Long-term, fixed power contracts make comeback

Recent volatility in the California power market has prompted municipally owned utilities to replace power bought on the spot market with long term power supply contracts. Roseville Electric recently signed a 5-year contract with Enron Power Marketing Inc.

Ann de Rouffignac

Volatile wholesale electricity prices in California have renewed municipal utilities' interest in locking up power supplies for a fixed price over longer terms.

Roseville city council approved a contract Aug. 4 for Roseville Electric to buy 50 Mw for 5 years from Enron Power Marketing Inc. Roseville Electric is a unit of the city of Roseville located in northern California.

The contract is for 438,000 Mw-hr at a price of $49 Mw-hr, says Bernie Fargen, spokesman for Roseville Electric. The contract is for energy only or a specific number of hours of electricity.

While the electricity will be delivered at the fixed price to Roseville�s distribution system, Fargen cautions transmission constraints and a power emergency could cause the California Independent System Operator to prevent the delivery of that power to Roseville. The contract is simply a protection against price volatility but not necessarily a guarantee that Roseville won�t ever be hit by rolling blackouts, Fargen explained.

�We�re looking for long-term protection from volatility,� says Fargen. �Being a municipal we need to provide maximum customer protection from uncertain increases in their electric bills.�

California has been hit with unseasonably hot weather and robust demand for electricity that have aggravated a short supply situation. This has caused power prices to spike into the triple digits and blackouts have been a constant threat during high afternoon demand.

The municipal utility has a peak load during the summer of about 250 Mw. About two-thirds of its power is delivered under fixed longer term contracts with the Northern California Power Agency, a group of 11 municipals that own generation, and from the Western Area Power Administration, a federal power agency that owns cheap hydroelectric generation. The rest of Roseville's electricity comes from spot market purchases as needed.

Contracts lengthen
Long-term contracts were the norm for decades until the uncertainty of deregulation caused many suppliers and buyers to back off from long-term commitments. Many wholesale buyers of electricity thought they could obtain better prices on the spot market as new generators and power marketers competed in the wholesale market.

In theory, the idea seemed reasonable. In practice, it has not worked out as hoped because of the shortage of generation that has developed in California.

�What happened in the last 5 or 7 years is the contracts got shorter,� says Dave Penn, deputy executive director of the American Public Power Association, Washington, DC. �In California, given the immediate fears of uncertainty, getting a block of energy with more certainty and less risk means signing longer term contracts.�

A spokesman for Reliant Energy noted an �uptick of interest� for firm power supply contracts as far out as 2005. But he would not comment on whether negotiations were ongoing for long term contracts with municipals or not.

Karen Denne, spokesperson Enron Corp., said the company is seeing more requests for proposals for these kinds of long term contracts from cooperatives and municipally owned utilities in California.

More in Exploration & Development