Electrical switch: Cheaper power causes hefty losses for California California is amassing big power-trading losses By Rebecca Smith THE WALL STREET JOURNAL July 31 — Mild weather means that California is escaping blackouts, but it also means that the state is amassing power-trading losses that are adding to the cost of an energy mess now in its 15th month. INTERNAL DOCUMENTS show that so far in July, California has resold the equivalent of 8% of the power it bought under short-term and long-term contracts that were designed to reduce the state’s reliance on the volatile and costly spot market. The problem is, the state has had a surfeit of power, and it has been selling the juice into the market at a fraction of the price it paid, leading to losses from July 1 through Thursday of about $30 million to $35 million.

The losses illustrate the difficulties dogging the state’s new energy czar, the California Department of Water Resources, despite a softening of electricity prices and demand. The department got into the power-purchasing business in a big way in January, when the state’s biggest investor-owned utilities quit buying power because they were no longer creditworthy.

Since then, the state has signed $43 billion worth of contracts, one for as much as 20 years, in a bid to tamp down high spot-market prices. Critics now say it was a mistake to lock in so much power at such a high cost. Power officials say the state has been in the odd position since last month of having too much power contracted for off-peak hours. “It’s something you’d expect when you first get into a new business and you’d hope to reduce it,” said Pete Garris, chief of operations for the power-purchasing agency.

Despite the agency’s power-trading losses, total market costs still are down substantially from previous months, partly due to price limits set June 19 by the Federal Energy Regulatory Commission. Slacker demand also has been a factor. In June, Southern California Edison, a unit of Edison International, sold 11.8% less electricity to its customers than in June 2000, reflecting energy conservation and reduced demand for air conditioning.

Since January the state has spent $9.5 billion buying power at an average cost of $237 per megawatt hour, according to internal DWR documents. That is more than double the price of wholesale electricity last year, when prices averaged $114. The state’s cash-strapped utilities have reimbursed the agency $1.53 billion of the $9.5 billion it has spent so far. As a result of the huge shortfall, the state has tapped California’s general fund and now is pursuing a plan to sell $12.5 billion worth of revenue bonds to replenish its coffers.

The state signed dozens of long-term power contracts after January, pushed by federal energy regulators to protect itself against spot-market volatility. So far this year, it has spent $851 million under long-term contracts, $2.36 billion under short-term arrangements and $5.54 billion on spot-market purchases, according to the DWR documents.

But the state’s “long” position in July, in which it had too much power, has at times given power-trading companies an arbitrage opportunity. Last Wednesday, for example, the state sold electricity for as little as $2 per megawatt hour on the same day that it was paying $22 to $75 on the spot market, presumably because its advance purchases did not exactly match the actual shape of demand.

John Stout, senior vice president for Houston-based Reliant Energy Inc., a big energy supplier to California, said a trader can double or triple his company’s profit by substituting cheap market power from the water-resources agency for power the company otherwise would generate. It is also free to resell the natural gas it might have used to fuel its plants. “That’s what the trader is there to do and not leave money on the table,” said Mr. Stout.

Copyright © 2001 Dow Jones & Company, Inc. All Rights Reserved.

http://www.msnbc.com/news/607301.asp

-- Martin Thompson (mthom1927@aol.com), July 31, 2001

Answers

The worst part is the taxpayers pay the government and its contract experts, gazillions of dollars to screw the taxpayers and ratepayers. They did nothing about the crisis up to and not till much after PG&E filed bankruptcy. If they would have instituted the various conservation incentives early on, then there would have been NO BLACKOUTS, and the energy providers wouldn't have been able to gouge the citizens of California. Why do we have to pay government so much money for there "vision".

Of course, the conservation didn't really take effect until the ratepayers were hammered with much higher utility costs. Unfortunately, that is the sad truth. Much higher prices are virtually the only way to get people to conserve. I'm sure the conservation incentives would have been very helpful too but no where near as effective as much higher prices.

-- Guy Daley (guydaley1@netzero.net), July 31, 2001.

Okay, so they misunderstood and have it backwards, buy low and sell high. :))

Now for some math, spot was $237 [for 2001] and I've seen some numbers @ $335. And $114 for 2000, which I don't believe is an accurate average, more like a low.

Now they bulk buy at $22-$75 and resell at $2, maybe they ought to sell this to BPA and get them to fill those resiviours back up!

Back to the math, $237-$114=$123, in spot savings! and selling for anywhere $2 to $35 [35 from another article posted by the ever tireless Martin] we get a savings break from the insane prices of $88-$121 !

Who should be whining? Well, everyone since this should of been addressed long before the pg+e bankruptcy occured! If Grey and the whole cab-bull get relected we better check those flouride levels!

Will this cause a "re-wilding" of the Californy, I doubt it.

-- (perry@ofuzzy1.com), July 31, 2001.

And another thing . . .

The local rag here in Sacramento had a big spread on the front page talking about the budget that just got passed, with a built in "surplus" of $2+ billion. The breakdown of the budget did not have anything about the energy purchases or the long term contracts. They couldn't hide the purchases in "other" because that was too small. It's like everybody downtown is ignoring the elephant in the living room.

-- Margaret J (mjans01@yahoo.com), August 01, 2001.