State pushing at all fronts to rework long-term power deals

By Jennifer Coleman, The Associated Press
Monday April 08, 2002

SACRAMENTO – Through complaints with the federal government and a mobilized cadre of lawyers, the state of California is trying to shed some of the long-term power contracts tying it to much higher than market rates. 

When he made the deals last year, Gov. Gray Davis called them a force to stabilize the state’s volatile energy market. Since then, however, the state has tried a variety of tactics to poke holes in those contracts and get a better deal. 

But that’s happening in a tenuous utility environment in which many companies are wallowing in Enron-related accounting problems and trying to stabilize their sagging finances. 

San Jose-based Calpine Corp. has four of 56 long-term contracts with the state, worth about $11.7 billion of the $43 billion total. Those deals have Calpine set to provide about 25 percent of the power under the long-term contracts. 

But the Department of Water Resources has been negotiating hard with Calpine to change the terms. Both sides said Friday they had no deal. 

“We are close, but we’ve been close before,” said Oscar Hidalgo, DWR spokesman. 

However, since the deals were signed, Calpine has faltered. Standard & Poor’s downgraded its credit rating to junk status, because of its large debts and concerns renegotiated energy deals with the state could cut badly needed revenues. 

That means Calpine really has nothing to offer the state, said University of California, Irvine, economist Peter Navarro. Any new deal Davis would reach with Calpine would have little meaning. 

Calpine, spokesman Bill Highlander said, is still “very stable.” 

The state started buying power in January 2001, after three utilities amassed billions of dollars in debts due to high wholesale costs and couldn’t buy energy for their customers. Davis said the long-term deals tamed the market and provide reliable supplies. 

Since then, wholesale electricity prices have dropped to less than half the $69 per megawatt hour average of the long-term deals, leading critics to say the state was rolled by the power companies and stuck consumers with a decade’s worth of high prices. 

In February, the state asked the Federal Energy Regulatory Commission to review some of the deals, saying the power sellers charged unfair prices and used illegal tactics to drive them higher. The state Electricity Oversight Board and the Public Utilities Commission want the contracts’ costs cut by $21 million. 

Energy sellers say the contracts are fair given the cost of energy at the time. Instead, said Jan Smutny-Jones, executive director of the Independent Energy Producers, the state has buyer’s remorse, which is discouraging companies from investing in California. 

Also, fallout from the collapse of bankrupt energy giant Enron is making it hard for generators to find money to build power plants, Smutny-Jones said. That could lead to another energy crunch in two or three years. 

Concern over a future shortage of generation is why the state tied about 70 percent of the long-term contracts to the building of new plants, Hidalgo said. 

Whether the contracts actually require energy companies to build a plant is open to interpretation. A recent Bureau of State Audits report found the contracts “typically do not impose the substantial penalty of termination for failure to build such generation ...” 

That hasn’t stopped DWR attorneys from telling Sempra Energy Resources, which holds a $7 billion deal, that it hasn’t lived up to its contract and may lose it because it hadn’t brought a 300-megawatt power plant online by April. 

Sempra responded by saying that plant could have been part of a larger, cleaner facility being built in Bakersfield. Sempra just decided not to operate the smaller plant while the larger one was being built, spokesman Tom Murnane said. 

Also, Murnane said, the contract doesn’t require Sempra to build anything, while the state claims the contract requires the company to have the plant working now. 

In fact, Hidalgo said, the promised new plant was the reason the state agreed to pay Sempra $160 a megawatt hour. 

Sempra president Michael Niggli said the state is just playing “political games” to break the contract. 

Sheldon Shultz, the owner of a biomass plant in Soledad, agreed. 

The DWR canceled a five-year, $35 million contract with Soledad Energy last week, saying the company had only supplied 30 percent of the power they were supposed to sell the state in the last several months. 

A mechanical problem has slowed production at the plant, Shultz said, and would have been fixed soon. 

Instead, he said, the state gave him a “take-it-or-leave-it offer” that would cut Soledad’s rate to below cost. That’s because of “the political pressure on the governor and the governor’s pressure on the agency to do something.” 

Among California’s power woes, his 13-megawatt biomass plant “isn’t on anyone’s radar,” he said, but since the state is his only customer, he shut the plant down and laid off 21 workers. “We’re a mouse in a battle of elephants and I guess we didn’t get out of the way.”