Posted on 10/04/2002 10:31:55 AM PDT by Robert357
Existing power supply resources owned by or under contract to the IOUs, governmental entities, and non-utility generators are not expected to be sufficient to meet the needs of the Customers and all other electric consumers in California during the Study Period. Consequently, DWR (through December 31, 2002) and other end-use providers will need to rely on new generating facilities constructed within California and the continuation of imported power to satisfy the capacity and energy requirements of electric end-users within the State.
(Excerpt) Read more at treasurer.ca.gov ...
Click here to go to Link of Prelim. Official Statement
I have written many Engineers Reports that go in OS documents. I was surprised at some of the things I read in this Engineers Report. They really stuck their neck out. They also pointed out a few warts on the Gov Davis' Administration's bottom.
Specifically, they indicated that the State does not and will not have sufficient resources and will be increasingly depending on other states for power supply and that transmission will need to be built. They also indicated that without saying so that the Governor's emergency powers have been used to legitimize the taking of some power contracts that DWR thought it needed. They also pointed out (without rubbing the Gov's nose in it) that the Summer 2001 blackouts were a partial result of air pollution limits on generation operations. Finally, and I must rethink my opinion of the Cal ISO, that the Cal ISO has been playing a cat-and-mouse game with FERC in trying to call emergencies at such times that it can lower price caps within the state. I have to take my hat off to snopercod, I now believe that Cal ISO may have manipulated when it declares Stage 1, Stage 2, etc. emergencies for political and economic reasons. That would explain why they seemed so arbitrary at the time.
All in all an interesting read, that I recommend to everyone, although it is a bit technical.
Hot parts from the Engineer's Report of the Preliminary Official Statement include:
Existing power supply resources owned by or under contract to the IOUs, governmental entities, and non-utility generators are not expected to be sufficient to meet the needs of the Customers and all other electric consumers in California during the Study Period. Consequently, DWR (through December 31, 2002) and other end-use providers will need to rely on new generating facilities constructed within California and the continuation of imported power to satisfy the capacity and energy requirements of electric end-users within the State.
On January 16, 2001, Standard & Poor’s and Moody’s Investors Service downgraded the credit ratings of PG&E and SCE below investment-grade status. As a result of such downgradings, the PX provided notice to PG&E and SCE that they were required under the PX tariff to post additional collateral. The two IOUs failed to post the required collateral and were suspended from trading in the PX markets on January 18, 2001. The PX contended that SCE and PG&E's failure to pay for their market purchases resulted in a substantial shortfall in funds available to the PX and gave the PX the right to liquidate the two IOUs’ Block Forward contracts.
PG&E and SCE sought injunctions in two separate actions filed with the California Superior Court to prevent the liquidation of the Block Forward contracts. The judges in both cases granted preliminary injunctions until February 2 and February 5, 2001, respectively. In the interim, on January 31, 2001, the Governor, pursuant to his emergency powers, issued Executive Order D-20-01 commandeering the SCE Block Forward contracts and Executive Order D-21-01, commandeering the PG&E Block Forward contracts. These contracts were relied on by DWR to meet a portion of the Customers’ net short requirements during 2001.
The contract price of the Block Forward contracts totaled approximately $352 million. The PX contends that the Block Forward contracts could have been liquidated following PG&E and SCE’s default and that the combined market value of the contracts was in excess of $1.1 billion. The issue of whether and to what extent compensation is due is now before the Sacramento County Superior Court in a declaratory relief action filed by the State in September 2001 which names as defendants those market participants which have and those which, the State believes, might claim compensation as a result of the Governor’s actions. DWR believes such claims for compensation to be substantially in excess of the contracts’ true value. If the claimants prevail, the difference in value could become a DWR liability and an element of DWR’s Retail Revenue Requirements to be recovered from the Customers.
