Power Is Assured, Buyers Insist
Eager to take credit for a sudden plunge in electricity prices, state power buyers said Wednesday that they had helped rein in California’s runaway market by locking up power in long-term contracts.
Though no one was ready to call an end to the state’s energy crisis, the state officials said they had gained the upper hand over private generating companies after months of buying electricity at exorbitant prices. Now, they said, they find themselves in the refreshing position of turning down power sellers who demand excessive prices.
According to a new report on the state’s power contracting efforts, obtained by The Times Wednesday, 43% of the power the state needs during the 16 hours of each day when electricity consumption is highest is now guaranteed at a fixed price under long-term contracts.
“That means that’s a big chunk of the market that’s no longer there,” said Ray Hart, deputy director of the Department of Water Resources, which was thrust into the power-buying business last January when the wholesale price of electricity soared beyond the ability of the state’s two largest utilities to pay for it.
Others knowledgeable about the state’s turbulent marketplace credited more temporary pressures with tamping down electricity prices. Mild weather, falling natural gas prices, a decline in power plant breakdowns and an impressive conservation effort all have helped to bring wholesale electricity prices to their lowest level since April 2000, these experts said.
In the last couple of weeks, the wholesale price of electricity has dropped at times below $100 per megawatt-hour--less than one-fifth the price the state was paying one month ago and roughly one-20th the peak price the state has paid in the last six months. During some off-peak hours in recent days, the price has gone below $20 a megawatt-hour.
Some observers suggested that the generators--which have been widely accused of “gaming” the market and artificially driving up prices--have reversed course in response to the intense criticism and to investigations into their market practices. Various state and federal agencies are investigating allegations that the power suppliers manipulated California’s energy market to maximize their profits.
“They’re feeling the heat,” said Douglas Heller of the Santa Monica-based Foundation for Taxpayer and Consumer Rights. “Suddenly, there are all these cops on the beat. They’re trying to sort of cool things off a little bit.”
Commercial generators, which have denied manipulating the market, also denied that the price declines in recent days represent a retreat on their part.
“The market is responding to the normal laws of supply and demand,” said John Stout, vice president of Reliant Energy, a Houston power generator that sells into California. Reliant has been singled out by Gov. Gray Davis for having charged the state $1,900 per megawatt-hour in April.
“Supply is up and demand is not on its summer peak yet,” he added. “Clearly, there are a lot of things taking place to reduce consumption.”
But one factor that should not be overlooked, say officials with the Davis administration, is the long-term contracts.
“All of a sudden, [power sellers] find themselves in a very competitive market,” Hart said. “They’re a little shocked when they call in the morning and say, ‘We want to sell you megawatts’ . . . and we say, ‘No, we don’t need it. Come down a little on price and we can maybe work a deal.’ ”
At times on weekends or at night, when demand is at its lowest, the state has found itself with too much electricity, Hart said. He noted, however, that he still expects blackouts as the summer weather turns hot and air-conditioners flip on.
Between April 18 and May 31, the state signed an additional 14 contracts with power plant owners and marketers, bringing the total finalized contracts to 38. Another 23 contracts are in the works but have yet to be executed, Hart said.
Hart said those contracts have allowed the state to cut by roughly half the amount of electricity it buys in the spot market, where prices are unrestrained and soared at times last month to more than $800 per megawatt-hour. In comparison, the average price of the power the state agreed to buy under contract for the rest of this year is $138 per megawatt-hour.
The average price of the megawatt-hour contracted for by the state falls to $106 in 2002 and $89 in 2003.
Gary Ackerman, a spokesman for the Western Power Trading Forum, a trade group of power sellers, minimized the contracts as a factor in falling prices.
“No trader has mentioned that as being a factor,” said Ackerman. “I’ve rarely seen prices be explained by the positions of buyers and sellers.”
More important influences on prices, he said, are weather, demand for electricity and water supplies in reservoirs equipped with hydroelectric generators.
Conservation has been a surprise factor, with the state Energy Commission saying Californians used 11% less electricity last month than during the same period last year--far more frugality than many people predicted would be possible.
Other analysts noted the drop in natural gas prices. Most power plants in California burn natural gas to create electricity. Alan Wiggins, a natural gas analyst for Conoco in Houston, said that cool weather has caused producers to put more gas into storage than a year ago, which is keeping prices lower.
“You expect to see your highest storage injection in the spring, so this is not unusual,” Wiggins said. He added, however, that storage totals are running 2% to 3% ahead of last year’s levels.
To be sure, natural gas prices in the state are still more than twice as high as elsewhere in the nation, and big markups in prices of gas exported into the state by outside generators are being examined by state and federal authorities. But in the last few weeks natural gas prices have fallen well below their record highs reached last December.
Yet some analysts said the forces pushing gas prices lower could change, and prices could turn back up in California if the state has an abnormally hot summer.
“A lot will depend on the weather,” because sweltering temperatures would mean more air-conditioning use that would further tax the state’s power plants, said Robert Christensen, an energy analyst with the investment firm FAC/Equities in Albany, N.Y.
Officials of San Jose-based Calpine Corp., which has two new California power plants opening this summer, told Wall Street analysts on Wednesday that the new plants, plus cheaper natural gas, may bring electricity prices down this summer.
The state’s recent signing of several long-term contracts for power--including three with Calpine--is another factor, said Calpine spokesman Bill Highlander.
Also worth noting is that far fewer power plants are out of commission than in recent months, when planned maintenance and unplanned breakdowns consistently kept well over 10,000 megawatts of electricity offline on any given day--enough to supply power to as many as 7.5 million homes.
In recent days, the number of plants out of commission has dramatically dropped, with only about 6,000 megawatts of electricity offline. Part of that can be explained by the completion of spring maintenance. But breakdowns also have declined sharply.
Lorie O’Donley, a spokeswoman for the California Independent System Operator, which runs the statewide transmission grid, said the plants “have had their tuneups” and are less likely to break down now.
Still, Severin Borenstein, director of the University of California Energy Institute in Berkeley, said he believes it is possible that the state power buyers are taming wholesale power prices.
“It’s hard to tell,” he said, “but the basic economics of what they’re saying is perfectly plausible--that by contracting forward they’ve managed to make the market more competitive.
Told that the state claims to have locked up under contract 43% of the power it needs to buy during peak hours, he said, “That’s a serious number.”
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Times staff writers Nancy Rivera Brooks, Robin Fields, Mitchell Landsberg, Robert J. Lopez and James F. Peltz in Los Angeles, Tim Reiterman in San Francisco and Thomas S. Mulligan in New York contributed to this story.
