Power Deals Exceed Prices on Spot Market

TIMES STAFF WRITERS

California officials have agreed to purchase power for years to come at prices higher than those now being paid in the daily spot market, according to confidential government records.

The 38 long-term contracts, totaling nearly $43 billion, could saddle consumers with unnecessarily high utility rates for years if recently declining prices represent a trend in the volatile electricity market.

Gov. Gray Davis in recent days has largely credited these contracts with breaking the fever of the energy crisis. But the cooling prices--and fresh details of the contracts--raise concerns that the 18 energy companies may have gotten the better end of the deals.

Perhaps adding to the downward pressure on prices, senior officials of the Federal Energy Regulatory Commission said Tuesday that the agency is considering new ways to curb California electricity prices this summer.

Among other things, the commission might extend its current wholesale price limits--now in effect only during power emergencies--to 24 hours a day, seven days a week.

The contract records obtained by The Times show that the state is committed to buying power at prices up to $154 a megawatt-hour for peak electricity and more than $95 for energy that includes times of day when demand is lowest.

By contrast, with a recent tumble in wholesale power prices, the state purchased peak daytime electricity at less than $100 an hour and less than $20 at night when demand trails off. On Tuesday, prices for last-minute peak power in California were under $58 a megawatt-hour, according a Bloomberg news service survey.

In some contracts, the state may pay more or less in the years ahead, depending on the price of natural gas. Under terms negotiated by the Davis administration, one company receives $80 million to $90 million a year simply to be ready to produce, even if no electricity is sold.

The good news surrounding current market prices could change rapidly this summer as temperatures climb and use of air conditioning surges.

Nonetheless, experts say, the recent prices could be an omen of the future, when as many as 15 new power plants come online, adding thousands of megawatts to the California grid.

"The theme here is the governor embarked on a long-term strategy for a short-term crisis," said Peter Navarro, an economist at UC Irvine, who reviewed some of the contract terms at the request of The Times. "They pretty much got this exactly wrong."

State officials, including Davis, say they are proud of the hard-fought concessions they won from the power merchants, who have reaped immense profits from the state's failed deregulation scheme.

They say the benefits of the power contracts, while less predictable in the long term, have already helped alter the marketplace. Perhaps most important, they say, the contracts have freed the state from a nearly total reliance on last-minute purchases in the costly spot market.

Officials say the contracts have locked up nearly half the state's peak power needs this summer. The remainder will come from short-term contracts, last-minute purchases and reduced demand from conservation programs. "This was all a well thought-through plan of action," said Davis energy advisor S. David Freeman, former head of the Los Angeles Department of Water and Power. "The war ain't over. But we have landed on enemy territory and we are rolling them back."

Freeman seemed less confident, however, when asked whether the state may end up being stuck with high-priced contracts. "We hardly know the present," he said, "we certainly don't know the future."

Ray Hart, deputy director of the Department of Water Resources, said the state is absolutely not overpaying for power under the contracts his agency is helping to negotiate. He acknowledged that the average price the state is paying under the contracts is higher than current market prices.

And that is the way it should be, he said, because the state has dampened the volatility of the spot market by reducing last-minute purchases.

"If we didn't have contracts," Hart said, "we'd be buying 100% on the spot market . . . spending $300-plus [a megawatt-hour] for energy."

Many of the contract details remain shrouded in mystery, making it difficult to gauge the true extent of the state's financial commitment.

News Organizations Seek Disclosure of Deals

The Times and other news organizations have sued the state to release the contracts and provide details on the state's daily power purchases, now totaling more than $7 billion. The Davis administration previously refused to release the information, saying that it would undercut the state's efforts to secure additional long-term contracts.

But on Tuesday the governor announced that he intended to release the contracts as early as today "with only very minor redactions."

The about-face came after state Atty. Gen. Bill Lockyer said publicly that the contracts should no longer be kept secret and preceded by a day a hearing before a San Diego Superior Court judge on the case brought by the news organizations.

The administration sent letters to the 18 power producers and marketers that have the contracts with the state notifying them of the hearing.

In a letter to one firm, the administration said the San Diego hearing "may be the only such opportunity for your firm to indicate whether it has any objection to the public disclosure of the contract."

More than one firm is likely to object.

"We have always maintained that there's information in the contracts that's proprietary that allows us to operate competitively," said Williams Companies spokeswoman Paula Hall-Collins.

Most of the contracts have been released under confidentiality agreements to federal regulators, state Controller Kathleen Connell and a congressional committee probing the power crisis.

One congressman who has studied the contracts, Doug Ose (R-Sacramento), criticized the governor for locking the state into "high rates for years to come."

"This sort of short-term fix," Ose said, "has squandered our [state budget] surplus and hampers the state treasury for the foreseeable future."

The records obtained The Times show that the contracts vary widely in cost and complexity.

For example, in a series of agreements for power in Southern California, the state has agreed to pay Dynegy Inc. some rates fixed at a $119 a megawatt-hour for peak power beginning next year, more than double the price of electricity on the spot market Tuesday.

Under a separate deal for the same three-year period, the Houston-based company has an entirely different rate structure that could minimize its risk of losses. The state will pay $21.65 a megawatt-hour, in addition to covering fuel and other production costs that could rise or fall dramatically.

Hart, of the state water agency, argues that California consumers could benefit should natural gas prices fall.

A pair of contracts with Constellation Energy Group illustrates the horse trading.

In one two-year deal, the Baltimore-based company will receive $154 a megawatt-hour for peak power, the highest price in the records reviewed by The Times. The state also agreed to take a larger amount of power around the clock. That deal, at $58 a megawatt-hour, extends over eight years beginning in 2003.

Freeman, who helped broker many of the deals, said the state had to sign long-term contracts to lock in electricity needed this year and next--a necessary "quid pro quo."

Freeman said critics do not recognize the difficult negotiating position the state faced earlier this year.

Some energy insiders say the state hurt itself by waiting too long to begin those negotiations, when prices had soared and its largest utilities were buried in debt.

Last summer, Houston-based Enron and several other firms offered to sell power to California's utilities for just five years at about $50 a megawatt-hour, according to Mark Palmer, an Enron spokesman. "Now you've got the state committed to 10 years of buying power at what appears to be significantly over market [prices]," he said.

Freeman blamed the Public Utilities Commission for balking at long-term contracts for fear that ratepayers would be stuck with overpriced energy if prices fell.

Times staff writers Doug Smith in Los Angeles, Nancy Vogel and Dan Morain in Sacramento and Ricardo Alonso-Zaldivar in Washington contributed to this story.

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