Pwr Deals Could Be Windfall To Generators, Taxing Calif Updated: Friday, June 22, 2001 08:15 AM ET

(This article was originally published Thursday)

By Jason Leopold

Of DOW JONES NEWSWIRES

LOS ANGELES (Dow Jones)--Hidden between the lines of the lengthy long-term power supply contracts California signed with 18 energy companies is a provision that has raised a few eyebrows in Sacramento.

If the state passes legislation imposing a windfall profits tax on generators' electricity sales into the state, most of the energy companies that signed deals with California won't be responsible for paying the tax. That burden will fall on the state's Department of Water Resources.

The discovery underscores that secrecy surrounding the contracts had more to do with concealing what generators got from the state in exchange for signing the $43 billion in deals, and less with hiding the price the state agreed to pay for the power, several lawmakers said.

"That's one of the reasons (the state) did not want to disclose the contracts," said state Sen. Byron Sher, D-Stanford, during a state Senate Energy Committee hearing Wednesday.

Ray Hart, director of the state's Department of Water Resources, the agency buying power on behalf of California's insolvent utilities, said "the ability to do better deals would be compromised" if terms of the deals were disclosed.

Another provision in the contracts states that the generators, including Mirant Corp. (MIR, news, msgs), Dynegy Inc. (DYN, news, msgs) and Williams Cos. (WMB, news, msgs), get paid first from rate payer revenues following the August sale of $12.5 billion in revenue bonds, the largest municipal bond sale in U.S. history, according to Hart.

But State Treasurer Phil Angelides, who is handling the bond sale, has always maintained that bondholders would be the first in line to see a return on their investment. The $12.5 billion bond sale will repay about $8 billion to the state's general fund and $4.5 billion to pay off a bridge loan, which the state expects to secure soon.

Sher questioned whether the bond market was aware that it wouldn't see a return on its investments until generators receive their payments from rate revenues.

Hart said the market was aware.

"The market anticipates that," Hart said. "Generators don't trust us. They were looking for the most security they can get. That's the reason you see they are the first in line" to be paid with revenue collected from rate payers.

The logic behind agreeing to pay a potential windfall profits tax, along with air-quality permits and other taxes, is that generators wanted to make sure the economic landscape in California didn't change once they signed the deals, Hart said.

"In some of our contracts, in order to preserve economics, we had to assure (generators) that we were not going to tax them," Hart testified before the Senate Energy Committee. "In order to enter into the deals, we had to say that a windfall profits tax would be a passthrough cost. That's for most contracts, but not all."

A windfall profits tax bill was introduced several months ago in the Senate, but the legislation has stalled.

An aide to Soto said it doesn't make sense to try to pass such a bill because the state essentially would be taxing itself.

Some generators criticized DWR, the agency that negotiated most of the long-term pacts, as inexperienced and willing to "give up a lot."

An executive at Dynegy Inc. said negotiating a deal with the DWR "was like playing poker with a second grader."

Oscar Hidalgo, a spokesman for the DWR, said some of the contract provisions show "that we did not have the leverage early on in the bargaining."

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-- Martin Thompson (mthom1927@aol.com), June 22, 2001