Power Moves

On March 31, 1998 California's power-producing industry ventured into a realm where no other state had gone before. It entered the world of deregulation.

The purpose was to create competition among utilities so people could choose their power providers based on competitive rates and services. This would theoretically result in lower costs for consumers -- from big business to the individual homeowner. But what will that mean for the State Water Project, California's biggest consumer of electricity?

Power is the muscle of the SWP, enabling its facilities to move water up and down the San Joaquin Valley and over the Tehachapis into the Southland. Exactly how much electricity is required each year by the Project depends on how much water is available in the system and how much of the supply must be delivered to contracting agencies to meet their needs.

While SWP power houses generate a large portion of the energy they need, DWR obtains its remaining power needs by purchasing or acquiring capacity or energy exchanges that DWR has with other utilities. How will the new marketplace impact power prices and—in turn the business of delivering water?

A Brief Lesson on Electricity
Electricity shares a few common traits with water. Like water, it is a resource that touches everyone's lives. Humans can exist without power, but would rather not. Both need a conduit to travel from place to place. Water uses pipelines, tunnels, and canals; electricity moves via wire lines.

But unlike water with its perpetuating cycle of evaporation, transpiration, and precipitation, power is somewhat more transient. While storable in batteries, energy must generally be used as it is produced.

The business of power is also similar to that of water. Power generated by, for example SWP plants, is transmitted over power lines to a purchasing utility, like SMUD (Sacramento Municipal Utility District). The utility then distributes it through its own system of power lines to houses and businesses within its service area. Much is the same for water. The SWP stores water which is later conveyed to contracting water agencies that in turn deliver it to their customers through local facilities.

And just as the homeowner pays for water or electricity used, DWR must pay all of the services—capacity, transmission, and dispatching—used to receive the power needed, as well as the power itself.

The Old Way
While the State Water Project's primary business is water, power is crucial to its operations. To deliver water to its many destinations can require from 4 to more than 8 billion kWh each year.

Nine SWP hydroelectric plants and a coal-fired unit in Nevada can provide about two-thirds of its needs; the rest comes from purchases, short-term agreements, and long-term contracts with other utilities. Before deregulation, electrical utilities (DWR became a bulk power entity in 1983) traded, bought, and sold electricity among themselves. Power generated was transmitted though a grid of electrical lines built by different utilities to move energy to and from locations.

Previously, utilities would enter into agreements to pay for a certain amount of power during a certain period of time. Price depended on time of day and availability. On-peak power, generated mainly during the day, is more costly—that's when SWP plants generate energy to sell. Off-peak power, produced at night or weekends, is cheaper to use—that's when the SWP does most of its pumping.

These utilities included the two giants in the power business: Pacific Gas and Electric and Southern California Edison. They served as major resources for the Department's power needs (also called loads) that could not be met by SWP power plants. Smaller energy-producers had no access to the transmission lines and were no match in the marketplace for the larger utilities.

During pre-deregulation times, the buying and selling of power were transacted with less formality. Prices were more predictable, except during shortages or emergencies. Utilities generally buy power in advance--from an hour to a day. So if DWR purchased 100 megawatts from PG&E for 6 p.m. that day, PG&E would produce power to meet all of its demands including the promised power to DWR and send it over their transmission lines to where it was needed. If they were not able to produce the amount needed to match demand with supply for that time period because one of their units shut down, the missing quantity would be supplied from the interconnected utilities and by PG&E at a later time.

All of that has changed.

The New Order
"It's a whole new system with new rules," says Viju Patel, the Executive Manager of Power Systems, who is guiding the Department into the world of de regulation. "New entities were established like the California Independent System Operator and the California Power Exchange (see sidebar)."

The new system created a new bureaucracy under which investor owned utilities such as PG&E and SCE must purchase energy from the PX (which acts as a commodities marketplace) and schedule its transmission with ISO (now in control of these lines owned by the utilities). With these new rules came new costs for new services.

