Power Firm, State Said to Be Near Revised Deal

The Davis administration and Calpine Corp. have reached tentative agreement on the renegotiation of four long-term power contracts valued at $11.7 billion, state and industry sources said Thursday.

If finalized, the Calpine deal would be California’s first successful reworking of a long-term power contract and could save the state hundreds of millions of dollars on consumers’ behalf.

Renegotiating the power contracts, signed last year at the height of California’s energy crisis, is one of Gov. Gray Davis’ top political priorities in this election year. Consumer activists, lawmakers and Republican opponent Bill Simon Jr. accuse the governor of panicking last spring and signing contracts that obligate the state to purchase too much electricity at average prices that are nearly three times the current market.

Polls show that voters take a dim view of Davis’ handling of the state’s electricity crisis, and he has been under pressure to rework the contracts at more favorable terms. The Calpine contracts are considered especially important because, although they number only four of the 56 long-term agreements signed last spring, they account for about one-fourth of the electricity in those deals. The $43 billion committed in the contracts ultimately will be paid by the customers of Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric.

Michael Kahn, the San Francisco attorney who has led months of talks with Calpine on behalf of the state, said that no deal has been reached and refused to comment on the details of the negotiations. “We have been close before and not closed the gap,” said Kahn. “I hope we’re further along than ever.”

“There is no deal,” added Davis press secretary Steven Maviglio.

Calpine spokeswoman Katherine Potter also emphasized that “we do not have an agreement with the state at this time.”

But sources close to the talks said Calpine has tentatively agreed to cut the duration of the contracts--in one case, from 20 years to 10 years--in return for the right to sell more power to the state in the next two years, and other concessions.

The financial effect, the sources said, is that Calpine would give up payments of roughly $2.8 billion from the state after 2009, when two of the reworked contracts would expire. The amount of the additional electricity to be purchased in the next two years has not been determined, and the price would fluctuate according to market swings. With that exception, the price of most electricity purchased by the state would not change under the new deal.

In addition, and of critical importance to Calpine, the state Public Utilities Commission would agree to drop its request that the Federal Energy Regulatory Commission review the legality of the Calpine contracts. The state’s petition creates uncertainty and concern among Calpine investors, say Wall Street analysts.

The state also is in talks to renegotiate long-term contracts with several other energy companies, including Constellation Power Source, and it threatened Wednesday to terminate a $6.6-billion contract with Sempra Energy Resources.

Just how much consumers stand to gain from the tentative Calpine deal could not be determined from the details available Thursday. While the tentative agreement would eliminate 14 years worth of contracts involving $2.8 billion in payments to Calpine, it appears to give California no more flexibility on when it buys electricity from Calpine. Consumer groups have complained that the contracts force the state to buy electricity whether or not it is needed.

The state would also forfeit the possibility of federal regulators reshaping the Calpine contracts more to consumers’ advantage.

If it finalizes the Calpine deal, the state is gambling that it will be able to buy electricity cheaper in 2009 and beyond than it would have paid under the existing long-term contracts, in which prices range from $59 to $174 per megawatt-hour. A megawatt-hour is enough power to supply roughly 750 homes for an hour.

When Davis advisors negotiated the $43 billion worth of contracts last spring, they did so to save the state from paying hundreds of dollars per megawatt-hour for power in the spot market and to avoid blackouts. The average price in the contracts is roughly $70 per megawatt-hour.

But not long after the contacts were signed, the market prices plummeted to $30 per megawatt-hour or less, so that now the state’s contracts are expensive in comparison.

In February, the PUC petitioned federal regulators to void or modify long-term contracts with 22 energy companies, including Calpine. The PUC argues the contracts are invalid because California was forced by the threat of blackouts to sign them when energy companies wielded undue control of the power market California created under a deregulation 1996 plan.

The federal regulatory commission, FERC, has yet to consider California’s challenge of the contracts. FERC has intervened in California’s market by capping prices for some electricity sales, but experts disagree on whether the five-member panel will use its authority to break or amend long-term commitments that were willingly signed by California and initially heralded by the governor.

Regardless, California’s petition to FERC creates more uncertainty and concern for San Jose-based Calpine, which is already struggling to prove its worth to investors. Calpine’s stock price has tumbled and its credit rating dropped to junk status as investors have taken a harsher view of energy companies since the bankruptcy of Enron. A nationwide drop in electricity prices has also crimped the earnings Calpine could expect from the two dozen power plants it is building around the country.

The tentative renegotiation of the state’s contracts could help Calpine, which is eager to bolster cash reserves quickly to reassure investors, by allowing it to sell power now rather than later. In particular, the tentative deal would cut in half a 20-year contract under which the state pays $80 million to $90 million annually simply for the right to buy more power from 11 “peaker” plants Calpine is building. Peakers are small power plants designed to run at short bursts on hot days when electricity consumption soars.

Two other contracts under which Calpine sells electricity to the state around the clock would be shortened to eight years from 10 years. Industry officials put the total savings to the state from truncating these contracts at $2 billion.

Sources said California would gain the right to buy additional power this year and next from Calpine at a price tied to the company’s natural gas costs.

That additional power could be cheaper than what California now pays under the Calpine contracts because the cost of natural gas--the main fuel burned to generate electricity--has plummeted since California’s electricity crisis hit high gear in early 2001.

A price break would be welcome, said William B. Marcus of JBS Energy, an economist who has studied the state’s power contracts for consumer groups.

But he questioned how much additional power the state really needs from Calpine in the next couple of years.

State forecasts show that in 2004, when the amount of power under contract peaks, the state could be selling as much as one-fourth of its electricity at a loss because there is no demand for it.

Marcus said he would like to see a final agreement with Calpine give the state the freedom to refuse to buy power in low-demand hours such as the early morning.

“I’d much rather see Calpine slice a bunch of kilowatt-hours off in the early morning instead of taking this power [seven days a week, 24 hours a day],” said Marcus. “Let the state have some ability to cut off some of that power when it doesn’t need it.”