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IssueAlert for  March 9, 2001 
California May Be Headed for Another Volatile Summer;
How Much Power Is Needed to Save the State?
by Will McNamara 
Director, Electric Industry Analysis
Unless Gov. Gray Davis arranges significantly more long-term electricity 
contracts, or convinces people to turn off a lot more lights, California's 
unpredictable spot market for power could wreak havoc again this summer. Even 
with the long-term deals announced by Davis on March 5, up to 40 percent of 
the state's daily needs may have to be bought on the highly volatile spot 
market, where power is purchased a day ahead of when it is needed. That could 
prove hugely expensive for the state, because if this past year's spot market 
prices are an indicator, then California might see spot market prices at five 
to six times more costly than what they would be under the long-term 
contracts. 
Analysis:  Despite the somewhat reassuring announcements that the state of 
California has lined up various new long-term contracts for the supply of 
power, it remains questionable if the power secured in the contracts will be 
enough to prevent another long, hard summer for the state and its residents. 
In fact, some predictions suggest that summer 2001 could be just as bad or 
worse as summer 2000, leading to another series of rolling blackouts and 
spikes in spot market prices. 
To date, California has spent upwards of $50 million a day (a total of $2 
billion since January) to buy electricity on the spot market. The long-term 
contracts in which the state has engaged are intended to lock in cheaper 
prices and cut down the amount of electricity the state has to buy in the 
volatile short-term market. 
On March 5, Gov. Davis announced that the state of California*through the 
Department of Water Resources (DWR), the newly appointed power purchasing 
agency*has agreed to 40 power purchase contracts with more than 20 generators 
and marketers, which will supply an average of 8,886 MW per year over the 
next 10 years. The contracts, varying in length from four months to 10 years 
and worth $43.4 billion in total, reportedly will provide the state with a 
diversified long-term power portfolio, said Davis in an announcement.  
According to a report in Megawatt Daily, the average price of the deals is 
$69/MWh over the entire 10-year period. For the first five years, the average 
price will be $79/MWh, dropping to $61/MWh for the period between 2006 and 
2011. Gov. Davis has offered that these prices are between 75 and 80 percent 
lower than recent spot market prices, although they are higher than the 
original goal of $55/MWh that Davis had established when he first began to 
negotiate long-term contracts. In a noticeable omission, the governor has 
refused to identify exactly how much power from long-term contracts will be 
available to the state this summer.  
There has been a string of announcements regarding the long-term contracts, 
so we know some of the 20 companies that are entering into agreements with 
the state. For instance, Calpine Corp. locked the DWR into a 10-year contract 
for the sale of approximately 5,000 MW of electricity. California will be 
paying a fixed price for the power it buys from Calpine, but most reports 
have placed the value of the deal in the range of $4.6 billion. Dynegy and 
NRG Energy said that they have agreed to sell up to 2,300 MW*enough to power 
about 2.3 million homes*to the DWR under contracts lasting through 2004. 
According to the companies, their California generating affiliates*El Segundo 
Power LLC, Long Beach Generation LLC and Cabrillo I*will provide up to 1,000 
MW of power to the state from today through the rest of 2001, increasing 
deliveries of 2,300 MW from Jan. 1, 2002. Mirant Corp. (formerly Southern 
Energy) announced an agreement to shift 1,000 MW in power contracts from the 
California Power Exchange to the state's DWR. 
These are just a few examples, among other companies such as Avista, Duke, 
Enron, PacifiCorp, and Williams that have signed on to serve the state under 
long-term contracts.  Absent from the list is Reliant Energy, which 
reportedly is in negotiations with the DWR, but reluctant to commit to more 
than a 30-day contract to sell power to the state. Reliant is owed over $300 
million for power delivered to Southern California Edison (SCE) and Pacific 
Gas & Electric (PG&E) in November and December 2000. The two major utilities 
owe more than $12 billion to power-generating companies and can't buy more, 
having no credit or cash to make the purchases, which is what prompted to the 
state to appoint the DWR into the power purchasing role  
Gov. Davis has said, "With these deals in place, California's energy future 
is looking a whole lot brighter." But is it really? That is the question of 
the hour. Representatives for the governor have indicated that the long-term 
contracts will reduce the state's need to purchase power on the spot market 
over the next 10 years by about 75 percent. Yet, of more immediate concern to 
analysts is what will transpire during the fast-approaching summer heat, when 
demand increases. This represents a quite precarious scenario, the start of 
which is only about two months away. Speaking at a press conference in Los 
Angeles on March 5, Davis said state DWR negotiators have so far been able to 
meet between 65 and 70 percent of the state's power needs for the coming 
summer, based on last summer's consumption. The governor again called on 
residents to cut usage by 10 percent over last year. Despite the tempered 
optimism associated with these announced long-term contracts, the general 
consensus is that, however much power Gov. Davis has lined up for this 
summer, it won't be enough. In fact, when pressed for details about how much 
power would be available this summer, Davis conceded that the state will 
still have to buy 30 to 45 percent of its power on the expensive short-term 
market. 
As noted, the long-term contracts that have been established thus far vary in 
length from four months to 10 years. However, when doing the math for the 
anticipated summer season, the calculation of what will be needed versus what 
will be available paints a pretty alarming picture. During the month of 
August*typically the hottest month in California*peak daily demand for power 
in the California ISO territory is expected to hit about 47,700 MW. The 
state's three IOUs*PG&E, SCE and San Diego Gas & Electric*still generate 
about 8,000 MW from their remaining power plants and have long-term contracts 
from wind, solar and other energy sources that gains them an additional 
11,700 MW of power. Gov. Davis has established that about 7,000 MW from the 
long-term contracts will be available this summer. In addition, back in 
February, Davis announced a plan to expedite new power plants in the state, 
which he promised would bring 5,000 MW online by July (an ambitious goal that 
may or may not materialize). Altogether, assuming that all of these 
projections are reliable, the total comes to about 26,000 MW that we know 
should be available in California this summer, leaving the state about 16,000 
MW short for its power supply needs.  
Gov. Davis may continue to secure long-term contracts with other power 
suppliers. Or, then again, he may not be able to do so. Most of the prominent 
power suppliers operating in the United States have already signed deals with 
the DWR and are included in the 7,000 MW that is already expected for the 
summer. Thus, there is a strong chance that the bulk of the 16,000 MW needed 
by California will have to be bought on the spot market, where prices are 
projected to remain high at least through the beginning of next year. 
Reportedly, just within the last week, last minute prices on California's 
spot market averaged $411/MWh, compared to $69/MWh, which is the average of 
the long-term contracts.  
Some officials, including Gov. Davis, have said that, now more than ever, 
conservation in California is critical. Representatives of the governor have 
suggested that if Californians reduce their electricity usage by 10 percent, 
conservation efforts across the state could reduce peak demand by nearly 
5,000 MW.  
Or, perhaps a traditional rain dance would be in order. California is due for 
a cooler summer season after the two previous summers that were unseasonably 
warm. A rainy season would bring cooler temperatures to the state and thus 
drive down the anticipated demand for the summer, which is based on last 
year's load. If the state is fortunate enough to receive a rainy season or 
otherwise cooler-than-expected summer, then the state could squeak by with 
enough power supply resources to accommodate anticipated demand. If summer 
2001 is another unseasonably warm one for the state, the plan that is 
presently in place sounds like a blueprint for another volatile and expensive 
summer for California 
An archive list of previous IssueAlerts is available at
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