"Prices are a lot more volatile in the market now," says Patel. "Plus there are penalties for those utilities that do not produce the quantity of power scheduled or balance their loads with their resources. They will pay much higher prices for misjudgments."

Under restructuring rules, existing contracts must be honored to term. DWR has transmission contracts and power exchange and purchase contracts that do not expire until 2004 and beyond. Once these transmission contracts expire, we may have to pay more for transmission, Patel explains.

“Because we wanted to be a starting player in the restructuring, we amended the scheduling and operating requirements under our interconnection contracts to be consistent with ISO rules and protocols,” he says.

As a public entity, DWR is not under the jurisdiction of the California Public Utilities Commission. That means the Department is not required to buy and sell with the PX. “Unlike the investor-owned utilities which are required to go through the PX,” Patel adds, “DWR can choose to buy and sell directly with other public entities and power marketers in California, with all entities outside California, or with the PX—whichever will bring the best prices.”

Whether we get the best deals depends on the skills of DWR’s schedulers who also act as DWR’s energy traders.

The Deal Makers
Schedulers, says Patel, must have knowledge of commodities trading and contracts, in addition to understanding the technical workings of the energy industry. "It would be like asking for an MBA graduate with an engineering degree," he adds.

Dick Jones knows the power industry from 34 years in the field. His was a hands-on education in power plant utility operations, first with the City of Pasadena, then in 1966 with DWR. He started at the San Luis Field Division, working his way up to Chief Dispatcher at the Project Operations Center. In that position, he was recognized by Director Kennedy in 1988 for his outstanding performance. Later he joined the Sacramento Municipal Utility District for a three-year stint. Today, he is Chief of the Project Operations Center and oversees the work of DWR’s schedulers.

Despite all that experience, he's beginning a new phase of learning with the advent of deregulation.

"Deregulation has turned everything upside down," says Jones. “The industry has totally re-invented itself."

The day-ahead and real-time schedulers in the POC handle all power transactions--purchases and transmissions--to fuel SWP facilities. They are in constant touch with the industry through print and phone. "It's like any commodity whose price goes up and down. We watch the major trading hubs and the daily indexes like in the stock market,” Jones says. “And we talk to each other continually on the telephone."

With the system more market-driven than ever, schedulers must try to anticipate and respond quickly to sudden drops or rises in prices. A generating plant could be forced out of service or the temperature could eclipse or fall below the predicted number by ten degrees. A skilled scheduler could sell power at top prices or buy at bargain rates.

"The playing field is more complicated with a lot more participants. Transactions have to be tracked to see who will be affected and who will pay if the promised power is not produced," Jones says. “Everything is now more labor intensive.”

With the new system came many new responsibilities.

"All marketing participants were to designate a scheduling coordinator to interface with ISO by March 1, 1998, but we missed that deadline. There were many software changes and other requirements that we had to meet,” he explains.

Another deadline was set for July 1, 1998 and successfully met. “It went much smoother than we anticipated, but that doesn’t mean we didn’t have problems,” says Jones, who, with his staff, has been working 10- to 12-hour days.

“Luckily there have been solutions to all the problems confronted, so we fixed each one and moved on.”

So What About the Future?
Experts like Patel say it's still too soon to say who will win or who will lose in this unprecedented move to de-regulate the electrical industry. "No one knows how this whole thing will unfold. There is no model to follow,” he explains.

“Deregulation unbundled all of the services such as generation and transmission, making them individual components. Before they were a part of the energy transaction. Now we must keep track of different markets and the relationships of parties involved."

But in the ever-complicated deregulated industry came a new opportunity for the Department. A new market for power opened, one in which the Department has an advantage over most utilities. DWR can now provide ancillary services, services that ensure power will be there when you need it. Because the Department can control its loads by determining when to or when not to move water, DWR’s schedulers can readily bid in that market.
Patel says much of DWR’s success in adapting to the new world of deregulation is owed to the Department’s executive managers who supported their work and allowed staff the freedom to propose solutions and make recommendations based on their own knowledge and judgment.

