Electricity Deals Could Supply 7 Million Homes, Davis Says

Gov. Gray Davis announced Monday that California has struck deals with power generators to supply enough electricity for as many as 7 million homes.

The agreements won’t result in further rate hikes beyond the 20% many consumers are already facing, he said, but they leave the state significantly short of its power needs for the summer.

Power generators reported that in many cases contracts are not yet final.

Consumer advocates, already fuming over rate hikes, repeated their fears that the state may be locking in prices that seem cheap now but may turn out to be excessive once order is restored to California’s haywire wholesale power market.

And Davis acknowledged that there could be a sizable gap between summer demand and supply, and he repeated his plea that Californians cut power use by 10% to forestall blackouts.

S. David Freeman, chief of the Los Angeles Department of Water and Power and Davis’ lead negotiator with the generators, said the contracts would lock up 6,000 to 7,000 megawatts for this summer. Contracts that have been detailed to date by various companies show that the state has reached accords on only a fraction of that amount.

The state began buying power in December after California’s largest electric utilities--Pacific Gas & Electric Co. and Southern California Edison--amassed billions in debt and no longer had credit or cash to make the purchases. Davis continues to negotiate with the utilities on a rescue plan.

Those purchases cover about a third of the state’s total electricity usage. Even with 7,000 megawatts, Davis said, the state would still fall short of fulfilling total demand by at least 8%, based on peak usage in past summers.

Nevertheless, Davis said: “These agreements are the bedrock of our long-term energy policy. Yes, we have more to do, particularly to get through this summer. But our energy future looks a lot brighter now that we have reliable power locked down at reliable rates.”

The governor, speaking at the DWP’s Scattergood power plant in Playa del Rey, said he does not intend to impose a pricing structure that would penalize residential consumers who fail to cut power use this summer.

But the largest business customers may be subject to higher prices for using power at times of peak demand if the state proceeds with proposals to install so-called real-time meters.

Davis appeared at the news conference with Freeman, who along with former Edison International executive Vikram S. Budhraja negotiated 40 deals with 20 energy producers and marketers to supply power to the state.

The agreements range from a few months to 10 years, with one extending 20 years. The contracts would provide 6,000 to 7,000 megawatts this summer, with the amount growing to 8,800 megawatts in later years as more power plants are built.

Over 10 years, Davis said, the average price would be $69 per megawatt-hour, although the cost would be $79 per megawatt-hour in the first five years. At the start of the talks with generators six weeks ago, Davis had said he hoped to secure contracts at an average price of $55 per megawatt-hour. Those prices compare to recent market spikes of more than $300 per megawatt-hour.

“These transactions are financially viable [and] will keep [costs] within the rate base,” Davis said.

Davis noted that consumers will ultimately be paying more for electricity. The average 10% rate hike approved by the California Public Utilities Commission in January will probably become permanent. Another 10% increase will occur early next year, when a rate cut granted by the Legislature in 1996 expires.

The Davis administration is using general tax money--more than $3 billion so far--to buy power. At the same time, state Treasurer Phil Angelides is working on the sale of $10 billion in revenue bonds to finance future power purchases and repay the state’s general fund.

The state spending is designed to soften the effect of high wholesale prices in the immediate future. But in later years, as more power plants are built and electricity supplies increase, wholesale prices could fall, leaving Californians paying artificially high retail rates.

“We’re trying to stabilize prices,” Davis said. “In the first two, three years, they will pay less, but in later years they may be paying a little more. I think that is a bargain most Californians would want.”

Assemblyman Fred Keeley (D-Boulder Creek), who helped craft the bill allowing the state power purchases, called Davis’ announcement “a very positive turn of events” and said the contracts would help keep rates stable.

But Keeley noted California’s continuing need to tap the expensive spot market. Under the deals announced Monday, the state may still need to buy about 8% of California’s power at spot rates.

“That is far, far, far too big an exposure for the state to carry on a sustained basis,” Keeley said.

