Concern Over Price of Long-Term Power Pacts Grows

Even as the summer progresses without blackouts, and Gov. Gray Davis prepares for yet another news conference today to symbolically switch on a new power plant, the work in the Capitol has shifted to the seemingly more daunting task of balancing the books.

It’s a task with potentially far more long-lasting implications for state coffers, for businesses’ bottom lines and for consumers’ wallets.

In particular, long-term power contracts trumpeted by the governor’s office as helping to bring stability to California’s out-of-control electricity market are having the opposite effect politically.

A growing concern about the $43-billion price tag of the contracts is complicating one of Davis’ most ambitious energy initiatives: a proposed financial rescue of Southern California Edison, which already faces an uncertain fate in the Legislature. Questions about the contracts come as California readies a complex $13.4-billion bond sale to reimburse the state’s general fund for other power purchases.

Critics worry that costs embedded in the contracts, on top of the billions needed to pay for the Edison rescue, could lead to additional electricity rate hikes for consumers. Key lawmakers, consumer advocates and business lobbyists are urging that at least some of the pacts be renegotiated.

Citing a recent plunge in wholesale energy costs, these critics say the state should work to shorten the duration of the contracts and lower some of the prices. They argue that the state entered into the deals under duress after California’s utilities neared insolvency and the state Department of Water Resources took over the purchasing of electricity for more than 25 million residents.

“They are vulnerable,” Senate Energy Committee Chairwoman Debra Bowen (D-Marina del Rey) said of deals the state struck with independent power companies when prices were at record highs.

Bowen lauds Davis administration negotiators for signing “the best deals they could.” But she said that in the crisis atmosphere in which the negotiations took place, “the state had two cards and the generators had 50.”

Contracts Open to Challenges

The contracts could be challenged in court or, more immediately, before the Federal Energy Regulatory Commission in Washington. There, an administrative law judge could direct that the pacts be reworked as part of a settlement of allegations by Davis that generators overcharged the state for electricity by $8.9 billion.

“We ought not to say, ‘Fine, the contracts were the best we could do,’ ” Bowen said.

For his part, Davis says he is willing to accept partial payment of the $8.9 billion in the form of contracts with terms more favorable to the state. He attributes the recent sharp drop in wholesale electricity prices to conservation, the administration’s effort to increase power supply and--a major factor--the long-term contracts, which slashed the state’s reliance on the volatile daily, or spot, market.

“You can see the value of these long-term contracts . . . dramatically shrinking our overall price, which is what matters to Californians,” Davis said, pointing out that the average cost of power plunged 30% from May to June.

Davis energy advisor S. David Freeman, who helped negotiate the contracts, said they may end up costing less than $43 billion, given the recent decline in prices for natural gas, the main fuel for California’s electricity-generating plants.

Freeman also compared critics to someone who calls the fire department to douse a blaze. “After the fire is out,” he said, “you complain about the water damage.”

The contracts have other defenders, among them UC Berkeley economics professor Severin Borenstein, who says the deals helped to tame the volatile spot market by reducing generators’ incentive to drive up prices, while reducing the state’s exposure to wild swings in price.

“The point of signing long-term contracts is not to get a great price; it’s to reduce risk,” Borenstein said.

Still, experts have been picking through the pacts ever since a Superior Court judge in San Diego, ruling in a California Public Records Act lawsuit by news organizations and Republican lawmakers, ordered last month that Davis unseal the contracts.

An analysis done for the Assembly by three experts--one each representing Southern California Edison; the Utility Reform Network, a consumer group; and large electricity consumers--concluded that the about $43-billion price tag announced by the administration may not account for all the costs. When other expenses are factored in--ranging from environmental equipment upgrades to any new energy-related taxes--the contracts could cost an additional 10% to 20%.

“Once the contracts were made public,” Senate Republican leader Jim Brulte of Rancho Cucamonga said, “just about anyone who can read began calling for those contracts to be renegotiated.”

