Audit finds major shortcomings, billions in hidden costs in power contracts

By Jim Wasserman, The Associated Press
Friday December 21, 2001

Taxpayers may end up paying the bill 


SACRAMENTO — The first major analysis of California’s reaction to 2001’s power crisis says “significant risks” still abound for the state’s electricity supply. 

State Auditor Elaine Howle reported Thursday that hurried decisions made during the energy crisis can’t guarantee power during times of tight supplies nor assure construction of new power plants. The state is also locked into buying power whether or not it’s needed, and at costs that may be higher than market prices. 

Taxpayers may end up paying for hidden costs into the billions of dollars, she said. 

“We certainly think that attempts should be made to renegotiate some of these contracts,” the auditor said. 

Howle saluted the Department of Water Resources for doing its job — buying $10.7 billion worth of power in nine months and contracting 10 years worth of power for $42.6 billion. 

But the audit team’s monthslong study found that DWR can’t end contracts with suppliers who don’t deliver and it didn’t seek contract terms standard in the energy industry. 

The state’s water department — an agency thrust into the power crisis early this year with little experience — mainly threw large amounts of money to suppliers to assure 10 years of electricity, the 258-page audit stated. Auditors said the mission “dwarfed the department’s capabilities.” 

Gov. Gray Davis’ office referred calls to DWR, which responded to the criticism, saying it did its best under trying circumstances. 

“Where we’re at here is some very serious Monday morning quarterbacking,” said DWR spokesman Oscar Hidalgo. “It’s easy to look back and say you should have, could have done that. The options were limited, the times were difficult. We haven’t forgotten that, but a lot of people have.” 

Thomas Hannigan, DWR director, said the agency successfully stabilized power prices and kept lights on despite dire forecasts of summer blackouts. He added that 70 percent of the long-term energy contracted by the agency will come from new power plants, an achievement “not even conceivable in the first half of this year.” 

The report provided an inside look at days of crisis following the state of emergency Davis declared Jan. 17. During winter and spring, the state spent $60 million to $100 million a day for power and asked numerous times for $500 million from the state’s general fund within 10 days. From Feb. 2 to March 2 alone, DWR hurriedly negotiated $35.9 billion in long-term power contacts with experienced energy firms. 

Those are the problem contracts, Howle said, adding that one contract saddles the state with the new costs of emission controls. Another makes the state pay future property tax hikes on its power plants. 

“Certainly, the state was in a difficult position, leverage wise, because we were in a crisis situation,” said Howle. “But things happened very quickly and there were cost consequences for that.” 

Hidalgo said DWR will try to reach new deals with long-term energy suppliers. 

“We’ve had some dialogue with the counter-parties. I can’t speak too much for the negotiations, he said. “They are under way. We are looking at all options, every aspect of the contracts, each and every contract.” 

Steve Stengel, spokesman for Houston-based energy supplier, Dynegy Inc., said, “We’ve said for several months that we have a legally binding agreement with the state, but that we would be willing to discuss the contract if it was mutually beneficial.” He said the state contacted Dynegy about the contract. 

“But to my knowledge,” he said, “there have not been any discussions at this point.”