-----Original Message-----
From: Landwehr, Susan M. 
Sent: Monday, October 08, 2001 1:16 PM
To: Whitt, Mark
Cc: Tycholiz, Barry
Subject: FW: DWR Contracts


Mark--here's the article that I mentioned this morning.  Interesting stuff on the long term power contracts

-----Original Message----- 
From: Dasovich, Jeff 
Sent: Mon 10/8/2001 12:13 PM 
To: Calger, Christopher F.; Belden, Tim; Richter, Jeff; Parquet, David; Steffes, James D.; Kean, Steven J.; Shapiro, Richard; Denne, Karen; Palmer, Mark A. (PR); Mara, Susan; Kaufman, Paul; Robertson, Linda; Landwehr, Susan M.; Badeer, Robert; Etringer, Michael 
Cc: 
Subject: FW: DWR Contracts



FYI.  Appears that the two sides may be crawling toward renegotiation. 

Best, 
Jeff 

Battle lines drawn over long-term power deals 
SD Union Tribune, 10.07.01 
In a perverse sign that normalcy is returning, the state's power crisis roared back to life last week with the California Public Utilities Commission as the focus. 

This time the state utilities commission pulled off a feat few could have anticipated, even from a long-running crisis that has caused blackouts and soaring electricity costs. 

In a span of three hours last week, the five-member panel went from being applauded by consumer groups and blasted by industry interests to being vilified by consumer advocates and applauded by business. 

Consumer advocates celebrated when the PUC refused to rubber stamp state-negotiated long-term power contracts, a move the governor said stalled the $12.5 billion bond offering needed to cover past power purchases. 

But business leaders and the governor cheered the PUC for approving a $3.3 billion rescue of Southern California Edison, which consumer advocates criticized as an unauthorized bailout. 

As massive as the Edison deal is, it may be less likely to affect customers of SDG&E than the second reality that emerged last week: Despite the PUC action on the contracts, Californians still face the burden of paying more than $40 billion over the next two decades for overpriced and possibly unneeded electricity. 

Or maybe not. 
While electricity providers continue to defend the long-term power contracts as fair and key to resolving the state's electricity crisis, consumer groups and others have launched a major offensive to get the contracts revised, renegotiated or canceled. 

Critics argue that the deals were negotiated while the state's economy was reeling, blackouts were striking and federal regulators were insisting that the state had to tie up the bulk of its electricity needs through long-term deals. 

Duress alleged 
Consumer advocates say the long-term contracts bind California to power purchases at more than double current market prices and force the state to buy power it does not need. 

"We should not be stuck with these agreements because conditions have changed so dramatically," said Bill Ahern, a senior analyst with Consumers Union, the publisher of Consumer Reports magazine. "We did these agreements under duress, and it is better for the generators and us to negotiate what all believe is a good deal." 

Ahern also said an investigation of possible conflicts of interest for at least one member of the state team that negotiated the contracts could lead to their invalidation. 

Michael Shames, executive director of the Utility Consumers' Action Network in San Diego, notes that much of the power to be delivered under the agreements will come from new plants yet to be built in California. 

"The state has the ability through the siting process to modify those contracts," Shames said. The motivation to do so could grow soon, he added. 

"Especially in an election year, the question will be whether elected officials and the public will tolerate the (cost) of these contracts," Shames said. 

Shames noted that the Federal Energy Regulatory Commission pressed California to lock up much of its power under long-term contracts, because it argued that excessive reliance on short-term purchases was a major contributor to the power crisis. 

Now it appears the cost of that solution could exceed the cost of the short-term crisis, Shames said. 
Beyond the growing political pressure, San Diego attorney Michael Aguirre is arguing in appellate court that Gov. Gray Davis overstepped his legal authority by declaring an emergency and signing the long-term agreements in the first place. 

He says California's electricity deals violate state law regarding purchasing practices. 
"To circumvent that law by calling it an emergency does not pass legal muster," said Aguirre, who is suing electricity providers for overcharging. "There were other means to manage the emergency." 

The PUC also says the state locked itself into too much power for too long a period. 
"First and foremost, we should try to renegotiate, try to get shorter terms," said Gary Cohen, general counsel for the PUC.

Willingness to deal 
At least two major suppliers have indicated a willingness to discuss the matter, Cohen said. The PUC also will continue to press for changes to the agreements with FERC. 

The federal commission regulates wholesale power markets and is legally mandated to ensure prices are "just and reasonable." FERC is considering refunds for prices paid by California in spot power markets during the crisis. 

Cohen argues that if spot prices are subject to refunds, long-term contracts should be subject to similar relief. The PUC has made several filings pressing this point, but has received no response from FERC. 

For his part, the governor declines to call for renegotiation of the contracts. 
"In order to renegotiate we would have to have the generator come to us, and they have not done so," said Steve Maviglio, the governor's spokesman. "We would be pleased to sit down and renegotiate. But we have not been approached by anyone." 

Some experts believe Davis wants to break the contracts more than he is willing to say, but he must maintain credibility with the providers with whom he signed agreements. The same people speculate that the governor, who blasted the PUC last week for failing to help implement the agreements, may have privately welcomed the commission's action as a step toward revising the agreements. 

Power providers, meanwhile, continue to support the agreements. 
"The contracts are good for the state and helped stabilize the market," said William Highlander, director of public relations for Calpine Corp. 

The San Jose company is the largest provider under the controversial agreements, with some $13 billion in contracts. Calpine hopes to provide much of that power from new plants it is building within California. 

Sempra says contract fair 
The company has not been approached by the state to revise its agreements, said Highlander, and he declined to say how Calpine would respond to such an overture. 

