Sellers Protest State Bid to Void Energy Pacts

Some of the long-term power contract provisions California formally challenged as unfair last month were proposed by the state itself, say electricity sellers in protests to be filed today with the Federal Energy Regulatory Commission.

California “spins a fiction of the highest order” in claiming that power firms had such a stranglehold on the electricity market last year that they could force the state to agree to contract terms, according to documents that energy industry groups are submitting.

In protesting California’s challenge of its energy contracts, at least one company says the state agreed to its prices and terms, and even asked for more such pacts.

Calpine Corp. Executive Vice President James Macias tells federal regulators in written remarks that the state’s chief negotiator, S. David Freeman, proposed doubling the length of a 10-year contract with Calpine. That deal, criticized by consumer advocates as too expensive, commits the state to pay at least $80 million a year whether or not the state buys electricity from 11 small Calpine “peaker” power plants.

“At some point during the final stages of drafting Contract 3,” Macias writes, “Mr. Freeman telephoned me and indicated that he felt that this capacity would be valuable in the future and proposed that all of the terms and conditions be extended to 20 years.”

Freeman said he stretched out the contract to cut the annual price by roughly a third. But, according to Macias’ statement, the annual payments in the last 10 years of the deal are still $80 million.

“We were really hurting, and they had some of the only peakers they could bring in for next summer,” Freeman said. “It’s proof positive of how much they had us over the barrel.”

The energy company protests come in response to the California Public Utilities Commission’s Feb. 25 request that federal regulators void or modify more than half of the 54 long-term contracts the state signed last spring.

In a petition to the Federal Energy Regulatory Commission, the PUC argued that the agreements were negotiated in the midst of widespread market manipulation and that the state had no choice but to accept the power generators’ terms or risk blackouts.

The contracts, with an estimated value of $43 billion, were negotiated by Freeman and other energy advisors last spring to help California avoid exorbitant spot-market purchases of electricity.

For several months, Davis and his advisors praised the contracts for guaranteeing California reasonable, reliable energy supplies.

But spot-market prices have since plunged, making the multiyear contracts expensive by comparison. Consumer advocates and other critics pressured Davis to amend or void the contracts, and they have become fodder in the race for governor.

“It is bitterly ironic that the same contracts that were heralded a year ago for taming the spot market and providing needed supplies