California Spent $43 Billion on Long-Term Power Contracts

06/16/2001
KRTBN Knight-Ridder Tribune Business News: The Sacramento Bee - California
Copyright (C) 2001 KRTBN Knight Ridder Tribune Business News; Source: World Reporter (TM)

The $43 billion California is spending on long-term power contracts is only an estimate, state officials acknowledged Friday, and the amount could easily go higher or lower because about half the supply is tied to fluctuating natural gas prices.

The disclosure came as the state released edited versions of the 38 electricity contracts it has signed so far, many at prices that exceed the newly deflated spot and futures markets.

It also unveiled the most detailed portrait yet of $7.6 billion in state spending since January, when California stepped in to buy power on behalf of battered utilities which said they could no longer afford to pay their suppliers. For the first time, the state provided a day-by-day list of money spent and power bought through March 31, and it promised similar tallies will be released each quarter.

The power contracts came in for immediate criticism from those who said California picked the worst time to try to lock in long-term deals and now will be stuck for a decade or more with above-market electricity costs.

But Gov. Gray Davis and his energy advisers contend the recent dip in last-minute or "spot" prices simply proves that their long-term deals have helped cool an overheated wholesale market, robbing sellers of some of their clout.

While people can "nit pick" if they choose, Davis said, "On May 10, the state spent $110 million for power, total cost. Two days ago we spent $29 million for total power. So clearly our strategy is beginning to work."

The state contracts provide for a dizzying array of deals to purchase power -- on-peak, off-peak, around the clock, and even swaps --many of them intricately priced. They cover about half the power the state will need to buy and will cost an average of $69 per megawatt-hour over the next 10 years, state officials have said.

Up to 70 percent of the electricity will come from new plants yet to come online, said Ray Hart, deputy director of the state Department of Water Resources, which handles the state's power buying.

That was one of the few bright spots seen by consumer advocates, who said such deals might help finance the building of newer, cleaner power plants.

It will take analysts days to read through the hundreds of pages of contracts to determine how good or bad the newly unveiled deals are for California -- and even then it might be hard to tell, experts said.

A contract with power trader Dynegy, for example, "looks to me like an extremely high fixed price," said Robert Michaels, an economics professor at California State University, Fullerton, and a consultant to generators and traders.

The $119.50 a megawatt-hour for power in 2002 through 2004 is close to twice what it would cost today for delivery in Southern California, but that's not enough information to truly evaluate the contract, he said.

The state edited out all references to which plants will supply the power, where it will be delivered and what transmission will be used, and without that, Michaels said, "essentially you can't see whether the state got rooked really badly or not."

State officials, who balked for months at releasing the contracts because they said it would tip their negotiating hand, changed their stance just before a hearing in a lawsuit by several news organizations to force the release. A further hearing is scheduled into whether the state will be permitted to keep some details private.

Overall, "we're very proud of these contracts," said S. David Freeman, a key energy adviser to Davis who helped negotiate some of the deals. He said the state has no interest in turning its back on any of the contracts, even though they were signed when the state was frantic to escape a blistering spot market.

Legislators and consumer advocates have already begun talking about whether the state can find escape clauses from buying power that now sounds too pricey.

But generators said the state got a better deal than the critics realize.

"It's a lot of fun to pick on the governor, but spot prices go down and spot prices go up," said Pete Cartwright, president and chief executive of San Jose-based generator Calpine Corp., which signed billions of dollars worth of contracts ranging from $58 to $115 a megawatt-hour.

"(Davis) has stabilized prices for a long time, and that's good," he said.

Among the sellers are affiliates of two of the utilities for which the water department is buying the electricity: Sempra Energy Resources, whose parent company owns San Diego Gas & Electric; and PG&E Energy Trading, whose parent owns Pacific Gas and Electric Co.

The Sempra contract pays the seller $189 a megawatt-hour this summer, even though summer power was selling for more than $320 back when the contract was signed in early May.

"We're trying to be part of the solution," said Michael Niggli, president of Sempra Energy.

However, the contract would revert to the May market prices -- $320 and up -- if the state doesn't complete its multibillion-dollar bond offering by Sept. 30, and if Sempra backs out of the deal. The bond offering is to raise money for the power purchases and to spread their cost over many years.

The PG&E Energy Trading contract, calling for 66.6 megawatts of capacity through September 2011, will cost the state $58.50 a megawatt-hour.

The costliest contract -- in terms of dollars per megawatt --appears to be with Alliance Colton of Littleton, Colo., which has begun delivering power from two "peaker plants" that generally operate only during high-demand periods. Alliance will be paid $258 a megawatt-hour beginning Aug. 1 and $278 next summer, although the price will vary from year to year. The contract runs out in 2010.

"It's a peaker, which is usually more expensive," said water department spokesman Oscar Hidalgo.

Some of the cheapest power, at about $58 per megawatt-hour, comes from PG&E Energy and Calpine.

Now that prices have fallen, Assembly Speaker Pro Tem Fred Keeley said he wants to examine the contracts to see if the state can bail out. Seven Assembly staffers began going through the contracts immediately, and Assembly leaders plan to get together Sunday night to discuss what they've found, he said.

The information comes just in time, Keeley said, giving lawmakers the kind of detail they'll need to decide on Davis' plan to keep Southern California Edison out of bankruptcy, as well as options for letting some consumers choose their power suppliers.

Sen. Debra Bowen, D-Marina del Rey, said she also has had discussions about possible bailout provisions, saying it will be "real, real tempting to second-guess" the administration's contracts.

"But none of the second-guessers have more experience negotiating contracts than David Freeman," she said.

Assembly Republicans were among the first second-guessers.

Republican leader Dave Cox of Fair Oaks questioned several provisions, including ones that appeared to allow some generators to pass along tax increases in their prices, make the state liable for some emission credit payments for exceeding pollution standards, and prevent the Public Utilities Commission from cutting electric rates unless the state can prove it won't jeopardize its contract payments.

"These contracts are sweetheart deals for the generators Gray Davis is so busy trying to demonize," Cox said in a press release.

Other critics included Mirant California, which owns Bay Area power plants and bristled at the state unveiling the terms of its deal, which pays it $148 per megawatt-hour from June 1 through the end of 2002.

However, energy economist Severin Borenstein, defending the contracts on the governor's behalf, said that just because the spot price has fallen, "that ... is not evidence the contract was a mistake."

"When you sign long-term contracts you're buying an insurance contract," he said. "If your house didn't burn down at the end of the year, you don't scold yourself."

By Carrie Peyton, Dale Kasler and John Hill. Bee Staff Writer Stuart Leavenworth contributed to this report.