Some of the contracts entered into by DWR contain clauses requiring DWR to pay the cost of air emission offsets (“Offsets”) that the seller must obtain to operate new generating resources or to extend the operating hours of existing resources. Offsets are reductions in air emission rates that are achieved from other sources in the same air quality basin. For new facilities, the procurement of adequate Offsets is a prerequisite to obtaining a construction permit. For existing facilities, there is an annual allocation of Offsets in line with annual emission limits under which the seller can operate the facility. Operation beyond the annual emissions limits requires additional Offsets. In addition, some of the contracts contain clauses that may enable the seller to pass through to DWR the cost of installing new emission control equipment that is required by changes in air quality regulations. In total, as of July 30, 2002, two contracts representing 14 generating units and 3,231 MW of generating capacity contain one or both of these clauses.
Most of California is classified as non-attainment for either or both the federal and State Ambient Air Quality Standards (“AAQS”) for ozone, the known cause of smog. Fossil fuel-fired electric generating facilities produce emissions of nitrogen oxides (“NOx”), carbon monoxide, volatile organic compounds (“VOCs”), sulfur dioxide, and fine particulate matter of 10 microns or less in diameter (“PM10”). Because NOx and VOCs act as precursors to the formation of ozone, siting of power plants in California generally requires procurement of Offsets for these pollutants. Similarly, Offsets for other pollutants may be required, depending on the location of the generating facility.
Offsets are either procured from entities that have banked them in the non-attainment area or are created through the implementation of additional emissions controls on existing sources. Generally, Offsets are required at a ratio of greater than 1:1 (e.g., 1.1:1 or 1.3:1). While Offset transactions are conducted directly between the buyers and sellers, the 35 individual air districts in California maintain Offset banks to monitor the types and quantities of Offsets available. As required by State law, they also assist the California Air Resources Board (“CARB”) in compiling an annual inventory of Offset transactions and costs. Similar to procurement, the creation of new Offsets (e.g., retrofitting more stringent NOx emissions controls on an industrial facility in the non-attainment area) is conducted directly between the buyer and seller with the air district ensuring that the proper banking and transfer procedures are performed.
Due to the acute need for additional generating capacity for the summer of 2001, the Governor of California issued Executive Order D-24-01 on February 8, 2001, requiring California air districts to modify air permit requirements for existing generating facilities to allow increased hours of operation and for new facilities to allow expedited permitting. For existing facilities, which exceed their permitted emissions limits due to increased operations (to meet the need for power), the air districts developed programs whereby payment of mitigation fees for all emissions in excess of previously allowed limits are required. For new or expanded peaking facilities that came on-line by September 30, 2001, Executive Order D-24-01 also required CARB to establish a new emissions reduction credit (“ERC”) bank. Normally, Offsets are transferred on a one-time, permanent basis. However, the ERC bank is a temporary (three-year) lease program that is intended to allow for the operation of peaking power units during the immediate- and short-term future crisis period. After three years the ERCs must be returned to CARB and the affected facilities must obtain replacement Offsets or shutdown. Return of the ERCs is necessary for the State to continue its progress toward attainment of the AAQS. In addition to the creation of a new ERC bank, CARB and many local air districts allowed peak power generation facilities that were scheduled to reach commercial operation in the summer of 2001 to forego installation of best available control technology (“BACT”) for emissions until June 2002. Installation of BACT is normally required as a prerequisite to an authority to construct permit.
The 14 generating stations for which DWR could be exposed to Offset cost pass-through are located within the jurisdictions of the South Coast Air Quality Management District and San Diego Air Pollution Control District. Discussions with staff of these air districts, as well as with owners of these units, reveal that nearly all of the units have been retrofitted with selective catalytic reduction or other appropriate emission control equipment. The remaining units are scheduled for retrofit with new emission control equipment by the end of 2002. The retrofits will result in ample “headroom” under current annual emission limits such that the risk of cost pass-through to DWR of mitigation fees, penalties, or additional Offsets resulting from operation of these units is expected
On June 19, 2001, FERC issued an order on price mitigation throughout the WECC. Under this order, a soft price cap was set for the entire WECC based on the heat rate of the least efficient unit and the average natural gas price during the most recent Stage 1 Emergency (“Stage 1”) warning period issued by the CAISO. During a Stage 1 (or higher) warning period, the cap was set equal to the energy cost resulting from the heat rate of the least efficient resource being utilized in the market and the average natural gas price in California, plus a $6.00 per MWh cost for operation and maintenance expenses. A 10 percent risk premium was added for energy sold in California. If a Stage 1 warning or higher was not in effect, the effective cap was calculated as 85 percent of the last Stage 1 cap in effect. Based on this formula, the non-Stage 1 price cap at July 8, 2002, was $91.87 per MWh (before the 10 percent risk premium for California power sales). This value was calculated based on gas prices on July 3, 2001, which, until recently, was the date of the latest system emergency declared by the CAISO.