Consumer advocates closely following the state’s energy crisis attacked the deals.

“Oh, no,” moaned Michael Shames, executive director of the Utility Consumers’ Action Network of San Diego, upon learning of Davis’ agreements.

Shames said he is “very uncomfortable” with contracts that could commit the state to paying above-market prices for at least a decade. Based on his organization’s calculations, Shames said, the long-term contracts could saddle California’s businesses and consumers with the extra burden of close to $9 billion during the next 10 years.

Economist Peter Navarro called the contracts “a long-term strategy to address a short-run problem” that will lock the state into prices that may be twice what electricity will cost when new power plants are built and natural gas prices decline in a few years.

“It’s a very poorly conceived strategy,” said Navarro, a utility finance expert and an economics professor at UC Irvine. “And the irony of the whole thing is it repeats the central mistake that got us into this mess in the first place,” he said, referring to long-term, high-priced contracts for renewable energy that the utilities signed in the late 1970s. Those contracts produced high electricity rates, sparking the first moves toward electricity deregulation

The DWP’s Freeman sharply disagreed: “I don’t know what the price is going to be eight years from now. But all these yahoos who are so certain that the price is going to be below [$60 per megawatt-hour] don’t know, either. There’s at least as much of a chance that the prices will be higher.”

Freeman said he opted against buying all the power he could have purchased in later years, saying the situation may change two or three years from now. As much as half the state’s power purchases could be made on spot markets in later years.

Freeman, who expects to return to his job at the DWP next week, noted that several deals announced Monday are not final. Attorneys are going over details. The PUC also must review the contracts. But he was confident that the final deals will be signed.

Several companies listed by the governor as having reached agreement with the state confirmed that they had not signed contracts. Reliant Energy in Houston, for one, has signed nothing more than a 30-day deal to sell power to the state. It expires March 19, spokesman Richard Wheatley said.

The company, which owns several major power plants in Southern California, continues to talk to the state about entering into long-term contracts. But an outstanding issue, Wheatley said, is how and when Reliant will get paid the more than $300 million owed it by PG&E; and Edison.

Duke Energy North America said it had reached a “memorandum of understanding” with California for power sales worth $4 billion over nine years. The contract, if signed, would give the state 550 megawatts beginning in January. At most, the Duke deal would give California 800 megawatts of power at any one time.

Morain reported from Los Angeles, Vogel from Sacramento. Times staff writers Carl Ingram, Julie Tamaki and Rone Tempest in Sacramento and Nancy Rivera Brooks in Los Angeles also contributed to this story.

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Power Points

Background

The state Legislature approved electricity deregulation with a unanimous vote in 1996. The move was expected to lower power bills in California by opening up the energy market to competition. Relatively few companies, however, entered that market to sell electricity, giving each that did considerable influence over the price. Meanwhile, demand has increased in recent years while no major power plants have been built. These factors combined last year to push up the wholesale cost of electricity. But the state’s biggest utilities--Pacific Gas & Electric and Southern California Edison--are barred from increasing consumer rates. So the utilities have accumulated billions of dollars in debt and, despite help from the state, have struggled to buy enough electricity.

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Daily Developments

* The governor says the state has arranged to buy enough power to supply up to 7 million homes, an amount still short of peak summer demand.

* Lawmakers are considering “real-time” metering, which would charge consumers according to when they use electricity as well as how much they use.

* In addition to more than $3 billion in general tax money spent so far for power, the state is working on the sale of $10 billion in revenue bonds.

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Verbatim

“Roses cost a lot more on Feb. 14. It’s not that there’s price-gouging going on; it’s that the system is much more strained.”

--Severin Borenstein, director of the University of California Energy Institute in Berkeley, on the benefits of “real time” metering.

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Complete package and updates at www.latimes.com/power

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More Inside

‘Real-Time’ Meters: Proponents say consumers could reduce power use if they could monitor it, A3