Power Crisis Puts Spotlight on Middlemen

SACRAMENTO — The utilities are billions of dollars in debt, power supplies have become so fickle that businesses risk losing millions, Christmas light displays have become a symbolic casualty, and higher rates loom for all consumers as the region copes with the most significant energy crisis in two decades.

But in between California’s big three utilities and their millions of customers is a multilayered, subterranean world of market traders, middlemen and hedged bets.

It’s comparable to the trading that goes on in the stock market, and it comes down to this: A single electron might be traded a dozen times before it reaches a computer or toaster--and the price may go up with every trade.

“This is legitimized gambling,” said Gary Ackerman, executive director of Western Power Trading Forum, an association of players in California’s electricity market.

The marketplace trading is at the heart of the deregulation system that state and federal officials are now struggling to correct in an effort to guarantee reliable power supplies at reasonable prices.

By insulating utilities from a tangle of middlemen, federal energy regulators hope to reassure the country that California’s experiment in competition will actually lead to cheaper electricity.

An order Friday by the Federal Energy Regulatory Commission frees the state’s biggest buyers of electricity--the three giant utilities --to go cut deals outside the market. It encourages them to sign long-term contracts at fixed prices to avoid a market where a megawatt-hour cost $30 last December, $150 in June and $1,500 last week.

Such deals would shrink the volume of electricity traded in the “day-ahead” market and minimize the role of the more than 100 electricity marketers and traders operating in California--a virtual industry that sprang up in the competitive marketplace unleashed by the 1996 deregulation law.

Federal Order Criticized

The commission’s order was criticized by California politicians and utility officials for not going far enough to cap rates, while consumer advocates cautioned that long-term contracts signed at a time of panic could lock in higher-than-justified rates. The Federal Energy Regulatory Commission has convened a summit in Washington tomorrow to hash out problems that are increasingly affecting energy supplies throughout the West.

But one impact of the federal order would be to curtail activities by the traders, who range from subsidiaries of power suppliers to independent entrepreneurs.

Some middlemen are connected to firms that own power plants, such as Duke Energy Trading & Marketing, or Powerex, an arm of British Columbia’s provincial utility. In those cases, the trading arms try to get the best possible price for the firms’ electricity, perhaps locking up some in contracts and selling the rest on the spot market.

Others own no power plants, but simply seek to buy low and sell high, such as the Morgan Stanley Capital Group. They may buy a block of electricity in the market a day, month or year ahead and resell it to the market, another broker, a city or a utility.

Frank Wolak, a Stanford University economist who monitors the market for the agency overseeing California’s electrical grid, said marketers play an important role by equalizing prices. They are a problem, he said, only to the extent that they have tied up access to power through contracts, and then withhold that electricity from the market to raise prices.

This winter for weeks at a time, grid operators have struggled to find enough electricity to meet each evening’s peak demand--even though that peak is just three-quarters of the summer’s high point of consumption. Grid operators blame the problem on many power plants shutting down at the same time for maintenance and installation of air pollution control equipment--work, they say, that was put off during the summer to avoid blackouts. But Wolak and others point out that generators and marketers could easily create scarcity--and thus trigger high prices. The Federal Energy Regulatory Commission has authority to investigate and punish such behavior, but their Friday order called simply for monitoring.

Here’s a hypothetical example of how the market works, according to Ackerman, whose group represents 29 trading firms:

A Virginia-based company that owns a gas-fired plant in Huntington Beach has a contract to sell all the power it produces for the next 15 years to Williams Companies, an international energy company, based in Tulsa.

Williams Companies supplies the plant with natural gas, buys the power at a price set in a 1998 contract, then turns around and sells it on California’s digital electricity marketplace, called the Power Exchange. Williams could, for example, offer in December to sell 100 megawatts--enough electricity to supply 100,000 homes--for delivery in January, at a price, say, of $130 per megawatt-hour.