On July 9, 2002, the CAISO declared a Stage 1 emergency and recalculated the price cap at $57.14 per MWh (before the 10 percent risk premium and adjustment for Stage 1 pricing). On July 10, 2002, the CAISO again declared a Stage 1 emergency as well as a Stage 2 emergency and the price cap was recalculated at $55.26 per MWh. The lower price caps calculated on July 9 and 10, 2002, were principally the result of changes in the price of natural gas from July 2001 to July 2002. On July 11, 2002, FERC issued an order replacing the previous formula for calculating the price cap with a hard cap of $91.87 per MWh. FERC took this action as a result of concern that reductions in the price cap during July 2002, as well as future potential variations in the price cap, could cause severe supply disruptions in the western power markets. FERC ordered that the hard cap of $91.87 per MWh remain in effect from July 12, 2002 through September 30, 2002 (the expiration date of the June 19, 2001, FERC order).
On July 17, 2002, FERC issued an order related to CAISO market design initiatives (discussed in Appendix III to this Report) that established a hard price cap of $250 per MWh, effective October 1, 2002. FERC has indicated it established the price cap at this level to promote further development of new generating resources in California. For purposes of this Report, the new price cap is assumed to remain in effect from October 1, 2002 through the end of the Study Period. However, no assurance can be given that the FERC price cap will be continued through the end of the Study Period.
Snopercod, I know that you might enjoy the air polution section of the OS and the discussion on what Gov. Davis was really doing with his emergency powers, as opposed to what we throught he was doing.
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How does that tie in with these?
California: CPUC Staff To Examine Energy Companies Response To Lynch Report
AES: Role In Calif Power Market Misrepresented By CPUC Report
California: The PUC and the great power-shortage fairy tale
Mirant Data Refutes CPUC Chair Lynch's Allegations
[California] State grid operator behind plant's output swings
Duke Energy Says 'Despicable' California Report Misstates Facts
Blackouts needless, PUC probe concludes- Study unsure if power withheld intentionally
Kalifornia Blackouts Could Have Been Avoided
I pulled these from the Calpowercrisis list , they seem to relate!
No firm in its right mind would try to ignore facts and quote spin, in an Official Statement. If they did something like that they could be litigated out of business.
That is why OS documents are so interesting to read, they have to be "learned research" on the ability to repay the bond holders and on the underlying economics of the stream of funds to be used to repay the bonds.
What you have linked to is a combination of political spin and companies replying to that spin, all the while trying to generate some positive newspaper coverage. The OS is not written to be quoted in a newspaper, it is to advise potential investors.
I had to laugh at the "concern" about imported power. After Navajo and Mohave are shut down, they won't have to worry so much about that. These plants are accused of producing haze in the Grand Canyon, and are slated to be shut down in the next couple of years. Either that or spend bazillions installing more and ever more pollution control equipment.
I think they will just shut down. I worked at MOGS for a while back in 1980 or so. They had a sign in their control room reading, "She Might Not be Pretty, but Run She Must". That was their philosophy. SCE ran the pants off that 1600MW [+/-] plant, and lashed it together with chewing gum and bailing wire to keep it running.
All you can say about this "cost pass-through" is that costs are ALWAYS passed through to the consumers. But Californians (and many others) think that "the rich" will pay for their pristine air and sparkling waters - not them.
Wrong-O!
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