to calm a volatile spot power market that sent prices to record levels in recent months, may actually end up being too expensive. As new power plants crank up here over the next two years, Californians appear to be locked into paying rates for as many as 20 years far in excess of what market prices are likely to be. State officials defend their power-management work, saying the negotiation of the long-term contracts and the daily power-purchasing record of the DWR have helped bring down electricity prices from punishing levels in recent weeks and have reduced the threat of blackouts. S. David Freeman, the governor's energy adviser, likens the state's job performance to "a plane that landed safely" after undergoing harsh turbulence. If so, it is a pretty bumpy approach. Take the case of purchasing too little power. Back in December, the Federal Energy Regulatory Commission imposed financial penalties designed to compel California utilities to lock in more power on the "forward" market and to reduce their dependence on last-minute purchases that jeopardized electric-system reliability. But in the 163-day period between the time the penalties were ordered and June 12, the DWR was judged by regulators to have purchased too little power 77% of the time. That, in turn, triggered penalties of $100 for each megawatt hour of power purchased by the California Independent System Operator, above certain thresholds, in its "real time" energy market. State officials notified FERC late Friday that the penalties had become astronomical and asked that they be eliminated. In its meeting Monday, FERC is expected to roll out broader price controls for the Western power market. But it isn't expected to address the penalty issue. Now the state faces a new problem of at times purchasing too much power, partly due to the activation of 38 long-term power contracts signed by the state since January. On Friday, Gov. Davis released heavily censored copies of these documents after a judge compelled him to do so as a result of lawsuits brought by Republican state legislators and a consortium of news organizations, including The Wall Street Journal. The plaintiffs will go back to court June 22 to request complete disclosure of the contract terms. In news conferences Friday and Sunday, state officials depicted the contracts as a victory for the state, which has been grappling with a huge supply-and-demand imbalance in its electricity market since last summer. "We had a mighty tussle to negotiate these contracts," said Mr. Freeman, adding that they provide energy at prices "anyone would consider just and reasonable." Some industry executives believe the contracts tell a different story. Jack Adrian, a power-industry executive who has been building power plants for 39 years, said his analysis leads him to believe "there's nothing to boast about here. The suppliers are getting the best of a desperate customer." Mr. Adrian, chief executive of California-based Delma Power Co. and a former executive at Edison International, parent of one of California's ailing utilities, said it is impossible in some instances to determine what prices the state has committed to pay because key pieces of information have been deleted. But he said where numbers are available it is clear that "prices are way too high, several orders of magnitude higher than anything ever permitted the utilities." Many of the contracts contain "take or pay" provisions that commit the state to pay for power for five to 20 years, whether or not it is needed. That may help to explain why in June a new problem has cropped up -- "overscheduling" -- where the state, at times, has ordered too much power to be delivered. To keep from overloading electric lines, the ISO has had to order some generating units to produce less juice. In the first 13 days of June, there were excess-supply problems on nine days. It is unclear if the state was able to resell any of that excess power and, if so, at what prices. State officials declined to comment. An examination of the long-term contracts shows about half contain fixed power prices. The rest have prices that fluctuate depending on fuel costs and other factors. Mr. Freeman said the state has negotiated prices that average $69 a megawatt hour for the next 10 years. For now, though, according to the state's own statistics, it appears California is paying substantially more than that. In five of the past six months, spot-market prices have been lower than the average price paid by the DWR. Mr. Freeman said forward contracting by the state is the reason spot prices have fallen. Regardless, it puts the state in an awkward position. Before FERC it is arguing that spot power prices are neither just nor reasonable and must be restrained. It also wants multibillion-dollar refunds from wholesale power suppliers. Yet, within California, state officials are making the case that the prices in the contracts it has signed are fair even though they are, in many cases, higher than spot prices. Analysts say it isn't clear how the state intends to resolve this apparent contradiction. In effect, they note, California is seeking refunds from generators on the lower spot-market prices they charged, while trumpeting contract prices which are, in many cases, higher. Write to Rebecca Smith at rebecca.smith@wsj.com
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