San Diego-based Sempra Energy, another major provider under the agreements, also insists its contracts provide power at fair rates to the state. 

Michael Niggli, president of Sempra Energy Resources, said his company will provide power for about 4 to 5 cents per kilowatt hour, based upon current natural gas prices. 

"It's pretty tough to say, 'Let's renegotiate the lowest price contract,' " Niggli said. 
But V. John White, director of the Center for Energy Efficiency and Renewable Technologies, said Sempra's contract and others lock the state into power that consumers are unlikely to need, and too much of the electricity comes from non-renewable sources. 

White says state consumers are being held hostage by some unnecessary posturing. 
"There are indications from several generators that a call to renegotiate would be responded to," White said. "The generators say nobody asked us. The governor says nobody has volunteered. 

"But the opportunity is there at this moment to renegotiate. Why don't we ask?" 
***************************************************************** 
State authority buying more power for 2002 
Critics say it's too costly, perhaps unnecessary and may be sold off later at a loss 
OC Register, 10.07.01 
SACRAMENTO -- California's new power agency is rushing to buy more electricity for next summer, even as the state has come under fire for buying too much costly power and then having to sell it at bargain prices. 

Moreover, another state agency says the state will have enough power - because of existing contracts and conservation - to get through the hottest of summers next year. 

The new power purchases, which are being negotiated by the California Public Power and Financing Authority, could add as much as 3,000 megawatts of power to California - enough for about 2.3 million homes - by June. That would be in addition to the existing $43 billion in long-term agreements the state has already inked with power generators. 

Many observers - even those supportive of the power authority's goal to increase cleaner, alternative energy sources in the state - are balking at the agency's rapid pace, saying consumers will end up paying more in the long run. 

"We're dumping power and (authority Chairman) David Freeman is buying more power. What's up with that? It's absolutely ludicrous,'' said Harry Snyder, executive director of Consumers' Union, which publishes Consumer Reports. 

A draft report by the California Energy Commission shows the state already has plenty of power for next year. 
Without the extra power being negotiated by the power authority, even in a very hot summer, the state would have about 6,000 extra megawatts during peak periods, when it needs 63,800 megawatts, about a 9 percent cushion. That is if all power plants came online as expected and residents continued to conserve as they are. 

In a normal summer, such as this year's, the state would have 10,000 extra megawatts above the average 59,000 megawatts it needs, roughly a 17 percent surplus. 

Power authority officials counter that those surplus figures are estimates that depend on people conserving at the rate they did this summer. "The more we own of our own supply, the more we can control the market,'' said state Treasurer Phil Angelides, an authority board member. 

Said Freeman: "We are thinking our way through what we should do for next summer. That why we get paid the big bucks." 
New contracts would increase 'green' power 
In addition, at least one-third of the new energy the power authority is trying to buy - 1,000 megawatts - would come from solar, wind and other renewable energy providers, officials said. 

Such generators were left out when the state signed its initial round of contracts. Bringing on 1,000 more megawatts would increase the portion of the state's energy derived from renewable resources to 13 percent. The long-term goal is 17 percent. 

The remaining power purchased under the new contracts, perhaps 2,000 megawatts, would be from so-called "peaker'' plants - less efficient jet-engine-like generators that are turned on only during emergency shortages. 

The emphasis on these natural gas plants irks many environmentalists, but proponents of them say these would be a new generation of gas peakers. While not preferable to conventional generating plants, they would pollute less than the peakers currently being pressed into service. If California can build new, more efficient ones, it can retire the old polluting ones, the argument goes. 

Nonetheless, critics fear the state, rushing into new negotiations, will leave ratepayers with more expensive power contracts. They note that the authority hasn't completed an assessment on exactly how much power it really needs and what it wants for the state's power portfolio. That assessment won't be done until February. 

"I hope they have a basis on which they've determined they need those (3,000) megawatts of contracts,'' said Lenny Goldberg, a lobbyist for The Utility Reform Network, a consumer watchdog group. 

Businesses worry new pacts will hurt them 
Even the state's businesses are critical. 
They believe that the more expensive long-term power there is under state contract, the less likely lawmakers are to businesses go into the open market to buy the cheaper electricity they think they can get there. 

Lawmakers, they believe, will want to force businesses to continue to buy power under the contracts they've negotiated because if the businesses were allowed to pull out, residential customers alone would be left paying the higher prices that those contracts dictate. 

Lawmakers are reluctant to put any more burdens on the average consumer, who they feel are the unintended victims of a severely flawed deregulation system. 

"I would just as soon not see them negotiate any more contracts,'' said Jack Stewart, president of the California Manufacturers and Technology Association. 

The state power authority was signed into law in May to build its own plants, help others finance them and compete with the private power companies. Leading the $5 million-a-year agency is Freeman, the former head of the Los Angeles Department of Water and Power and one of Davis' closest advisers during the energy crisis. 

The Legislature's auditors are casting a critical eye at the power authority and will hold hearings next month. 
"It's not an investigation,'' said Assemblyman Fred Keeley, D-Felton, chairman of the Joint Legislative Audit Committee. But "it's appropriate early and often to review their work in a public venue and have them held accountable for compliance of the law.'' 

Keeley's committee is looking into the planned purchases and he said he could not yet conclude whether the power authority's actions could help or hurt the state. 

Freeman said onlookers have been too quick to criticize the state's work. 
"The plain truth is we had blackouts last winter. We did what we could. We kept the rates stable and lights on,'' Freeman said. "Criticism is real easy with the benefit of 20/20 hindsight.''