Davis Releases Power Contracts

State Locked Into Higher-Than-Market Prices

SACRAMENTO, Calif., 3:18 p.m. EDT June 15, 2001 -- Gov. Gray Davis has released nearly $43 billion worth of state long-term energy contracts with 18 electricity providers.

Davis released the foot-thick, roughly 600-page stack of 38 contracts Friday after months of saying the documents needed to remain secret.

The documents show California is locked into what are likely to be higher-than-market prices for the next decade.

Davis' administration signed the contracts this spring when rates were skyrocketing. But he said the contracts for about half of California's long-term energy needs helped force prices to their current low rates.

The pacts require the state to pay an average of about 8 cents per kilowatt hour over the next five years, or an average of about 7 cents per kilowatt hour over the 10-year length of most of the contracts.

Davis predicted those prices will be "very competitive" compared to the daily spot electricity market over the next couple of years. Critics, however, said that over the long term the state will be paying higher rates as supply increases and prices fall.

The governor balked for months at releasing the contracts, despite a lawsuit by The Associated Press and other news organizations and Republican Assemblyman Tony Strickland asserting the contracts used state money and should be open to public inspection.

However, Davis asked a state judge this week to release the state from the contracts' confidentiality clauses, saying contract negotiations are advanced enough that the secrecy could no longer be justified.

"He had no right to keep this information from the people of California. It's their money, not his money," said Strickland, R-Thousand Oaks, who received the contracts by overnight mail Friday morning. "We're going to be paying these astronomical prices for the next 10, 15, 20 years. We did not get a good deal in this."

However, the Davis administration and San Diego Superior Court Judge Linda B. Quinn agreed to keep some of contract details confidential. Davis also is waiting six months to release details of short-term contracts to prevent wholesalers from knowing what the state was being charged.

-- PHO (owennos@bigfoot.com), June 15, 2001

Answers

We have a circus clown for a govenor of this state. The long term contracts he signed at way-above current market rates will be of benefit for no more than 2 years of the 10, then the poor taxpayers and ratepayers of California will be clobbered with sky-high extra costs for the next 8 as supply catches up with demand, and reduces rates to a pittance in other states.

I've had it. I'm totally disgusted, and am seriously considering moving out of the state.

-- JackW (jpayne@webtv.net), June 15, 2001.

Two years out of ten? Hmmm! That puts it past the next election, doesn't it? Gosh, I wonder if any politics was involved.

-- Uncle Fred (dogboy45@bigfoot.com), June 15, 2001.

There's no doubt about it in my mind. The ill-advised, all-or-nothing, long-term contract deal was a give-away, to secure the next election.

-- Wellesley (wellesley@freeport.net), June 16, 2001.

Rather than a policy decision that would be for the true, lasting good of the people, isn't just about every decision made in govenment these days primarily a political decision? Get past the next election appears to be all that counts.

-- QMan (qman@c-zone.net), June 16, 2001.

I say good for Davis. At least he has bought time for for a better fix to develop.

-- Polly-Anna (polly-anna@webster.net), June 16, 2001.

Energy deals rest on unsteady markets Long-term pacts tied to gas costs, rely on plants not yet built

By James P. Sweeney and Michael Gardner COPLEY NEWS SERVICE and Ed Mendel and Craig D. Rose STAFF WRITERS

June 16, 2001

SACRAMENTO -- Long-term electricity contracts that were expected to lead California out of its energy crisis depend heavily on unpredictable natural gas prices and power plants yet to be built.

Of nearly $43 billion worth of power secured for the next decade, the price of half will fluctuate with the natural gas market, said S. David Freeman, Gov. Gray Davis' chief energy adviser.

Seventy percent of the contracted energy has been promised from power plants that don't yet exist.

But Freeman and other state officials said they believe the electricity will be delivered at an average price of $69 per megawatt- hour.

That price, which is 6.9 cents per kilowatt-hour in consumer terms, is about what most utility customers pay now.

An energy industry analyst, however, said that predicting electricity prices from these deals is problematic because of the link to natural gas costs, which can fluctuate almost as wildly as electricity costs.

Natural gas prices, which earlier had been below $3 per million British thermal units, stayed above $10 for weeks this winter and spiked to $60 in December.

"Has the state locked in electricity prices? Probably not," said Andrew Safir, president of Recon Research Corp. in Los Angeles.

Harry Snyder, a senior advocate for Consumers Union in San Francisco, blasted the contracts as a bad deal for customers, even if they can deliver power at $69 a megawatt-hour.

"The price of power from all these generators is going down, with the market predicting a lot of power plants coming online," Snyder said. "And now they are locked in at $69."

The long-term deals, intended to wring some of the windfall profits out of the deregulated energy market, stretch from a few months for some contractors to 20 years for a San Jose-based generator, Calpine Energy Services.

The contracts should cover 45 percent of the state's peak power needs in the immediate future, and all of its projected demand in 2004, before scaling back in later years, state officials said.

The threat of rolling blackouts, however, has not been lifted.

"No one is declaring victory. No one is saying the crisis is over, but we are very proud of the role long-term contracts are playing," Freeman said.

The state released the details of 38 electricity contracts with 18 suppliers to comply with an order issued by a San Diego Superior Court judge.

