Davis Seeks Reversal of Power Deals

In an about-face, Gov. Gray Davis is expected to announce today that he will petition the federal government to overturn dozens of long-term electricity contracts signed by California at the height of the power crisis.

Once heralded by Davis as the whip that tamed a wild electricity market, the long-term contracts lately have been attacked as too expensive by consumer advocates and lawmakers. The contracts also have become an issue in the governor’s race, where the three main Republicans--former Los Angeles Mayor Richard Riordan, Secretary of State Bill Jones and financier Bill Simon Jr.--have criticized Davis’ handling of the state’s energy crisis.

Several state sources confirmed Saturday that the state will ask the Federal Energy Regulatory Commission, the nation’s top referee of wholesale electricity sales, to declare the state’s $43 billion worth of power contracts unreasonably high-priced and therefore subject to modification.

Contemplated for months by the California Public Utilities Commission, such a request could at least give the state leverage in its so far unsuccessful efforts to renegotiate the contracts, say some Davis administration officials.

But energy company officials now in contract-renegotiation talks with the state say they welcome the challenge at FERC. “We’re very confident on the merits that these contracts will be upheld,” said Joe Ronan, vice president of government affairs for Calpine. The San Jose-based energy company committed to sell California more electricity than any other company under the contracts.

California began negotiating such deals in January 2001, after soaring prices left private utilities too financially crippled to buy power for their customers.

Eight Davis administration officials, including PUC President Loretta Lynch and Davis’ chief counsel, Barry Goode, are expected to explain the FERC petition in a press teleconference today. California’s challenge would come under a federal law that requires FERC to ensure “just and reasonable” wholesale electricity prices.

The state will argue that manipulation by energy companies created illegally high electricity prices in the market California created, with FERC’s endorsement, under a 1996 deregulation plan.

Because energy companies use spot-market prices to guide the cost of contracts that extend months or years into the future, the long-term contracts signed in January and February 2001 are also unreasonably expensive and should therefore be modified by FERC, according to California officials.

Since summer 2000, when electricity prices first spiked, California politicians have beseeched FERC to intervene in the state’s electricity market. Mostly they’ve been frustrated by FERC’s response.

FERC did not impose strict price caps until June 2001, after President Bush appointed two new members to the panel. FERC is still weighing California’s request for $8.9 billion in refunds from power sellers. The Davis administration argues that the state was overcharged by that amount on electricity sales in 2000 and 2001.

FERC Order May Help State’s Cause

As ammunition in its petitions to FERC, California officials will point to a December 2000 order in which FERC concluded that the state’s market structure and rules give power sellers the opportunity to ratchet up prices “and can result in unjust and unreasonable rates.” Though FERC concluded there was insufficient evidence to accuse individual companies of manipulating the market, it urged the state’s utilities to sign long-term power contracts.

California politicians say the state’s pleas for help may fare better at FERC since the December bankruptcy of Enron. The Houston company aggressively lobbied FERC, Congress and other agencies to promote energy deregulation and a hands-off approach to California’s electricity troubles. Earlier this month, FERC Chairman Patrick H. Wood III promised a congressional committee that his agency would investigate whether Enron and other companies manipulated California’s power market and inappropriately influenced the prices of long-term power contracts.

Asking FERC now to help California amend its contracts would be a complete turnabout for Davis from a year ago. Last March, as he announced the signing of the first contracts, the governor called the deals “financially viable.” S. David Freeman, chief negotiator of the contracts, has called them reasonably priced.

But market prices plummeted in June, making the contracts expensive in comparison. The contracts were designed to rescue California from having to pay spot-market prices of $300 per megawatt-hour or more. Now, the average price of the contracts--$88 per megawatt-hour--is roughly three times more expensive than the spot market.

Critics say some of the 54 contracts force the state to pay companies whether they provide power or not, obligate the state to take more electricity than it can use, and strap consumers with higher-than-necessary electricity costs for years to come.

The contracts are ultimately paid for by the customers of Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric.

After resisting calls to amend the contracts for several months, the Davis administration in October invited energy companies back to the negotiating table. So far, no agreements on contract changes have been announced.

Last year, utilities in Nevada and Washington filed similar petitions challenging long-term contracts with FERC. Those petitions are pending.