June 11, 2001
California Paying Hundreds of Millions Over Market for Power
(Sacramento, California) California paid hundreds of millions of dollars above average market prices for electricity in the first quarter as the state bought high-cost power to avoid blackouts, Bloomberg statistics show.
California, the largest power buyer in the U.S., said it paid an average of $285 a megawatt hour in the first quarter. The average daily market price was about $248 in northern California and $211 in southern California, Bloomberg data indicate. That suggests the state paid between $492 million and $985 million over market. The state bought 13.31 million megawatt hours in the period.
State officials admit they pay more than other buyers in the West, citing alleged market manipulation by power sellers and the need to buy when shortages are acute and prices are soaring. Advisers to the state also say its buyers are no match for traders at power sellers such as Enron Corp. and Williams Cos.
“Experts say it’s kind of like a high school baseball team going up against the New York Yankees,” said Richard Sklar, who has been hired by California Governor Gray Davis to lead the state’s efforts to speed power-plant construction in the state.
Energy trading companies are demanding big “credit premiums” saying the state may renege on agreements to pay negotiated prices. Those companies also know when they can charge more because they have computer systems that predict demand using data on weather and historic consumption, state officials says.
Williams hires expert traders and “has made a significant investment . . . in technology and modeling,” company spokeswoman Paula Hall-Collins said. “If the state doesn’t have those types of investments, it’s unlikely they would be able to trade as effectively.”
The state is on track to pay $1 billion above average market prices in the second quarter, Bloomberg and state statistics indicate. It estimates it will buy 10.47 million megawatt hours on the spot market in the period. A megawatt is enough to light 750 California homes.
Saber Partners LLC and the Blackstone Group, hired by as advisers by Davis, estimate the state will pay $346 a megawatt hour to buy power on the spot market during the quarter.
Average market prices in Northern California were $205 and $166 in Southern California so far this quarter, according to weighted averages calculated by Bloomberg News. Based on the state’s estimated cost of $346 a megawatt, California will pay $1.47 billion to $1.88 billion over market prices in the second quarter, Bloomberg data indicates.
Billions in Expenses
California has spent $7.6 billion buying power over the last five months, after stepping in to prevent blackouts for customers of the state’s two largest utilities, both of which are insolvent.
The state’s Department of Water Resources now buys about one-third of the power used by the state’s two largest utilities. The utilities sell about 75 percent of the electricity used in California, generating about a third of it themselves and buying another third under fixed-price contracts.
The high prices are a result of what some energy analysts and economists call “a perfect storm” for power sellers — supplies are low and the state, usually the biggest buyer in the market, often is willing to pay any price to keep the lights on.
A severe shortage of generation often leaves the state with few choices of traders to buy from when blackouts loom. Sellers with the last 50 megawatts needed to keep the lights on have demanded the state pay prices 10 times going rates or more.
“In many cases, they needed the power and they couldn’t get it anywhere else,” said Paul Holthe, chief executive at Viasyn, a San Francisco-based energy consultant advising small power generators on the California market. “They’re often at the mercy of the market.”
DWR has hired the equivalent of 15 full-time people to buy electricity, including a former Pacific Gas & Electric trader, and has retained Deloitte & Touche and Navigant Consulting as advisers, DWR Deputy Director Ray Hart said.
It also relies on its internal traders and employees from the U.S. Bureau of Reclamation, which oversees many hydroelectric dams in the state.
“Clearly, we’re not an Enron,” Hart said. “They’re out paying top dollar for traders, and we don’t pay top dollar for traders, but I think they (state traders) do a really good job in watching out for the money.”
Power trading requires skill and training, and that’s “why the state should not be in the power-buying business,” Enron spokeswoman Karen Denne said.
“We hire extremely bright people,” Denne said. “Most of them have advanced degrees. . . I came from a civil service background and can guarantee that (Enron traders) get paid more than your average civil servant.”
The DWR isn’t just paying more for power because of inexperienced traders, state officials say. They accuse generators and marketers who buy and then trade that electricity of taking advantage of the state’s limited supply to manipulate prices and charge the state higher prices.
“The state is subject to market power and manipulation because we’re in a shortage,” said Joseph Fichera, president of Saber Partners. “We’re vulnerable to price gouging.”
Fichera and others also say the state is being charged a “credit premium” by power generators who are concerned about being repaid. The state is currently paying for power from its general fund, and the state Legislature has approved a $13.4 billion bond issue to cover power-buying costs. Those bonds will not be issued until at least August.
Federal and state regulators, including the U.S. Justice Department, are investigating whether power generators and marketers manipulated the market or engaged in anticompetitive practices to boost their profits.
Electricity can be bought at several points in California and around the West for delivery into the state. Prices at two delivery points, NP15 in Northern California and SP15 in Southern California, are the most reliable indicators of what power costs in the state, according to Mark Seetin, a government affairs analyst at the New York Mercantile Exchange, which has studied the California market and trades electricity futures contracts.
Electricity prices are set based on the time of day. Power prices for the 16 hours of the day when demand is highest are known as peak prices. Prices during the eight night-time hours when demand is lowest are called non-peak prices.
The Bloomberg weighted averages used to determine California average prices are from the NP15 and SP15 delivery points, and are adjusted to take into account the difference between peak and non-peak prices.