Audit Finds Power Pacts Ill-Conceived, Rushed

Desperate to avoid blackouts last spring, the state moved too fast to sign long-term power contracts that are ill-matched to California’s needs, according to the most comprehensive audit yet of California’s 11 months in the power-buying business.

A report released Thursday by the Bureau of State Audits concludes that the Department of Water Resources, thrust in January into the emergency role of buying power for 27 million utility customers, should have done a better analysis of power needs before it signed 57 separate agreements with energy companies.

The water resources department signed those deals to avoid record high prices in a deregulated market gone haywire.

“Decisions committing the customers of the investor-owned utilities to $35.9 billion in future power-purchase obligations were made in 30 days,” auditors wrote. Several billion dollars in additional contracts were negotiated later in the year.

Auditors also criticize the department for failing to include enforcement provisions, standard in the power industry, in case sellers don’t deliver electricity as promised under the contracts.

And they warn that the state must monitor the contracts over the next decade to make sure they don’t end up costing the customers of Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric more than necessary. Some of the contracts force the state to pick up such costs as air pollution fees for power plants.

Portfolio Holds ‘Significant Risks’

“The speed in which the department entered into contracts in response to the crisis precluded the planning necessary for a power-purchasing program of this size,” the auditors said. “As a result, it assembled a portfolio of power contracts that presents significant risks that will need careful management to avoid increased costs to consumers.”

The state auditor’s report echoes the criticisms that consumer advocates, environmentalists and lawmakers have leveled against the Department of Water Resources contracts for months.

“It’s what we’ve been saying all along,” said Sen. John Burton, (D-San Francisco). “Too much, too fast and a lot of the wrong kind.”

Critics say the contracts will strap Californians with high electricity rates for a decade. The average price of power in the contracts is $70 per megawatt-hour, while power can be bought on the spot market now for $30 per megawatt-hour or less. A megawatt-hour is enough electricity to supply 750 homes for an hour.

But Water Resources officials say Californians couldn’t have had those current low prices without the large contracts. The fact that the state signed the contracts tamed the power market, they say.

The amount that the department spends each month buying power has plunged 80% since May. No blackouts were triggered last summer, despite dire predictions. And supporters of the contracts say the long-term agreements help guarantee that major new power plants will soon be churning out electricity.

“You can’t win; you cannot satisfy everyone,” said Oscar Hidalgo, spokesman for the 135-person power-buying team at the Department of Water Resources. “The lights are on; the costs are way down; stability is back in the market. The long-term contracts are a big part of it.”

After months of defending the long-term contracts, aides to Gov. Gray Davis have begun trying to renegotiate some to get better terms for the state.

The original negotiations were led by S. David Freeman, the former general manager of the Los Angeles Department of Water and Power and current head of the state’s 4-month-old public power authority. At the time, Davis pushed Freeman hard to get the contracts, which normally would take months to negotiate, finished in weeks. On Thursday, Freeman declined to comment on the audit, referring inquiries to Department of Water Resources.

Experienced at buying and selling electricity as a sideline to running the pumps of the State Water Project, the department was tapped by Davis on Jan. 17 to begin buying roughly 30% of the electricity needed by the customers of Edison, PG&E; and San Diego Gas & Electric.

The utilities had been drained of cash by seven months of soaring wholesale electricity prices. Power plant owners and electricity marketers no longer wanted to do business with the utilities for fear of not getting paid. Fearing widespread blackouts, Davis signed a bill into law authorizing the state to use its good credit rating and taxpayer funds to keep power flowing to Edison, PG&E; and SDG&E; customers.

The law that makes the Department of Water Resources the biggest electricity buyer in the West expires at the end of next year, when the utilities presumably will be financially healthy enough to take back the job of buying power.

Oversight of Contracts Unclear

It’s not clear whether the department, the utilities or perhaps the new state power authority will take over management of the contracts after 2002, said department Director Tom Hannigan.

While acknowledging the immense challenge the Department of Water Resources faced in January, state auditors say the department should have moved more methodically. Too many of the contracts commit the state to buying electricity six days a week, 16 hours a day, they say. As a result, at times of low demand, the state must sell power at a loss.

The department’s own calculations show that such surplus sales could cost consumers as much as $4 billion over the next nine years.

In the opposite scenario, on hot summer days when air conditioning drives electricity consumption to peak levels, California may find itself vulnerable to price spikes because the long-term contracts don’t include enough commitments from “peaker” plants, which are designed to run briefly.

Auditors also say that most contracts leave the department vulnerable if a power seller fails to deliver under the contract and instead sells the power for a higher price in the spot market. Many of the contracts limit the state in such a situation to recovering the difference between the contract price and the cost to replace the power.

“A better remedy would have been the right to terminate contracts with generators that repeatedly fail to deliver,” auditors wrote.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Contract Problems

(tabular data not included)