FYI.

8 State Power Contracts Seen as Bad Deals
Energy: The long-term pacts require the purchase of too much electricity at too high a price for too long, a study finds. Immediate renegotiation is urged.
By VIRGINIA ELLIS and NANCY VOGEL
Times Staff Writers

September 30 2001

SACRAMENTO -- At least eight of the long-term contracts to buy electricity that California officials signed this year are so egregious that they should immediately be renegotiated, according to a new, detailed study. 

The biggest problems are so-called "take or pay" clauses that require the state to buy large quantities of expensive power even if there is no demand for it, the study said. 

The contracts will saddle Californians with high electricity rates for the next decade because the state negotiated many deals that require the purchase of too much energy at too high a price, according to the analysis, which was sponsored by a coalition of consumer, environmental and renewable energy groups. 

Between January and September, the state Department of Water Resources entered into 53 agreements to buy electricity for customers of the state's three investor-owned utilities, which have been unable to buy power on their own. The longest of the contracts would last 20 years, and overall, the pacts are estimated to cost $43 billion over the next two decades. 

Power generators did not rule out the possibility of renegotiating at least some contracts, but said any move to do so would have to be requested by the state. 

"If we receive a request and it makes sense for both parties to restructure the contracts, we will consider it," said Joe Ronan, a senior vice president for San Jose-based Calpine Corp. But, he said, the company has "no intention of asking for renegotiation" on its own. 

Jan Smutny-Jones, executive director of the Independent Energy Producers, a trade association for electricity generating companies, said other members of his group might also consider renegotiation. So far, he said, "I don't see any realistic legislative or regulatory efforts to push it in that direction." 

And he said the producers would oppose any efforts to force them back to the bargaining table. "We'd take strong exception to involuntary renegotiations," he said. 

For his part, Gov. Gray Davis would be open to renegotiations, said his spokesman, Steve Maviglio, but only if power generators show a willingness to return to the bargaining table. 

"Would we love to get a better deal?" Maviglio said. "Of course we would, but the contracts we negotiated helped us get in the positive position we are in now, and if the generators were willing to renegotiate the contracts, we'd be the first ones at the table." 

S. David Freeman, who led the contract talks last winter on behalf of the state, said critics miss the larger purpose of the agreements. When the state began negotiating contracts, California had just suffered two days of rotating blackouts. The contracts tamed the market and eliminated the blackout threat, he said. 

"Insurance is insurance, and it costs a little bit," said Freeman, "but it's a good thing to have." 

But William B. Marcus, chief economist for JBS Energy, which conducted the three-month study, noted that at least one of the most troublesome agreements was signed in July--weeks after the market had stabilized and prices had declined. 

The study of the contracts was sponsored by the Center for Energy Efficiency and Renewable Technologies and was financed by a $200,000 grant from the San Francisco-based Energy Foundation. It was conducted by JBS, a consulting group. 

The study singled out for criticism: 

* A deal with Sempra Energy, parent company to San Diego Gas & Electric, which Marcus called the most expensive and inflexible of all the contracts. Over the life of the pact, he calculated, Sempra would earn $1.2 billion more than the California Energy Commission estimates unregulated power should cost. 

The contract lasts until 2011. For each year, it requires the state to buy large amounts of power at fixed prices whether it's needed or not. 

* A deal to buy electricity from small Northern California power plants owned by Calpine Co. that have yet to be built. The plants will be "peakers," designed to run in short bursts when electricity supplies are tight, such as on hot summer afternoons. The state agreed to pay Calpine $90 million a year for five years simply for the right to buy 495 megawatts of electricity. 

"They get $90 million a year on plants that cost $250 million," said Marcus. "That's huge. You get your money out in three years. If a utility had built these power plants, they would have charged half as much." 

* A deal with Alliance-Colton LLC to buy the output of two inefficient peaker power plants in San Bernardino County. The deal commits the state to pay $207 million through 2010 whether or not it uses any of the 72 megawatts of electricity. 

* An agreement to pay $150 per megawatt-hour for two years--more than twice the average price of $69 per megawatt-hour of all the contracts--for power from several aging plants that Mirant Corp. of Atlanta owns in the San Francisco Bay Area. 

* A contract the state signed in July to buy power from Pacificorp, a private utility based in Portland, Ore. Pacificorp agreed to sell electricity at a fixed price of $70 per megawatt-hour. That price could have looked reasonable at the height of last winter's crisis, but it was double what energy sold for when the contract was signed. 

* Contracts with two power marketing companies for electricity generated by the same Southern California plants. The difference in price shows what a poor deal the state got under one of the contracts, the study said. 

One of the marketers, Allegheny Energy Supply Co., agreed to sell from 150 to 1,000 megawatts from March 2001 to December 2011 for a straight $61 per megawatt-hour. 

But a second marketer, Williams Energy Marketing & Trading Co. got a nine-year contract to sell from 35 to 600 megawatts from the same plants for $62.50 to $87 per megawatt-hour. 

"When you compare those two contracts," Marcus said, "you know you've got a dog here. I think Williams showed up earlier, and the state was desperate." 

* An agreement with Dynegy Corp. of Houston that requires the state to pay for emissions credits and upgrading of pollution control equipment on the firm's California-based plants. The contract puts no ceiling on those costs, Marcus said, and it is unclear how high they are likely to go. 

* A pact to buy electricity from a plant being built in Victorville by a partnership between Inland Energy of Newport Beach and Constellation Power Development of Baltimore. The state agreed to a price of $58 per megawatt-hour, but is obligated to take all of the power, 24 hours a day, seven days a week. 

Marcus, a Harvard-trained economist who has 23 years of experience with electricity and gas utility issues, said the brunt of the financial pain from the contracts will not be felt by consumers until after the next election, when the pacts significantly increase the amount of power the state buys. He said 96% of all the electricity purchased under the contracts becomes available--much of it on a take or pay basis--after next summer. 

Those large power buys will come when the state is expected to have energy surpluses because of increasing supply and a decline in demand driven by higher prices. 

"The state has agreed to buy too much power, often for too long a period, at too high a price, and much of this power is simply too dirty," said V. John White, executive director of the Center for Energy Efficiency and Renewable Technologies. "To make matters worse, almost all of these contracts are dependent on one price-volatile fuel: natural gas." 

When the state began negotiating contracts in January, electricity prices averaged $177 per megawatt-hour and sometimes spiked higher than $1,000 per megawatt-hour. By June, the average price had fallen below $100. Lately, prices hover around $30 per megawatt-hour, similar to the cost California enjoyed before prices went haywire. 

Marcus was particularly critical of one element of the Pacificorp contract: a clause that prevents the state from taking advantage of the plummeting price of natural gas until after 2003. The price of natural gas, the main fuel used to run power plants in California, began to jump last fall but has plummeted since spring. 

Another weakness of the contracts, Marcus said, is that they lock the state into further dependence on gas. For the prices California will pay under these pacts, residents could have made a greater investment in power generated by the sun, wind or other renewable sources for the same price or cheaper, he said. 

Windmills and solar panels would help buffer against natural gas price spikes, he said. Renewable sources of power also don't release air pollution and gases that contribute to global warming, he added. 

"I'm paying to buy something that really isn't the right thing to buy," Marcus said. 

"I don't want to pay Williams $69 a megawatt-hour to generate lots of inefficient gas-fired power that I have to take that's going to increase global warming and increase pollution in the South Coast Air Basin."