State Expects Huge Losses on Surplus Power

The first detailed breakdown of California’s commitment to purchase electricity projects an oversupply so large that in the next nine years consumers could pay as much as $3.9 billion for power that isn’t needed.

A Department of Water Resources analysis obtained by The Times indicates that in some years the state expects to dump a third of the power it is purchasing for California’s biggest utilities--at losses approaching 80 cents on the dollar.

Power purchased at an average price of $75 per megawatt-hour is expected to sell for an average of $16, the analysis shows.

In one three-month, low-usage period expected next spring, the department estimates that 57% of its power will have to be sold at a loss, costing utility customers as much as $193 million. The numbers show power surpluses will reach their peak in 2004 and then gradually decline through 2010.

The state reached its conclusions by comparing its commitments under the long-term contracts negotiated this year to estimates of electricity demand and market costs through 2010.

Industry experts say surplus energy sales are common. But the projections by DWR greatly exceed the industry’s rule of thumb that surplus sales should not exceed 5% of the power purchased.

DWR officials and consumer advocates place much of the blame for the projected surpluses on a policy that has allowed large industrial users to stop buying electricity from utilities and instead strike deals directly with private energy companies. As a result, the amount of electricity demand DWR now expects is one-third less than projected when the contracts were signed, leaving the remaining utility customers to absorb the losses.

“We have essentially put ourselves in an energy straitjacket which will cost us billions of dollars over the next several years,” said William B. Marcus, chief economist for JBS Energy, who reviewed the DWR forecasts for The Times.

But the projections, outlined in confidential documents prepared for the Legislature, also reinforce critics’ charges that in 54 separate agreements with energy companies, the Davis administration bought too much power for times of low demand. Electricity cannot be stored, so when there is no demand for it in California, the surplus must be sold elsewhere.

A diverse array of critics, including Republican lawmakers and consumer groups, have urged Gov. Gray Davis to renegotiate many of the contracts to remove requirements for large purchases during low-usage periods.

Michael Shames, executive director of the Utility Consumers’ Action Network in San Diego, said the forecasts now provide dramatic new evidence of “the inflexibility of these contracts in which the state is essentially being forced to be the full risk-taker.”

The agreements were reached after the state decided in January to buy electricity on behalf of financially troubled Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric. Those utilities were driven deep into debt by high wholesale electricity prices in the market California created under a 1996 deregulation plan.

Long-Term Pacts With Set Prices

Once the state stepped into the power-buying business, it moved quickly to sign multiple-year contracts with energy producers that guaranteed the delivery of electricity at set prices. The strategy allowed the state to escape the spot market, where prices had soared as high as $500 per megawatt-hour--roughly equivalent to buying a gallon of milk for $20.

This week, DWR officials defended the contracts and the surpluses they engendered, saying they have had their intended effect--to drive down spot market prices. Plummeting prices have reduced DWR’s overall expenditures for power in recent months. The same amount of power purchased by the state in February for $1.4 billion cost $415 million in October.

“What may make us look bad in the public eye may actually be making us look very good in the market in terms of prices,” said Oscar Hidalgo, a spokesman for DWR’s power-buying branch.

“In order for us to get stability, we have to go through some months of surplus.”

But he said the projected surpluses are higher than anticipated because state regulators have allowed large manufacturers, grocery stores and other big businesses to opt out of the system.

So many businesses have cut deals with independent energy companies, he said, that the utilities’ overall power demand has shrunk by 13%. The impact on DWR, which purchases whatever electricity is needed beyond that generated by the utilities, is a 33% reduction in energy needs.

“It changes the landscape significantly from what we thought it to be,” Hidalgo said. “There are tremendous impacts down the road.”

Shames, the consumer advocate, estimated that the state could cut by half the amount of power it sells at a loss if the Public Utilities Commission would forbid big users to buy power directly from independent producers.

Energy Firms Blame Contracts

Energy company officials, who hope to lure customers from the utilities, disagree, saying the root problem is the long-term contracts. They argue that the contracts are too expensive and require the state to take too much power at low-usage periods.

“If there is a skunk in the basement, it’s better to get the skunk out than to lock all the people in,” said Richard Counihan, director of public affairs for the Texas-based Green Mountain Energy Co.

Marcus said he fears that the surpluses could have far more serious consequences than high prices for consumers. The power glut will discourage further development of renewable energy--such as wind and solar--and stop companies that don’t have long-term contracts with the state from building new power plants, he said.

He predicts that in 10 years California could find itself with another energy shortage, fueled by high growth and a hiatus in power plant construction.

“We have through these contracts sowed the seeds for the next boom-bust market 10 years from now,” he said.

After months of defending the contracts, the Davis administration has asked several companies to voluntarily renegotiate their contracts. So far, no serious negotiations are underway.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Selling at a Loss

An analysis by the Department of Water Resources shows that California expects in some years to sell at a loss as much as one-third of the power purchased for the state’s three biggest utilities under a series of long-term contracts.

*--*

Power purchased Cost per % of Cost of by state under megawatt- contracted selling long-term contracts hour power sold surplus power (in millions of as surplus at a loss megawatt-hours) 2002 24.8 $127 31% $540 million 2003 47.0 $83 24% $610 million 2004 63.3 $72 25% $772 million 2005 61.0 $68 20% $544 million 2006 62.6 $65 18% $490 million 2007 62.6 $65 16% $426 million 2008 62.4 $65 10% $240 million 2009 62.7 $66 7% $177 million 2010 62.5 $66 5% $122 million

*--*

Note: A megawatt-hour is about enough electricity to supply 750 homes for one hour.

Source: California Energy Resources Scheduling