California’s New Problem: Sudden Surplus of Energy

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The New York Times

After months of warnings about power shortages and forced blackouts, an unusually cool July and surprisingly effective conservation efforts have put California in a stunning position: it has so much electricity on its hands that it is selling its surplus into a glutted market.

In fact, state officials said today, after spending much of the winter and spring scrambling to line up new supplies of electricity at a cost of tens of billions of dollars, the agency that is in charge of buying power has actually been selling some back at a loss this week.

Oscar Hidalgo, the spokesman for the Department of Water Resources, which became the state’s main buyer of power after soaring wholesale prices pushed private utilities toward bankruptcy this year, would not provide exact figures on how much the state was selling or how much money it was losing.

But the department has said it was paying on average $133 per megawatt-hour this month, much of which it is obliged to buy whether it needs it or not, under long-term contracts signed in recent months. By contrast, officials say, the department at times has sold some of that power back into the market at prices as low as $15 per megawatt-hour.

Mr. Hidalgo insisted that the surplus power could quickly vanish if temperatures soar as expected in August.

Some consumer groups, which have bitterly criticized the state’s energy policies in the crisis, seized on the sales as evidence of what they said was a poorly thought-out plan that had left the state at the mercy of a merciless market.

“This state agency has no expertise in trading,” said Harvey Rosenfield, an official at the Foundation for Taxpayer and Consumer Rights. “It is amateurish at best and sometimes incompetent, negotiating with a bunch of M.B.A.’s whose goal is to soak California. The state was panicked into leaping into this business, and it is being outwitted.”

But a spokesman for Gov. Gray Davis defended the state’s purchases, saying its response to an emergency has produced greater reliability and, in the long term, a greater supply of power.

“Like we said all along, we’re doing everything within our power to control the situation and stabilize things,” said Steve Maviglio, the governor’s spokesman. “But the weather is not within our control. When the utilities were in this business, they ran into this situation routinely.”

On Monday, for example, the high temperature in San Diego was 70 degrees, compared with an average of 77 degrees. In San Francisco, the high was 66, compared with an average of 72, and in Fresno it was 87, down from the average of 99. That meant that air-conditioners across the state were turned down.

But officials said that the weather was not the only factor in relieving the sense of crisis in California and that the state’s conservation program had produced a significant reduction in demand.

The state energy commission has said that total demand was down 12 percent this June from June 2000, adjusted for the weather and economic growth.

The conservation program provides rebates for buying certain energy-efficient appliances and special discounts for large consumers that reduce their power needs sharply from previous years.

In addition, state and federal office buildings have instituted conservation measures, including turning off lights and computers at night and adjusting thermostats.

Also, big rate increases, of as much as 40 percent in certain instances, kicked in this June, encouraging consumers to cut electricity use further.

Some experts have warned that while a sense of crisis has helped produce the big reductions in demand, as soon as people feel that the emergency has passed at least some will return to their old ways and demand may rise again.

According to the California Independent System Operator, which manages the power system, peak demand today was expected to be 32,651 megawatts, and the available supply was slightly above 40,000 megawatts.

In January, the state suffered several power emergencies in which it was forced to pay more than $1,000 a megawatt at times of critical shortages.

But even with those purchases, utilities were forced to cut power in some places when the demand exceeded the supply. The last time the state had to resort to blackouts was on May 8.

After the emergencies in the winter, the state frantically lined up power purchases on contracts ranging from a few months to 10 years and more.

The state tried to put together a diverse portfolio of contracts that would ease the shortages but not lock the government into paying too much if prices declined in the future. Energy experts expected some declines in prices but not this quickly.

The Department of Water Resources paid an average of $243 per megawatt in May, but the price has now dropped to $133 per megawatt on average this month, some of that in the form of spot purchases and some under the long-term contracts. Mr. Hidalgo said the department’s sales of power back to the market had been at $15 to $30 per megawatt.

Some energy traders said the state was just paying the price any market participant must accept.

“They’re not doing anything imprudent,” said Patrick Dorinson, a spokesman for the Mirant Corporation, a large power generator and trader. “They’re just finding out how the markets work. Everything is built on forecasting, and sometimes the forecasts are wrong.”

Mr. Maviglio, the governor’s spokesman, said the state’s planning was built on forecasts of a harsher summer and less conservation. “The forecasts have turned out to be far more conservative than the reality,” he said.

Mr. Rosenfield countered: “We’ve been outwitted. They goofed, and it looks like taxpayer money is being thrown down the toilet.”

In May, the amount of power the state needed to buy on the so-called spot market, which means purchases in which the electricity would be supplied immediately, accounted for close to 45 percent of the total purchases. Typically, longer-term contracts are at fixed prices, while spot purchases can be enormously volatile.

But because of the reduced demand in July, spot purchases have made up just 5 percent or so of the Department of Water Resource’s total purchases, and at the times of lowest demand, like this week, officials have decided to get what they can by reselling excess power.

“This is a normal business practice,” Mr. Hidalgo said. “We can buy power and we can sell power. I don’t think anyone would have predicted that we would have found ourselves in this position in July. But we’re not out of the woods. August could be raging hot.”

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