Power Contracts Still Out of State’s Grasp

Seeking to bring stability to the state’s volatile energy market, the Davis administration has been working for weeks to negotiate long-term, fixed power contracts that would assure Californians of an ample supply at a fair price.

But no such deals have been signed since the governor announced several contracts Feb. 6. And the longer it takes to secure long-term contracts, the more money taxpayers will pay each day to keep the power on for Southern California Edison and Pacific Gas & Electric customers.

The state treasury is being drained by more than $1 billion a month to allow the California Department of Water Resources to buy power. By this week, about $2.3 billion will have been consumed, say sources familiar with the expenditures who spoke on condition of anonymity. The administration refuses to release details, arguing that such disclosure would harm the state’s bargaining position as a buyer.

Gov. Gray Davis on Friday said the state is making progress at the bargaining table, with more announcements coming this week or next.

But there are signs that the state’s attempt to lock up supplies at reasonable prices is being slowed by the political scramble for a way to financially revive the state’s two biggest utilities. Edison and PG&E; have defaulted on payments of hundreds of millions of dollars to power producers.

At least one power supplier said it is not willing to sign a deal with the state until the utilities pay off their debt.

“It’s our intent to be made whole before we sign a contract,” said Tom Williams, spokesman for Duke Energy North America, a Charlotte, N.C.-based company with four power plants in California. “Those who think we’re bluffing are wrong.”

Whether the utilities get a cash infusion to pay off creditors depends upon a game of brinkmanship now underway among lawmakers, the governor, utilities and consumer groups. Davis announced a plan Friday to pull Edison and PG&E; from the edge of bankruptcy in part through state purchase of their transmission grid. But it could be weeks before agreement is reached and locked into law.

And some lawmakers say that, as part of that agreement, the generators should be willing to write off a portion of what the utilities owe.

“I can’t see any reason why Duke and Southern and Reliant and Dynegy, whose stock has soared and who have made phenomenal amounts of money during this period, ought to be the only ones who come out of this without having to give something,” said state Sen. Debra Bowen (D-Marina del Rey), chairwoman of the Senate Energy Committee.

“The generators, bondholders and others who benefited significantly from the transactions that caused the utilities to become insolvent,” she said, “have to put some skin in the game too. They don’t get to be made whole at the expense of California ratepayers.”

Since May, Edison and PG&E; have spent nearly $13 billion more buying power than they collected from customers, who are protected by a rate freeze. The utilities paid often astronomical prices in the market created as part of the state’s 1996 deregulation plan.

By mid-January, the utilities were so close to bankruptcy that power suppliers shunned them for fear of not getting paid. To avoid blackouts, the Legislature and governor put the state water department in the business of buying power with taxpayers’ money on behalf of the utilities.

John H. Stout, a Reliant Energy vice president, said that at least five class-action lawsuits have been filed against his company and other power sellers that seek to recoup profits they earned.

“This is the forum where it will be decided whether or not generators and marketers have to give up some of the money they made,” said Stout, whose Houston-based company saw its wholesale energy earnings increase 600% last summer.

“To negotiate a deal with lawmakers and the governor would be appropriate,” he said, “only if they can guarantee us that the litigation against us could be dismissed.”

Still, Stout said, Reliant continues to discuss long-term contracts with California.

“We’re trying to be part of the solution,” he said.

Davis has called long-term contracts “a critical first step” in easing the state’s dual electricity woes of high costs and scarce supplies. He has said he would like to lock up as much as 12,000 megawatts, about one-third of the state’s peak winter demand, under contracts lasting from months to a decade.

Earlier this month, the governor announced agreement with several power sellers that would involve an initial 500 megawatts, increasing to 5,000 megawatts within a couple of years. Davis did not identify the companies involved, but one of them, San Jose-based Calpine Corp., announced that it had struck a $4.6-billion deal with the state to provide as much as 1,000 megawatts of electricity for 10 years. Delivery of that power would not begin until October.

Such deals would help spare the state from market prices that range from $250 per megawatt-hour to more than $1,000 per megawatt-hour.

But over time, as new power plants boost supply, the market price of electricity is expected to fall. At that point, long-term contracts could linger as an expensive burden to consumers.

It could be just as well for California consumers, Bowen said, if generators balk at signing long-term contracts. She compared cutting such deals now, when market prices are so high, with refinancing every state building at a time of soaring interest rates.

“We’re in a terrible situation whether we sign them now or don’t sign them now,” Bowen said.