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High-Pressure, High-Stakes Job of Buying State's Power
Electricity: Team rises early each morning to buy the megawatts to get state through the next day.
By JENIFER WARREN, Times Staff Writer
SACRAMENTO--In a narrow gray conference room not far from the Capitol, a team of state workers is spending $2 million an hour on a mission scrupulously hidden from public view. Their work space is spartan. Save for some doughnut crumbs, it holds nothing but computers, a fax machine and the all-important tool of their trade: the telephone. These are California's power buyers, stalkers who prowl the electricity market day in, day out, hunting for energy before most of us switch on the coffee maker. In the last two months, the power buyers have burned through nearly $2.3 billion of state money rounding up megawatts for Californians. On Thursday, they asked the Legislature for $500 million more.
Because the work is so sensitive and so much money is involved, state officials say, CIA-like secrecy has been imposed. Visitors are allowed only quick peeks into the tightly shuttered quarters. Interviews are restricted. Information on blackboards--including trading strategies and numbers for deals just sealed--is shielded from sight.
Though such precautions may seem extreme, if details about what the state is paying per megawatt hour--or the trading strategies used --leaked out, it could hurt California's bargaining position and drive up asking prices, said Ray Hart, who supervises the operation as deputy director of the Department of Water Resources.
But because of the secrecy, there is no way to judge the bartering prowess of the traders, who spend about $45 million a day buying one-third of the energy Californians use.
Some high-level energy players have questioned whether the department--normally focused on managing dams and pumping water--has the know-how to handle its new role in the volatile energy world. It took over the job last month, when generators balked at selling power to the state's near-bankrupt utilities.
In an interview with The Times earlier this month, the president of Houston-based Reliant Energy, Joe Bob Perkins, said it's hard for the department to "go from one mode to another" and expressed hope that "they'll get it together soon." And Stephen E. Pickett, vice president and general counsel at Southern California Edison, said the department was "struggling to get up to speed."
But on Thursday, praise for the department's performance came from the California Independent System Operator, which balances supply and demand on the electricity grid serving 75% of the state. Over the last year, advance scheduling of energy has covered about 70% of the state's needs, leaving Cal-ISO to scramble to find the remaining 30% at the last minute.
On Thursday, however, Cal-ISO said advance purchases covered a whopping 90% of demand. By lining up more megawatts a day in advance, the department's buyers are "really helping us maintain the reliability of the grid," ISO spokeswoman Stephanie McCorkle said. "We're not having to search for as many megawatts at the last minute. That's an enormous improvement and we owe it to them. We're thrilled."
Hart said the shift stems from the bonds that have been developing between his negotiators and power merchants since Gov. Gray Davis issued an executive order in January making the department California's electricity buyer.
In the beginning, Hart said, power generators "had all kinds of questions about the state jumping into this, like how are the bills paid, are we credit-worthy--that sort of thing." Now, he said, the department has "established relationships and it's paying off with success in contracting. . . . The proof's in the pudding. I'm very proud of our folks."
The folks begin work each day about 5 a.m., filing into Room 332 in the bowels of an office building east of downtown. The earliest early birds are the market analysts, who gather information on projected electricity demand, the weather, transmission capacity, which power plants are off and on line, and other forces in play.
As the computers boot up and the caffeine kicks in, the six or eight traders--mostly men--put on their game faces. Consulting analysts and one another, they develop a strategy for the trading day ahead. And at 6 a.m. the phones start to ring. And ring. And ring some more.
"Everybody knows we're the biggest buyer out there, so they tend to come to us," Hart said with a smile.
In this era of the Internet and instantaneous information swaps, power transactions seem oddly low-tech. They boil down to this: Verbal agreements are made in tape-recorded phone conversations lasting one to three minutes. Deals are sealed with a faxed confirmation later in the day.
Though brief, the conversations are high-voltage. Some buyers play the guilt card to get a good price, asking an out-of-state seller, for example, whether he has some relatives in California who might not get a bit cold if the power goes out.
Others appeal to a seller's sense of public spirit, as in: Come on, let's work together and do the right thing for the state. Another popular approach relies on the use of good old competition--real or phantom--to enhance one's standing. If Seller X is offering 1,000 megawatts at $350, a buyer can snort in outrage, counter that Sellers Y and Z are offering a deal at $325, and threaten to hang up.
"It's all about bartering," Hart said. Important character traits, it seems, include tenacity, an analytical mind and guts.
Sonny Fong, a 25-year employee with the department, logged some long hours at the traders' table last month. Fong's typical duties are helping the department respond to crises--floods, earthquakes and fires--so he's used to emergencies. But nothing compares with this, he said.
When you put on your trading hat, "it's like going into battle," he said. "Your adrenaline's flowing, your senses are alive . . . and the gravity of everything is hanging over you." As they labor, the traders monitor computer screens displaying deals recently closed and the wild spikes on the market. One minute, a megawatt hour--the amount of energy used to power 1,000 homes for an hour--might be going for $400. The next, it's at $710.
"It's hard to convey the stress," Fong said. "But imagine a very smart car dealer, and remember that what you do--or don't do--could mean a rolling blackout. . . . Do you buy at $600 and get the assurance that you're locking up some supply the state needs, or do you wait in the hope that the price will drop? It's very intense."
To keep the traders strong, supervisors supply them with Power Bars, sodas and other treats. They lighten the mood by scrawling humorous messages on the wall. One offers prizes for top performers--a ride on the boss's Harley-Davidson, a new job as a janitor.
The supervisors also keep watch for symptoms of burnout--an ailment treated with a few days of rejuvenation time with the family. "With the long hours, people start to get rummy after awhile, and that's when it's time to rotate them out," Fong said.
The trades done in Room 332 are for energy to be used 24 hours later. Also under the Department of Water Resources umbrella are negotiators pursuing long-term contracts with locked-in prices intended to guarantee a more stable energy supply. Those will be paid for with revenue bonds.
Though its central role as state power buyer is new, the department is well acquainted with the energy business. Indeed, the department's State Water Project--a sprawling web of reservoirs, canals, hydroelectric plants and pumping stations that delivers water to more than 20 million people--is the single largest user of power in California. Times staff writer Nancy Rivera Brooks contributed to this story.
Copyright 2000 Los Angeles Times
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