Temperatures--and Profits--Soar for DWP

It may be a summer of budget busting costs for other cities’ utilities, but for the Los Angeles Department of Water and Power, July’s heat blast has meant bundles of cash.

The DWP is sitting pretty because, unlike many other utilities, it still owns its power-generation system, giving it constant access to ample, cheap power while others must turn to the new roller-coaster open markets for electricity.

What’s more, DWP is now selling vast amounts of power to other utilities--up to a fifth of its total capacity--timing its sales carefully to cash in on soaring prices in the wild new private markets for power.

In fact, as DWP bulk power director Marcie Edwards sees it, deregulation, which poses huge potential problems for the DWP in the future, looks awfully good so far.

“We can take advantage of the upside,” said Edwards, “and we are shielded from the downside. The future I see is very positive at this point.”

DWP posted a net income of about $41.7 million from the sale of surplus power in the fiscal year that ended in June. That’s a 44% gain from last year’s net income of $29 million.

Most of the boon came in May, June and July, when the weather started heating up in neighboring markets. In July, the agency netted $6 million from sales of surplus power, up 50% from $4 million in July 1997.

“We are liking this,” said Frank Salas, executive assistant to DWP’s general manager.

The news from DWP is in stark contrast to that from the Midwest and other areas, where utilities are reeling from steep price hikes. Midwest electricity prices per megawatt hour rocketed as high as $7,000 in recent weeks--hundreds of times what are considered average rates nowadays in California markets.

While utilities in Western states are faring better, those that, unlike DWP, are dependent on the whims of the new market have been buffeted too.

Southern California Edison, for example, which has been required by law to buy its power from the newly created California Power Exchange (think of the New York Stock Exchange of electricity wattage) has had to contend with substantial price hikes.

These have come, Edwards thinks, with the bumps inherent in the process of creating markets from scratch.

But hot weather that has some electric utilities straining to keep up hasn’t helped--glitches in supplies and cranked-up air conditioners have conspired to send prices spiraling in California too.

For a brief moment earlier this year, prices at the California exchange reached an astronomical $5,000 per megawatt, said Ed Freudenburg, an exchange spokesman.

Changes in the market’s rules will prevent such high prices in the future, he said, and more recently, prices of about $20 per megawatt have been more typical. But occasional spikes still bring prices to $150 per megawatt.

Southern Edison, which has divested itself of much of its power-generating facilities, is dependent on this market. But utilities such as DWP, which have excess generation capacity, “during heat waves, they are in the catbird’s seat,” said Tom Boyd, a spokesman for Southern California Edison.

None of the price changes affect consumers directly, since their electricity prices are kept fixed for the moment. But when Edison must pay high prices for power, profits are cut and it becomes harder to pay its corporate debt.

DWP on the other hand may pay off its massive $4-billion debt more quickly. That debt has prompted the agency to embark on a massive restructuring to make it competitive once the electrical market completes its deregulation and the city utility must compete with rivals capable of producing cheaper power during routine times.

Through this summer, however, DWP has emerged glowing and unscathed.

With coal-fire plants out of state and numerous plants in the L.A. Basin, DWP can produce power for far less than this summer’s peak prices. And after it takes care of the needs of its primary customers, the people of Los Angeles, DWP can sell whatever’s left over, Edwards said.

And sell it does. Arizona, Nevada and utilities throughout California buy power from DWP through so-called bilateral agreements.

New markets also have opened through a new strata of electricity entrepreneurs launching risky wholesale brokerages for power.

Because they assume the risks, “a lot of our revenues are from the losses they’re posting,” Edwards said.

Also working in DWP’s favor is its power plant at Castaic Lake. The plant is a golden goose that offers the agency the enviable ability to, in a sense, store power when it is cheap and sell it when its price quadruples.

To do this, the plant buys electricity at night when it costs next to nothing and uses it to pump water uphill. But during the day, when prices soar again to meet peak-hour demands, DWP lets the water cascade through turbines and sells the resulting power at a considerable profit.

It is Edwards’ job to capitalize on these price differentials hour by hour in a dizzyingly complex arbitrage game. Like the brokers huddled over trading computers at the California Power Exchange in Alhambra, Edwards is on the cutting edge of the raucous new world of utilities markets.

She cranks up a plant here, turns one down there, then buys power here and sells another batch there, all while keeping abreast of power demands that wax and wane throughout the day.

To predict how much electricity will be needed the next day, she relies on weather reports, taking in at least four a night. She refers to L.A.’s power-generation system as a “resource portfolio” and talks of “playing into the market.”

The job, she said, is a little like trying to figure out how many teapots to keep on the stove as unexpected guests keep filing in for tea.

“When someone calls and says a nuclear plant in Nevada can’t reduce their load right now and has to sell, I say I’ll buy--for a buck,” she said. “But I have to figure out what to shut down here.”

DWP purposely shies away from price gouging, she said. Nonetheless, it has sold power this hot summer for the princely price of $200 a megawatt hour at some points, Edwards said.

“We cut the best deal we can for L.A.,” she said.