Several news organizations, including The Copley Press, which publishes The San Diego Union-Tribune, sought the order after Davis refused to make the contracts public.

The complex contracts, which cover more than 600 pages, promise nearly 600 million megawatt hours over the next decade. Contract sections considered sensitive or proprietary were blacked out, making comparisons and analyses difficult.

A spot check late yesterday raised questions about some aspects of the contracts for one expert.

Could be trouble "There appear to be a lot of little 'gotcha' clauses here that if the seller wanted to push them could be troublesome to the state," said Roger Bohn, a professor of management at UCSD and co-author of the book "Spot Pricing of Electricity." He is a former member of the market monitoring committee of the California Power Exchange. Such provisions might allow a supplier to alter the quantity of electricity it provided to the state in response to spot market prices in a way that would be a disadvantage to California, Bohn said. The Union-Tribune retained Bohn to examine the agreements.

The state has struck tentative deals on an additional 23 contracts that could be signed in the coming weeks or months.

The 6.9 cent average, if it holds up, is more than double what power cost before prices spiked last summer. Advocates had predicted that deregulation would lower electricity prices 20 percent by 2002.

"Some of these contracts are very expensive deals," said Michael Shames, executive director of Utility Consumers' Action Network of San Diego.

He criticized a deal that will pay Dynegy $140 per megawatt-hour -- 14 cents per kilowatt-hour -- through 2004. Power likely will drop to $50 per megawatt-hour by 2003, he said.

But the governor and Freeman said the long-term contracts, some of which have already kicked in, have punctured an inflated market.

"The reason the spot market is down where it is, is we've reduced the volume we have to buy in that market," Freeman argued.

Conservation effort California businesses and households also have responded to the governor's call for a conservation effort. While contracts for half the energy allow generators to pass along natural gas prices, Freeman and Raymond Hart, a deputy director of the state Department of Water Resources, said they expect natural gas rates to continue to decline.

Natural gas accounts for about 80 percent of the cost of electricity in gas-fired plants, Freeman said. As a safeguard, the state reserved the right to purchase gas supplies directly for power plants.

Hart suggested that the state also will attempt to line up a share of its projected natural gas needs at fixed rates.

Michael Aguirre, an attorney pressing a class action suit against generators, said consumer attention should now be on natural gas prices.

"We shifted from one volatile commodity to another," Aguirre said. "This is a ruse. It does not give the people of California the protection we thought it gave us."

While some of the anticipated new power plants could be delayed or might never be built, Hart said, the generators who want to build the plants would not even be able to get financing without the long-term contracts.

"That means we're going to have more competition in the future," he said.

Mike Niggli, president of Sempra Energy Resources of San Diego, suggested that the lengthy agreements may calm the market.

'Service to customers' "Not only does it minimize price spikes, there's less to be purchased and sold on the spot market," Niggli said. "The state, having locked up long-term energy, has done a service to customers." At least one power supplier, however, apparently sought to safeguard itself against tough state action that could occur if volatility returns. A contract with Allegheny Energy Supply Co. includes provisions for special payments to the company in the event California seizes its plants using powers of eminent domain.

UCSD's Bohn called the feature an unusual inclusion in an electricity power supply contract.

Not much in any of the contracts appealed to Assembly Republican Leader Dave Cox, who dismissed the agreements as "sweetheart deals for the generators Gray Davis is so busy trying to demonize."

"The most frightening aspect of these contracts is that Gov. Davis' mismanagement has saddled this state with high rates and an uncompetitive economy for years to come," said Cox of Sacramento.

But Democratic state Sen. Debra Bowen, one of the Legislature's utility experts, said the state simply traded lower costs today for higher prices later.

"There weren't a lot of choices. They didn't hold many cards," she said of state negotiators.

Steve Stengel, a spokesman for Dynegy, a Houston-based generator, agreed that the contracts "have the potential to take some of the volatility out of the market."

Supply and demand But Reliant spokeswoman Pat Hammond cautioned that "supply and demand remain the driving force behind price spikes." Houston-based Reliant and the state have been negotiating a multiyear contract to no avail. Much of the relatively cheap power that the state will purchase during peak periods this summer comes from long-term contracts seized from the defunct Power Exchange, a step taken by the governor earlier this year under his emergency powers.

The seized contracts provided 1,150 megawatts during February through March for prices ranging from $46 to $91.50 per megawatt-hour. In the second quarter, April through June, the contracts are providing 775 megawatts for $53 to $78.50 per megawatt-hour.

In July through September, the contracts will provide 1,425 megawatts at prices from $71.20 to $146 per megawatt-hour. Most of the contracts seized by the state from the Power Exchange are with Duke, Mirant, Enron and Constellation.

Among the contracts negotiated by the state Department of Water Resources, a Houston firm, Coral Power, receives some of the highest prices for power delivered during peak periods this year, $249 per megawatt-hour. Coral agreed to provide 100 megawatts during peak hours this month, 150 megawatts in July, 250 megawatts in August, and 325 megawatts in September.

http://www.uniontrib.com/news/uniontrib/sat/news/news_1n16power.html

-- Martin Thompson (mthom1927@aol.com), June 17, 2001.