As buyers’ remorse spreads through the Capitol, the contracts increasingly are seen as a hurdle--or a bargaining chip--as Davis and lawmakers confront fast-approaching deadlines in their effort to prevent the energy crisis from morphing into a broader financial crisis.

A bill pushed by Davis to avert bankruptcy for the financially hobbled Southern California Edison must be approved by Aug. 15. The deadline could be tighter, because the Legislature is scheduled to adjourn for a monthlong break July 20.

Davis’ rescue plan, along with legislative alternatives, languishes in the Legislature. The plan, which has little apparent support, would require the state to buy Edison’s system of transmission lines for $2.76 billion and permit the utility to charge ratepayers for the rest of its back debt of $3.5 billion.

Some lobbyists and lawmakers believe that the electricity rate hike approved in March by the California Public Utilities Commission--at 3 cents a kilowatt-hour the largest in state history--may not be enough. The revenue generated under the new rate structure must cover the costs of the long-term power contracts and repay the planned $13.4 billion in bonds, which would be the largest municipal deal ever.

Whether there would be sufficient money left to pay for the Edison rescue remains to be seen. But some experts say the utility may need to seek a separate rate hike to cover its costs.

As written, the contracts have few escape clauses; Davis cannot simply walk away from them if he concludes that prices are too high. Still, criticism persists and crosses political lines.

Harry Snyder, longtime Sacramento lobbyist for Consumers Union, and Jack Stewart, president of the California Manufacturers and Technology Assn., rarely find themselves on the same side of a debate. But in separate interviews, they sounded similar themes.

“If there is a way to buy our way out of these contracts, even if we have to pay damages, we’d be better off in the long run,” Snyder said.

Stewart, like other business leaders, does not advocate abrogating the contracts. But like many familiar with the terms, he hopes that some deals can be renegotiated.

“They are problematic,” he said.

In a move that critics fear could lock in high electricity prices for the next decade, the Davis administration is pushing the PUC to agree within a month to limit its authority to question costs incurred by the Department of Water Resources as it goes about procuring power.

State Treasurer Phil Angelides said the PUC must act so he can complete the $13.4-billion bond sale. A binding agreement is necessary so that Wall Street investors can be assured that they will be repaid.

“The state will be out of cash by the end of the year without the bond sale,” he said. “We will move toward fiscal insolvency.”

The so-called rate agreement, a draft of which was obtained by The Times, would bind customers of the three big regulated utilities to pay more than just the principal and interest on the $13.4 billion in bonds. Consumers would have to pay for consultants, lawyers, to pay taxes, fees and other as-yet-undefined charges that may be incurred by the Department of Water Resources.

Additionally, the PUC would be obligated to approve payments for programs by which the state would pay large and small customers to cut electricity use, although the Legislature has not approved the programs and their details remain to be worked out. The Department of Water Resources estimates the cost to be $800 million, spread over this year and next.

“It is loaded up,” Senate President Pro Tem John Burton (D-San Francisco) said of the proposed rate deal, adding that it would require the commission to “raise rates to cover whatever the Department of Water Resources decides to do.”

“That is giving a blank check to some bureaucratic office,” he said.

‘Dictatorial Power’ Warning

Stewart of the manufacturers group also is alarmed by the plan, saying it would provide the water agency with “dictatorial power.”

“As skeptical as we are of the PUC process, at least there is a process,” Stewart said, referring to the commission’s procedures to set electricity rates. “There is no process for DWR. DWR just tells the PUC, ‘This is what we need,’ and the PUC must approve it.”

Others say the rate agreement is a standard piece of work, given the extraordinary step the Legislature took in January when it authorized the Department of Water Resources to buy power for utilities that had fallen so deeply into debt that they could no longer carry out their obligation to consumers.

In essence, Davis energy advisor Freeman said, lawmakers in January created “the equivalent of a public power purchasing agency” beyond the jurisdiction of the PUC.

“There is no public power agency in California that is reviewed by the PUC,” said Freeman, former head of the Los Angeles Department of Water and Power.

*

Times staff writer Nancy Rivera Brooks in Los Angeles contributed to this story.