The Salt River Project, a public power utility in Phoenix, looks at the price and decides it is better off buying that power and scaling back their own power plants.

But before January comes, Enron Corp., an active trader in California, might, through the Power Exchange, offer $138 per megawatt-hour for the electricity. So the Salt River Project sells to Enron, pockets the $800 difference and keeps its own plants running.

Enron might then raise the price to $142 per megawatt-hour and offer to divvy its 100 megawatts. Several utilities and companies in the Pacific Northwest, worried that a dry winter will reduce power generation on local rivers, could agree to buy.

Enron Corp., based in Houston, is the largest marketer of energy in the nation. The company in October reported third-quarter earnings 31% higher than the same period last year. Enron chief executive Kenneth Lay credited the jump mostly to “record-setting” levels of profitability in wholesale and retail electricity.

Come January, the power plant in Huntington Beach burns fuel, spins turbines and squirts 100 megawatts of electricity onto the transmission grid that connects the West from Canada to Mexico. Somewhere in the Pacific Northwest, the utilities that ultimately agreed to buy the power draw off an equal amount.

The price doesn’t always go up in the market, of course. When January rolls around, warm weather might settle on Seattle. Residents use less electricity to heat their homes. The utility that bought power at $142 per megawatt-hour from Enron suddenly has no place to put the power. It must sell, and the price in the California market that day might be only $106 per megawatt-hour. The utility takes a hit.

“The energy you produce today has to be used today--it can’t be stored,” said Jesus Arredondo, spokesman for the Pasadena-based Power Exchange, which handles nearly 85% of the electricity consumed in California. “It’s unlike any other commodity in the world. So the electricity industry is hyper-planned.”

Possibility of a Rate Hike Next Year

Though they are invisible to most consumers, the marketers are in the cross-hairs of California politicians desperate to bring down wholesale electricity costs. Since May the state’s two biggest buyers--Pacific Gas & Electric Co. and Southern California Edison--have spent a combined $8 billion more than they can pass on to the 24 million people they serve. A rate freeze imposed as part of the Legislature’s 1996 deregulation law still protects customers, though talks began last week between the utilities and the governor’s office on the possibility of a rate hike next year to help the utilities’ begin recouping costs. The skyrocketing price of natural gas, used to fuel many power plants, has also unexpectedly driven up electricity prices.

Gov. Gray Davis takes care to include marketers and brokers when he publicly chastises the players in California’s market for excessive greed. On Friday he attacked the federal agency’s decision as so weak as to ensure “unconscionable profits for the pirate generators and power brokers who are gouging California consumers and businesses.”

But Ackerman said the marketers play a legitimate role.

“They take the risk; they bring their own money to the table,” he said.

Under California’s old regulated electricity industry, Ackerman said, consumers paid, in the form of higher rates, whenever regulated utilities made mistakes--such as cost overruns at nuclear power plants.

Don’t blame middlemen for the high prices, he said, blame the fact that California has not built a major new power plant in a decade and at times demand for power severely outstrips supply.

“People are yanking at every megawatt out there,” he said.

The shift to long-term contracts that the energy commission seeks would undo a key provision of the deregulation plan that state regulators and lawmakers crafted in 1995 and 1996. They forced utilities to buy nearly all of their electricity in the Power Exchange to guarantee the new market enough business, and also because they feared that utilities would undercut competitors if they could sign direct, secret, long-term deals with power generators.

Now the utilities have sold off most of their power plants as part of deregulation. They’ve gone billions of dollars into debt buying back, at market prices, the electricity those plants produced. In the topsy-turvy world of deregulation, federal energy regulators now hope to salvage California’s experiment by shooing buyers away from the market in search of stable prices.

“If our order can actually achieve this goal,” said Commissioner William L. Massey on Friday, “it will go a long way toward ensuring just and reasonable rates in California.”

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A package of Times stories on electricity deregulation is at http://cache.nohib.com./power