Plant Construction Stalled Over State’s Effort to Revise Contracts

The construction of a fleet of small power plants--capable of supplying 1 million homes--is being stalled because of a dispute between state officials and the plant builders.

Two weeks ago, Gov. Gray Davis toured a power plant under construction among the orchards of Sutter County. He ordered state Energy Commission regulators to roll out the red carpet for anybody willing to quickly build small, sometimes temporary, generators called “peakers” to help the state get through next summer without blackouts.

Yet plans for 29 such plants, which have been in the works since last fall, have been slowed by the state, according to the companies hired to build the plants. The problem, they say, is that the California Department of Water Resources, which was pushed into the electricity business on an emergency basis last month, is trying to amend 4-month-old contracts for construction of peaker plants.

State officials say the original contracts gave too much to the plant builders, and they want to save the taxpayers money by revising the terms.

“We’re not delaying any construction,” said Davis spokesman Phil Trounstine. “We’re providing financial assurances for the generators and protections for California consumers.”

“There’s no reason,” he added, “that these guys can’t rework these contracts and get these plants up and running on time.”

But peaker plant operators say the contract revisions probably will slow down construction.

Last week, Harold Dittmer found out that the department wants to stretch to 10 years the terms of what had been a three-year contract with his company, Sacramento-based Wellhead Power.

He said he is scrambling to alter land and equipment leases and isn’t certain he will get his four power plants installed in the Central Valley by the target dates of May and July.

“Having to renegotiate the agreements adds uncertainty, and uncertainty adds time,” Dittmer said.

Some of the other eight companies with contracts to build peakers say they’ve also been asked to alter their contracts.

“The projects will not be done in June, as originally contemplated,” said Dale Fredericks, chief executive officer of DG Power Inc. in the San Francisco suburb of Walnut Creek. His company intends to build seven small plants around the state with the combined capacity to supply more than 340,000 homes.

These gas-fired plants, some so small they fit on the back of a big-rig truck, are designed to run a few hours at times of heightened demand. Most are slated for construction on existing industrial sites, such as utility substations.

Officials of the Department of Water Resources did not return calls for comment. Steve Maviglio, a spokesman for Davis, said department officials are confident that the plants will all be finished this summer. He said the agency--thrust into the power-buying business as a result of the near-bankruptcy of the state’s two biggest utilities--wants to amend the original contracts to save money.

“We’re simply trying to get the best prices for taxpayers,” Maviglio said.

But in slowing down the plant construction, the department’s action undermines the governor’s campaign to quickly expand the state’s power production. Two weeks ago, Davis ordered the Energy Commission to offer licensing of such plants in 21 days or less. On Wednesday, the commission published a list of 32 sites around the state that could, by its estimation, quickly and easily accommodate a peaker plant.

Among these sites, targeted for proximity to transmission lines and natural gas supplies, are an airport in Kern County, the port of Long Beach and a cardboard recycling plant in Ontario.

“Our target is 1,000 megawatts,” said Energy Commission spokeswoman Claudia Chandler.

Fredericks, the power plant builder, said the state’s best shot of getting that much peaking power built by this summer is through existing contracts like his. So many plants are under construction around the country that there is often a long wait for delivery of the turbines, compressors and other crucial components of a power plant, he said.

“We’ve been working on this six months, so we have equipment lined up,” said Fredericks, who searched worldwide for the parts he needed. “But somebody coming in right now probably can’t find the equipment.”

His company and eight others signed contracts last fall with the California Independent System Operator. That nonprofit agency, based east of Sacramento in Folsom, was established under the state’s 1996 deregulation plan to balance the flow of electricity on the transmission grid reaching 75% of California.

Typically, Cal-ISO wouldn’t be in the business of soliciting construction of power plants. But a scarcity of supply complicates Cal-ISO’s job. Managers looking ahead to the summer of 2001 predicted last year that the state would be short of electricity by one-fifth of what it needs on those hottest afternoons when demand for power spikes upward.

Warning of “a very substantial risk” of rotating blackouts in the summer of 2001, Cal-ISO officials signed contracts last October and November for 29 small power plants to be built by June. The plants would be capable of providing 1,279 megawatts of peak-time electricity--enough to supply more than 1 million homes--at a cost of $214 million a year for three years.

That would amount to about $6 per California household per year, Cal-ISO staff figured.

“These costs,” wrote Cal-ISO management in a memo to its policy-making board of governors, “should be weighed against the financial, social and human costs” associated with blackouts.

“We saw the summer of 2001 coming like a freight train,” said Brian Theaker, manager of reliability contracts at Cal-ISO. “And we gulped and swallowed and said, ‘We’ve got to do this because nobody else is.’ ”

Those contracts were signed despite the misgivings of two appointees of the governor.

In an Oct. 26 letter, Public Utilities Commission Chairwoman Loretta Lynch and Michael Kahn, head of the Electricity Oversight Board, complained that the contracts for peaker plants seemed too expensive.

They urged Cal-ISO to refrain from signing the contracts until the PUC could check whether Edison and PG&E; were willing to build the plants more cheaply.

But the utilities came forward with no such plans, and the Cal-ISO board approved the contracts.

Under those contracts, the plants would be required to produce electricity for 500 hours at most this summer, when called upon to do so by Cal-ISO.

But work on the plants tapered off in January, when the deteriorating financial condition of Edison and PG&E; threw the future of Cal-ISO into jeopardy.

Cal-ISO doesn’t actually buy electricity. It bills utilities for the power it needs to balance the grid. So as Edison and PG&E; spiraled toward bankruptcy in December, Cal-ISO lost its credit-worthy status, and companies--and their lenders--feared doing business with the agency.

To calm those fears and to get construction underway, the Department of Water Resources has offered to replace Cal-ISO in the contracts. But that has not yet happened, as department officials seek to change the contracts. The state has hired a Massachusetts firm, Navigant, to renegotiate the deals.

“If DWR would just assume the contracts as they are, we’d all be in high gear,” Dittmer said.