Undoing Costly Power Deals

Last winter’s power crisis is nearly forgotten, except for the monthly reminder provided by the much higher electric rates paid by most California consumers. That’s why critics of Gov. Gray Davis draw an attentive audience when they clamor for him to renegotiate the $43 billion in electric power contracts forged during the crisis. It’s certainly not something the big energy companies want to do; it would be like selling an auto for $20,000 and then having to hand back $5,000 six months later because car prices had dropped. But there are ways for the state to pressure the companies to come to the bargaining table, from the carrot of low-cost loans to the stick of threatened legal action.

Davis’ foes accuse him of making bad deals in buying all that power under contracts running as long as 10 years. The average cost to the state will be $75 a megawatt-hour; California may get as little as $16 when it resells excess electricity to the utilities. The loss over the next nine years could run nearly $4 billion.

The state jumped into the power-buying business last January when the independent energy companies refused to sell any more electricity to Southern California Edison and Pacific Gas & Electric because the utilities went broke paying wholesale power rates of $500 a megawatt-hour or more. Within a few months, as suddenly as the crisis began, the blackouts ended and plenty of power became available at much lower rates.

Davis and the Department of Water Resources, the power-buying agency, argue that the state’s locking up of so much power in long-term contracts caused the spot market price to plummet. True or not, that still doesn’t make the deals look good in hindsight.

So how can the state open renegotiations? One idea emerged from a legislative hearing this week into the role of the state’s new power authority, created by the Legislature earlier this year. Its chairman, former Los Angeles Department of Water and Power chief S. David Freeman, suggested that the agency offer low-cost loans to the energy companies to finance construction of new power plants. Freeman said, “If one party has 6% money and the other party’s cost of money is double or triple that, there is the makings of a deal.” The authority can issue as much as $5 billion in revenue bonds to finance power projects.

Also, the state can ask the federal energy commission to order the companies to refund what the commission may find to be overcharges in sales to the state. And the California attorney general is investigating possible conflicts of interest by state power buyers who were hastily hired from energy companies during the heat of the crisis. Presumably, the state could void contracts negotiated by employees who had interests in the firms they were bargaining with.

As long as it is going to all that trouble, the state should also reduce its dependence on power generated by natural gas, which is also subject to shortages. It’s a point that got lost in the mad scramble to secure enough electricity.

California needs greater investment in alternative and renewable energy sources. And the state should continue to consider buying the vast hydroelectric power system of the bankrupt Pacific Gas & Electric.

Whether California’s power contracts were bad deals will be hotly argued until next year’s gubernatorial election. What’s more important right now is that the state still has an opportunity to build a better energy future.