Oversupply may be sold for millions at net loss

By Ed Mendel STAFF WRITER

September 8, 2001

SACRAMENTO -- A new forecast shows the state has acquired enough electricity that it expects to receive $500 million from the sale of surplus power by the end of next year, although much of that power will be sold at a loss.

Critics fear the state, while struggling to rein in runaway power prices, signed dozens of overpriced contracts that may force California to pay above-market prices for electricity for the rest of the decade.

The new forecast, included this week in a proposal by the state Public Utilities Commission to allocate ratepayer revenue, provides the first glimpse of how much surplus power the state expects to sell in the months ahead.

A state consultant, Ron Nichols of Navigant, said the forecast is the product of a complex computer model that includes details about generators throughout the West and takes about a day to run.

Nichols, without releasing details, said he thinks the state will have to sell about 4 percent of the power it has purchased, which would be within the normal range for a large system.

"If they were able to get within 7 to 8 percent of off-system sales, they have done very well," he said.

Nichols said he believes most of the surplus will be sold at a "net loss," bringing prices below what the state paid for the power. But the forecast did not attempt to calculate the loss.

"We haven't done it because it is, quite frankly, not relevant," he said.

The forecast of surplus power sales was made to reduce the estimate of money that the state will need from monthly ratepayer bills, presumably easing pressure for another rate increase.

The state began buying power for utility customers in January after Pacific Gas and Electric and Southern California Edison -- both ran up huge debts under a failed deregulation plan -- were no longer able to borrow money.

The administration of Gov. Gray Davis negotiated long-term contracts to tame soaring power prices on the spot market, claiming victory when prices began to fall dramatically in June.

The number of state long-term contracts has continued to grow, reaching 55 agreements with generators for about $45 billion worth of power through the end of the decade. One contract is for 20 years.

Now the Davis administration, blamed for not allowing utilities to obtain long-term contracts last fall, is being criticized for paying too much for too much power.

"People are circling in trying to find some soft underbelly on what is a normal utility operation," Nichols said.

The surplus of state power has become an issue for generators and utilities. They cite different problems resulting from the inability to match supply with demand.

A spokesman for large generators said the new forecast is likely to be too optimistic about sales in a tight market, even though analysis is difficult because the amount of surplus power expected to be sold was not released.

"I'm skeptical, extremely skeptical," said Gary Ackerman of the Western Power Trading Forum. "The state does what it does so well, which is buy dear and sell cheap."

Ackerman said some generators, with cheap power to sell, suspect the state transmission grid operator tells them to reduce production at times to make room for the high-priced surplus purchased by the state.

"They know they are getting pushed down to accommodate the state's long-term contracts," Ackerman said. "It's getting very annoying."

PG&E, which filed for bankruptcy in April after talks with Davis on a rescue plan stalled, opposes the PUC proposal to split ratepayer revenue between the state and the utilities, claiming it's being shortchanged.

A spokesman said PG&E believes the state power-purchasing agency, the Department of Water Resources, has a surplus of high-priced power under contract.

"We think they are asking the PUC for the authority to charge our customers for that high-priced power, even though our customers won't use it," said Ron Low, a PG&E spokesman.

Apart from the surplus, the price paid for power under the contracts is another issue. An analyst for a San Francisco-based consumer group, The Utility Reform Network, has examined most of the contracts.

"I will say the contracts are extraordinarily high, perhaps understandably given what prices were at the time they were negotiated," said Randy Wu of TURN.

The chairman of the Joint Legislative Audit Committee, Assemblyman Fred Keeley, D-Boulder Creek, plans to hold hearings to explore the possibility of reopening some of the contracts.

The state originally wanted $13.1 billion from ratepayers to pay for power through the end of next year. The new forecast that the state will receive $500 million from surplus power sales reduces the request to $12.6 billion.

Since the state began selling surplus power in March, DWR reports show the state received $23 million through July. Nearly half of the revenue came from sales in July averaging $30.40 per megawatt-hour, well below contract prices.

The surplus power in July was sold on the spot market to more than 20 buyers -- among them traders, including Allegheny and Sempra, and municipal utilities in Los Angeles and Sacramento.

The new forecast expects the state to receive $477 million for surplus power from July through the end of next year. Surplus sales in the third quarter of this year are expected to total $30.4 million.

As the amount of surplus under contract increases, state revenue from sales on the spot market jumps to $183.5 million in the third quarter of next year, followed by $101.5 million in the fourth quarter.

A DWR spokesman, Oscar Hidalgo, said the forecast of surplus power sales does not extend beyond the end of next year

http://www.uniontrib.com/news/uniontrib/sat/news/news_1n8power.html

-- Martin Thompson (mthom1927@aol.com), September 09, 2001