As Cash Flows, Davis Sets Up Power Pacts
With the state spending at a clip of more than $1 billion a month to buy power, Gov. Gray Davis on Tuesday struck the first long-term contracts aimed at cutting power costs and stopping the hemorrhaging of the state treasury.
The contracts were announced hours before the midnight expiration of a federal order requiring electricity and natural gas suppliers to sell power to the state. Also Tuesday, a federal judge issued a temporary order requiring Houston’s Reliant Energy Services to continue selling electricity to California.
Davis called the long-term contracts “a critical first step” in California’s digging its way out of the energy deficit. Combined, the deals will amount over time to 5,000 megawatts--enough to power about 5 million homes--and are divided among three- to 10-year contracts.
The initial supply of power in the contracts announced Tuesday is far less. At least some companies entering into the long-term deals are constructing power plants. Those facilities will not be completed for months or years.
“Initial deliveries under these contracts are approximately 500 megawatts building to approximately 5,000 megawatts over the next couple of years,” Davis said in a joint statement with his chief negotiator, S. David Freeman.
The administration did not disclose significant aspects of the deals reached Tuesday, including the names of the sellers and prices of the power.
Nor did the administration reveal the amount of power that will be available this summer, when demand traditionally is high and experts have warned that there will be blackouts.
One of the companies that reached a deal was Calpine Energy of San Jose, according to a source who spoke on condition of anonymity. The firm was offering to supply up to 1,000 megawatts over 10 years. However, none of that power would be available until the end of the year, the source said.
Freeman, on leave as general manager of the Los Angeles Department of Water and Power, said in the statement that he is “unable to discuss specifics of the contracts, because we are still in the negotiating process, and it is not in the interest of the people of California to discuss prices or terms.”
State Has Spent $750 Million So Far
Davis said he hopes to lock up 10,000 to 12,000 megawatts by the time he completes the bidding process. The state called for a second round of sealed bids for long-term power contracts in an auction that ended Tuesday evening. Details were not available.
Altogether, California has spent at least $750 million in general taxpayer money on power purchases since it made its first foray into the electricity business two months ago.
The state stepped in after Southern California Edison and Pacific Gas & Electric ran up billions of dollars in debt--and said they were on the verge of bankruptcy--buying power they could no longer afford on the volatile spot markets.
Only five days after California lawmakers allocated $500 million to finance the state’s entry into the long-term power business, the Davis administration sent lawmakers a letter Monday saying it is exhausting the fund, and will need an additional $500 million by Feb. 15.
“We’re just burning through money,” said state Sen. Ross Johnson (R-Irvine), one of the more pointed critics of the power-purchasing plan signed into law Thursday. “Clearly, the prices we are paying on the spot market are enormous.”
California’s power purchases have helped avert blackouts. But at the same time, the unprecedented decision by Davis and the Legislature to buy electricity on a large scale threatens to drain what had been a budget surplus estimated to be $8 billion.
For now, the money is coming from the budget’s general fund--estimated at about $80 billion--which gets revenue from income and sales taxes. Under the bill approved last week, the state ultimately plans to finance its power purchases by selling up to $10 billion in bonds to investors.
The legislation says the proceeds from the first bond sales will be used to repay the general fund. However, state Treasurer Phil Angelides says the bonds probably won’t be ready to go to market before May--raising the possibility that there will be a multibillion-dollar drain on the general fund.
The drain threatens to abruptly halt spending initiatives and tax cuts contemplated by Davis and legislators. The governor, for example, has proposed lengthening the middle school year by several weeks. Democratic lawmakers are hoping for a major expansion of health care for poor people. Republicans are calling for $3.2 billion in tax cuts.
“It devastates them,” Senate President Pro Tem John Burton (D-San Francisco) said of such plans. “I don’t want to think of it.”
Davis spokesman Roger Salazar said that as the state enters into long-term contracts for power purchases, the price and supply of electricity will become more stable.
“It is our hope that this $500 million will stretch much further than the previous money,” Salazar said.
State Finance Director Timothy Gage and other state officials are unsure how much money California will end up spending before the bonds are issued. At current rates--the state spent $400 million in one 10-day stretch--the sum would hit $1.2 billion per month, the Senate estimates.
Other state officials say the actual exposure could be less, depending on how many long-term contracts the state can enter into at lower, more stable rates. With each megawatt locked up in long-term deals, the need to buy power on the expensive spot market decreases, lowering its overall costs.
“We’re just taking it day to day, getting the price down, and minimizing the exposure to the spot market,” Gage said.
Under the legislation approved last week, the general fund is supposed to be fully reimbursed once the state begins selling the bonds.
Until that happens, people who live in municipal utility districts--including customers of the DWP--are essentially paying twice for electricity: once in their monthly utility bills and again when they pay income or sales taxes.
Major questions remain unanswered about the power purchases. It is not known whether the sale of $10 billion in bonds authorized by the legislation will suffice. Nor is it clear that rates users pay can cover the cost of the state’s electricity purchases.
PUC Could Raise Rates Again
Davis has said he intends to navigate through the crisis without raising rates beyond the 9% imposed on Edison and PG&E;’s residential customers by the California Public Utilities Commission last month.
An additional 10% rate increase is likely to occur in early 2002, when a rate cut ordered by the Legislature in 1996 expires.
The PUC could raise rates again if additional money is needed to pay bond debt. But the legislation passed last week limits the commission’s authority by protecting residents against increases if they use less than 130% of their so-called baseline allocation.
In other developments Tuesday:
* U.S. District Judge Frank C. Damrell said Reliant must continue to sell power to the state until the conclusion of a hearing in Sacramento this afternoon. The order came in response to a suit by the California Independent System Operator, the agency charged with running the vast electricity transmission grid.
The order was issued over the objections of Reliant, which said the state has plenty of reserve power available to avoid blackouts.
The temporary restraining order applies only to Reliant. But representatives of three other large energy sellers--AES, Dynegy and Williams--said they would continue to supply the state with electricity until at least the conclusion of today’s hearing.
* Southern California Edison General Counsel Stephen Pickett said the utility is “not alarmed” at a possible investigation by the PUC into the relationship between the utilities and their parent companies.
* The loss of the federal order compelling natural gas suppliers to sell to the state had PG&E; feverishly negotiating new contracts with its suppliers, backed by the ability, granted last week by the PUC, to use its unpaid customer bills as collateral for gas purchases. PG&E; announced that it had lined up five suppliers by late Tuesday.
* A major Wall Street credit-rating agency expressed annoyance that California has not yet figured out how to end the crisis. Standard & Poor’s, which rates the debt of the utilities at risky “junk bond” status, said that “the prospects for state officials to provide near-term relief that will strengthen financial performance and improve credit quality at the utilities remain dim in light of the current legislative proposals that are under consideration.”
* Calpine, which now supplies about 1% of the state’s power, reported that fourth-quarter profit more than tripled from a year ago, following a similarly sharp increase in earnings from continuing operations posted Monday by Williams Cos., a big electricity marketer and natural gas distributor.
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Times staff writers Nancy Vogel in Sacramento and Nancy Rivera Brooks in Los Angeles contributed to this story.
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More Inside
Peter H. King: If myths about the energy mess could be converted into megawatts, the state would be awash in electricity, A3
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* PROFIT SURGES
Higher energy prices sent power plant owner Calpine’s profit soaring. C2
