Davis OKs Subsidy of Pollution Fees

As part of his closed-door negotiations to buy electricity, Gov. Gray Davis has agreed to relieve some generators from having to pay potentially millions of dollars in fees for emitting pollutants into the air, Davis said Tuesday.

Davis announced two weeks ago that his negotiators had reached deals with 20 generators to supply $43 billion worth of power during the next 10 years.

However, the Democratic governor has refused to release any of the contracts or detail various terms, contending that release of such information would hamper the state’s ability to negotiate deals with other generators and therefore ultimately would raise prices Californians pay for electricity.

Sources familiar with the negotiations, speaking on condition of anonymity, said the agreement reached with Dynegy Inc., a power company based in Houston, is one that includes language requiring that the state pay the cost of credits that allow emissions. Dynegy spokesman Steve Stengel declined to discuss the company’s deal with the state.

“We couldn’t get them to sign contracts; it was a sticking point,” Davis said of the decision to pay the fees of some generators. “We had to lock down some power so we were not totally dependent on the spot market.”

The fees in question are part of an emission trading system known as RECLAIM. Under the system, companies are allotted a certain amount of allowable pollution. If their operations pollute more, companies are required to purchase credits on an open market. Currently the credits cost about $45 per pound of pollution--an amount that can lead to a bill of well over $10 million a year for a power plant.

The South Coast Air Quality Management District, which regulates pollution in the Los Angeles Basin, is considering steps to significantly lower the cost of the system--a step that could considerably cut the state’s potential cost, Davis said.

Senate Energy Committee Chairwoman Debra Bowen (D-Marina del Rey) defended the decision to cover the power company’s costs.

“It is a question of whether it brings down the price of power,” she said. “If it brings down the price of power, I don’t have a problem with it.”

Nevertheless, word that the contracts could bind the state to pay pollution fees caused some critics of Davis’ policy to renew calls for Davis to reconsider the secrecy surrounding the power negotiations. The payment provision underscores the fact that the contracts involve more than merely the prices the state will pay for its megawatts, the critics note.

“The Legislature should have known about it,” said Senate President Pro Tem John Burton (D-San Francisco). “It is going to cost taxpayers money. It makes you wonder. . . . This was a policy issue that was never discussed with the Legislature.”

V. John White, a lobbyist for the Sierra Club, who also represents alternative energy producers, called the contract proposal “a horrible precedent.”

“Until we know exactly what the state has agreed to and how much of a subsidy this represents, we can’t determine how serious the breach of principle this is,” White said.

Another critic of the secrecy of the negotiations, Terry Francke, general counsel for the California First Amendment Coalition, said the provision in question “raises the possibility that there are other [concessions]” that have not yet come to light.

In the summer, when demand for power is highest, some generators probably will exceed pollution limits set by regional air quality management districts.

To avert blackouts, state officials might ask the companies to keep plants running. In such cases, some sources familiar with aspects of the contracts said, the contract language could be interpreted to suggest that the state would cover any fines--although Davis said Tuesday the state will not cover the cost of fines.

A recent Dynegy filing with the Securities and Exchange Commission underscores the rising cost of pollution-related measures. The company, which is partners with NRG Energy in three California plants in El Segundo, Long Beach and Carlsbad in San Diego County, said its “aggregate expenditures for compliance with laws related to the regulation of discharge of materials into the environment” rose to $14.3 million in 2000, from $3.6 million in 1999.

A South Coast Air Quality Management spokesman said Dynegy’s facilities appear to be fairly clean--although Sierra Club lobbyist White said Dynegy has been seeking a permit at one of its plants to burn fuel oil, which is dirtier than natural gas.

Davis said he intends to “make this information public,” but he added that “we do not want to put the public’s interest in jeopardy by asking them to pay higher prices.”

“Nobody likes the notion that [the administration is] not being fully forthcoming,” Davis said. “But I also have a corollary responsibility that I don’t stick these generators with a higher rate.”

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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 stateearss biggest utilitiesednesdayPacific 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.

Daily Developments:

* Blackouts rolled through the state for a second straight day with hourlong outages hitting more than 500,000 customers from San Diego to the Oregon border.

* Los Angeles and Long Beach filed separate lawsuits alleging that gas companies conspired to eliminate competition, drive up natural gas prices and discourage construction of electricity plants.

* Southern California Gas Co., San Diego Gas & Electric and El Paso Natural Gas Co. say the state is the victim of its own soaring electricity needs.

Verbatim:

“The outages of the last two days are something that Californians are going to have to get used to for July and August.” -- Michael Zenker, California director of Cambridge Energy Research Associates.