FYI.

California Struggles in Role
Of a Large Buyer of Power
By REBECCA SMITH
Staff Reporter of THE WALL STREET JOURNAL


Despite proclamations by Gov. Gray Davis that California finally has gotten
the upper hand over its electricity crisis, there are new signs that the
state is struggling in its role as an enormous power buyer.

For the first five months of this year, the state Department of Water
Resources, in charge of purchasing electricity on behalf of two big,
financially ailing California utilities, bought too little power to meet the
state's needs and, as a result, risks triggering $1 billion in federal
fines. Then, for the past few weeks, the DWR, as the agency is known, has
been buying too much electricity, potentially saddling rate payers with the
cost of juice they won't ever actually use.

Finally, a slew of long-term contracts the state signed with suppliers,
intended to calm a volatile spot power market that sent prices to record
levels in recent months, may actually end up being too expensive. As new
power plants crank up here over the next two years, Californians appear to
be locked into paying rates for as many as 20 years far in excess of what
market prices are likely to be.

State officials defend their power-management work, saying the negotiation
of the long-term contracts and the daily power-purchasing record of the DWR
have helped bring down electricity prices from punishing levels in recent
weeks and have reduced the threat of blackouts. S. David Freeman, the
governor's energy adviser, likens the state's job performance to "a plane
that landed safely" after undergoing harsh turbulence.

If so, it is a pretty bumpy approach. Take the case of purchasing too little
power. Back in December, the Federal Energy Regulatory Commission imposed
financial penalties designed to compel California utilities to lock in more
power on the "forward" market and to reduce their dependence on last-minute
purchases that jeopardized electric-system reliability.

But in the 163-day period between the time the penalties were ordered and
June 12, the DWR was judged by regulators to have purchased too little power
77% of the time. That, in turn, triggered penalties of $100 for each
megawatt hour of power purchased by the California Independent System
Operator, above certain thresholds, in its "real time" energy market.

State officials notified FERC late Friday that the penalties had become
astronomical and asked that they be eliminated. In its meeting Monday, FERC
is expected to roll out broader price controls for the Western power market.
But it isn't expected to address the penalty issue.

Now the state faces a new problem of at times purchasing too much power,
partly due to the activation of 38 long-term power contracts signed by the
state since January. On Friday, Gov. Davis released heavily censored copies
of these documents after a judge compelled him to do so as a result of
lawsuits brought by Republican state legislators and a consortium of news
organizations, including The Wall Street Journal. The plaintiffs will go
back to court June 22 to request complete disclosure of the contract terms.

In news conferences Friday and Sunday, state officials depicted the
contracts as a victory for the state, which has been grappling with a huge
supply-and-demand imbalance in its electricity market since last summer. "We
had a mighty tussle to negotiate these contracts," said Mr. Freeman, adding
that they provide energy at prices "anyone would consider just and
reasonable."

Some industry executives believe the contracts tell a different story. Jack
Adrian, a power-industry executive who has been building power plants for 39
years, said his analysis leads him to believe "there's nothing to boast
about here. The suppliers are getting the best of a desperate customer."

Mr. Adrian, chief executive of California-based Delma Power Co. and a former
executive at Edison International, parent of one of California's ailing
utilities, said it is impossible in some instances to determine what prices
the state has committed to pay because key pieces of information have been
deleted. But he said where numbers are available it is clear that "prices
are way too high, several orders of magnitude higher than anything ever
permitted the utilities."

Many of the contracts contain "take or pay" provisions that commit the state
to pay for power for five to 20 years, whether or not it is needed. That may
help to explain why in June a new problem has cropped up -- "overscheduling"
-- where the state, at times, has ordered too much power to be delivered. To
keep from overloading electric lines, the ISO has had to order some
generating units to produce less juice.

In the first 13 days of June, there were excess-supply problems on nine
days. It is unclear if the state was able to resell any of that excess power
and, if so, at what prices. State officials declined to comment.

An examination of the long-term contracts shows about half contain fixed
power prices. The rest have prices that fluctuate depending on fuel costs
and other factors. Mr. Freeman said the state has negotiated prices that
average $69 a megawatt hour for the next 10 years.

For now, though, according to the state's own statistics, it appears
California is paying substantially more than that. In five of the past six
months, spot-market prices have been lower than the average price paid by
the DWR.

Mr. Freeman said forward contracting by the state is the reason spot prices
have fallen. Regardless, it puts the state in an awkward position. Before
FERC it is arguing that spot power prices are neither just nor reasonable
and must be restrained. It also wants multibillion-dollar refunds from
wholesale power suppliers. Yet, within California, state officials are
making the case that the prices in the contracts it has signed are fair even
though they are, in many cases, higher than spot prices.

Analysts say it isn't clear how the state intends to resolve this apparent
contradiction. In effect, they note, California is seeking refunds from
generators on the lower spot-market prices they charged, while trumpeting
contract prices which are, in many cases, higher.

Write to Rebecca Smith at rebecca.smith@wsj.com