Agency Seeks to Fend Off Power Shortages

With all the ingredients converging for a future electricity shortage, the state public power agency is extending a hand to a humbled, hobbled energy industry.

The authority met Friday to debate how it might prevent a return of high prices and blackouts as battered energy companies shut down aging power plants and scuttle plans for new ones.

Within the next decade, California faces an electricity shortfall equal to the amount of power needed to supply nearly 4 million homes, according to one expert’s testimony.

The quickest way to prevent a supply crunch, the power authority board concluded, is through long-term contracts that commit the state or utilities to buy electricity at prices high enough to cover the cost of building new power plants or babying old ones.

After soaring to more than $300 per megawatt-hour in the winter of 2001, wholesale power prices have been stuck at $30 or less for the past year. Such chronically low prices have discouraged investment. And accounting and market manipulation scandals have pushed some energy companies toward bankruptcy and frightened bankers from lending them money.

“We have had companies come in and talk to us in the last few days, saying they are losing money operating their old plants and they can’t keep it up without contracts,” said S. David Freeman, chairman of the California Consumer Power and Conservation Financing Authority. “We’re vulnerable to being manipulated again, perhaps even legally.”

In recent months, he said, he has talked with “almost everybody in this business” about using the power authority’s ability to borrow money relatively cheaply to help companies keep their plants running and launch new construction.

AES Corp., for example, needs $5 million to finish refurbishing a Huntington Beach generator that could produce enough electricity to supply 150,000 homes. The unit has been fitted with state-of-the-art air pollution control equipment, said Mark Woodruff, president of AES’ Western division.

But banks are not willing to finance the final stage of modernization until AES signs a contract to sell the electricity, he said.

“At the end of the day,” said Woodruff, “any new investment in power infrastructure has to come with a clear path to how you recoup that investment.”

“We would be interested in talking to any entity interested in helping to fund completion of that investment,” he said.

In its 18-month existence, the public power authority has avoided getting into the construction business. It has invested instead in conservation, renewable power sources and programs that pay businesses to curtail consumption when electricity demand soars.

But the board vowed Friday to keep a close eye on the state’s private utilities, which were crippled by the state’s attempt at deregulation, as they ease back into the business of buying electricity in January. And the board considered asking state regulators to earmark a portion of utility customers’ bills to fund its work.

With such a guarantee, the agency could use its legal authority to borrow as much as $5 billion.

Ideally, though, the board members said, the utilities -- Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric -- would negotiate enough new contracts to safeguard the state from a future supply crunch.

Freeman warned that, to encourage construction, the public must be willing to accept contract prices higher than those on the spot market.

Two years ago, as an advisor to Gov. Gray Davis, Freeman helped negotiate dozens of long-term power contracts. The contracts spared the state from exorbitant spot market prices for several months, but they were roundly criticized after market prices fell in June 2001.

Today the average megawatt-hour under the contracts costs twice as much as it would in the market.

Still, about 40% of the power plants built in California in the last two years or now under construction belong to companies with state contracts, said Vikram Budhraja, a consultant to the power-buying division within the state Department of Water Resources.

He said that California -- with a peak demand of roughly 50,000 megawatts -- added 4,400 megawatts of electricity-generating capacity this year and last, with facilities to generate 5,000 megawatts more now under construction.

Over the next several years, he said, a gap in supply will grow as the state’s contracts expire and electricity demand increases at a pace of 500 to 1,000 megawatts each year -- the capacity of a major power plant.

The burden of preventing a shortage falls to the power authority, which was created by the Legislature and governor to guarantee that the state never again found itself at the mercy of private power generators.

The Davis appointees to the authority seemed keenly aware of where blame will fall, should the electricity crisis return.

“If it doesn’t come together,” said board member Don Vial, “there’s obviously no place to go but here.”