As for the future, Patel is cautiously optimistic.

"What we thought would happen last year has not materialized the way we thought would happen. The change in the industry was so far-ranging that after its first year, it’s still an infant. There will be many more fix-its and improvements to come. In the next three to five years, the system will evolve as new expertise is developed, and as we learn what works and what doesn't."

SIDEBAR
Who are the ISO and the PX?
The Independent System Operator (ISO) now oversees the electrical transmission system in California. This system is a network of high voltage electrical lines that connect power producers from Colorado to the Pacific, Canada to northern Mexico. Before the deregulation era, utilities owned and operated these lines. Now the ISO is responsible for power transmission to ensure fair and impartial access for all generators while maintaining reliable operations. Like air traffic controllers, ISO staff schedules and directs the flow of energy over the transmission system.

The PX, as the Power Exchange is called, was founded to create a "pool" or "spot market" where power price information is publicly available. Electricity generators compete to sell their power to the PX which will buy needed supplies from the lowest bidders. PX prices change hourly and affect the costs paid by consumers who in turn can use the public price information to decide which provider offers the best prices and services.

SIDEBAR
Key DWR Players
Work on transitioning to the new order started nearly four years ago for at least one of the three DWR staffers, under Viju Patel, who are blazing the Department's trail into the realm of deregulation.

Senior Hydroelectric Power Utility Engineer Mike Werner was in from the very beginning, spending weeks in meetings to discuss the organization and workings of the new system. As head of the SWP Analysis Office's Power and Transmission Contracts, he handles the filings for the Federal Energy Regulatory Commission, which licenses all power plants and issues requirements that must be met. (FERC also regulates the ISO.)

Byron DeVilbiss and his staff in the Project Operations Support Branch, have been working on the software that will allow DWR computers to "talk" with ISO computers. "The software produces templates in the ISO format so they can be uploaded to the ISO to schedule power for the day-ahead and the hour-ahead markets," explains DeVilbiss,whose involvement dates back to early 1997.

The biggest challenge is the templates themselves. "It's like trying to hit a moving target; they keep changing and will, I guarantee it, change in the future," he says.

However scheduling with the ISO leaves no margin for error, he adds. "The templates must be in the correct format and must represent a balanced schedule both internally to DWR and with our trading partners, or the ISO will not accept the schedule."

On July 1, 1998, when DWR took its first steps into the new world of deregulation and tested its preparation, the transition went "quite well" for DeVilbiss and his staff. "Not that there aren't any problems," he says. "But we are up and running, and everyone is quite happy with our progress."

As he predicted, the target is still moving and will continue to move for quite some time.  "As the environment of deregulation changes, we are learning and understanding more," says DeVilbiss.


SIDEBAR
And what about the consumer?
If you're among the 80 percent of Californians who receive their power from one of the big three—PG&E, Southern California Edison, and San Diego Gas and Electric—then you will be among the first to shop around for another provider in an open market. The phase-in period began on January 1st of this year.

Customers of other utilities such as the Sacramento Municipal Utility District or the L.A. Department of Water and Power, may not have that opportunity until later. These utilities' governing body will decide if they will allow other electricity providers to do business in their service areas. However, by the year 2002, all energy consumers will have the option to switch to another provider based on services and costs.

Although the law mandates rate reductions, if you are among the consumers who can shop around, you will have to pay your fair share of transitional costs that are estimated to range in the billions. Such costs cover, among other expenses, investments made (e.g. construction of power plants) but not yet repaid through electricity rates and retraining of employees.

Whether consumers save money on their electricity bills will depend on how they negotiate for services and costs. As part of a larger group (e.g. your community/city), the chances of obtaining lower power rates are better. The individual consumers may find themselves at a disadvantage in determining what to pay for different services such as power generation, transmission, and distribution. But there is always the option of just staying with the same company.

No one knows exactly how deregulation will play out. New business opportunities will be created; new companies will be established to offer new products and services. In the end, only the most cost-effective and efficient will survive in the new world of energy deregulation.