Calif May Be Buying Big Power Supplies At Market's Top
By Mark Golden
  
03/07/2001 
Dow Jones Energy Service 
(Copyright (c) 2001, Dow Jones & Company, Inc.) 


NEW YORK -(Dow Jones)- When market-savvy energy companies like Enron, Calpine 
and Dynegy are selling like crazy, that might be a sign it's not a good time 
to buy. 


Nevertheless, the state of California is signing contracts for $43 billion 
worth of power under supply deals stretching up to 20 years. Some industry 
experts say these contracts could be overpriced by billions of dollars in a 
matter of months. What's more, deliveries for most of the supplies already 
signed for won't begin until after this summer, which is likely when the 
power will be needed most.


"The state should be involved in portfolio contracts to stabilize costs, but 
signing 10-year and 20-year contracts is inappropriate," said Michael Zenker, 
director of western energy consulting services at Cambridge Energy Research 
Associates. "That could end up locking consumers into higher rates for many 
years to come." 


The near bankruptcy of California's two largest utilities has forced the 
state to step heavily into the power markets. The state's idea behind signing 
long-term contracts is to stabilize its power costs by spreading them out, 
said Vikram Budhraja, whose company, Electric Power Group, is advising the 
state on the contracts. 


"What we set out to do is get California out of the spot market, bring 
stability to the market and get dependable supplies," Budhraja said. "We 
believe we have done that." 


But some said California could find cheaper prices for forward power if it 
waits. Power prices will continue to be very volatile for the next 12 months 
to 24 months, but the price of power for delivery in 2002 and beyond is 
likely to begin falling at the end of this summer, said Gerald Keenan, a 
senior partner for PricewaterhouseCoopers' utility consulting group. The best 
approach now is to sign contracts covering just a few months or years, he 
said. 


"It's not a good bet that gas prices will stay high for such a long time," he 
said. "And very little of that power will be delivered this summer anyway."


This week, California Gov. Gray Davis said the state has nailed down about 
7,000 megawatts for the summer - more than half the difference between 
generation already controlled by the utilities and the projected peak demand 
on a very hot day. 


But contract details released by Calpine Corp. (CPN), Dynegy Inc. (DYN), Duke 
Energy (DUK) and Williams Companies (WMB) belie the governor's claim. 
According to press releases from those generators, only 1,640 MW of the power 
they're selling will be available this summer. 


Not everyone agrees the state has overpaid. To head off a meltdown, 
independent power companies in California are giving the state prices 
slightly below the current forward market, said Gary Ackerman, executive 
director of the Western Power Trading Forum. 


"These are probably good deals," said Ackerman, who added that potential 
out-of-state suppliers are seeking higher prices because they don't have the 
same political motivation. "Never guess at what prices are going to do. They 
can always go higher." 


Still, California's inability to find much power for this summer means that 
the state's imbalance between supply and demand will have to be solved in the 
near term on the demand side, according to one perspective. Once demand falls 
- whether through higher prices, voluntary conservation, involuntary 
blackouts or even a recession - forward electricity prices in California 
could come crashing down. 


Davis has proposed conservation plans that he says will reduce electricity 
consumption by 10% from expected levels this summer. As part of the 
conservation program, Davis wants to install new real-time meters before 
summer at 43,000 industrial and commercial customers which will then get some 
market prices for their power and would be motivated to reduce consumption 
during peak-use hours. 


The current forward market reflects a skepticism that the meters and other 
conservation efforts will be anywhere near as effective this summer as the 
governor says. But some industry experts say the real-time meters alone could 
reduce power consumption by 10%, which would slash both spot and forward 
supply prices, again reason for the state to wait. 


"The state should absolutely install the meters first before signing the 
long-term contracts," Zenker said. 


The governor agreed, when asked about this in his press conference, that 
conservation efforts will weaken forward markets. But he said securing stable 
prices now is worth the cost. 


"Consumers will know approximately what it will cost them for power. The 
first two or three years they will probably pay less than the real cost of 
power. In the next five or six years they may pay a little bit more," Davis 
said. "I think that is a bargain that Californians can learn to accept." 


Moreover, if the state had signed deals for just a couple of years, the 
average price would be double the $69/average price of the longer-term 
contracts announced this week. Such prices, in turn, would have forced the 
state to raise electricity rates, something that is politically unpalatable, 
Zenker conceded. 


Davis and his staff defended their approach, saying that the problem for this 
summer will be so acute that it requires a multipronged attack rather than 
pursuing demand reductions first. 


"There is no one piece that is going to solve this problem," Budhraja said. 
"All have to be pursued simultaneously." 


-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com



 

  
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