State Auditor Lauds Revised Power Pacts

State power buyers significantly improved nearly two dozen long-term electricity contracts last year, but as a legacy of California’s electricity crisis the pacts still burden consumers, according to a state audit released Wednesday.

The fairly laudatory report by California State Auditor Elaine M. Howle follows a highly critical December 2001 audit of the California Department of Water Resources. That agency was pushed into the emergency job of buying electricity for 27 million people in January 2001 after the state’s major private utilities became too short of cash to do so.

The report found that 23 contracts restructured by DWR in 2002 will save money, let the state better match its power purchases to consumption and allow California consumers to benefit if the price of natural gas -- the state’s main power-plant fuel -- falls in the future.

“In reviewing the renegotiated contracts,” concludes the audit, which was requested by the Legislature, “we found that they have resulted in major improvements in many of the areas we identified as weak in our December 2001 audit.”

At the height of the electricity crisis, to keep electricity flowing to utility customers and avoid exorbitant hourly market prices, DWR hurriedly signed $43-billion worth of power contracts lasting from just a few months to 20 years. At the time, the average contract price of $70 per megawatt-hour compared favorably to spot market prices of more than $300 per megawatt-hour.

But the DWR contracts came under heavy criticism from consumer advocates and state auditors after market prices plummeted to roughly $30 per megawatt-hour in June 2001. Gov. Gray Davis eventually called on DWR to bring energy companies back to the table to revamp the deals.

Starting in late 2001, DWR officials began to restructure 23 contracts. Auditors generally praised that work.

For example, in the original batch of contracts, an average of 71% of the electricity had to be purchased whether consumers needed it or not. By renegotiating, DWR lowered that “non-dispatchable” power to an average of 59%.

The revised contracts -- many shortened by several years -- pare $5.5 billion in payments from a portfolio of $43-billion worth of contracts, according to auditors. The costs of the contracts are paid by the customers of Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric.

A chief criticism of the original power contracts was that they locked up so much electricity around the clock that DWR would be forced to sell huge amounts at a loss when demand was low, such as in the middle of the night.

The auditor found that in the first three quarters of 2002, DWR sold surplus power amounting to 9% of its total purchases. Of the sales, 20% was attributable to long-term contracts. The auditor’s report did not quantify how much money DWR lost on such sales.

Overall, auditors described DWR’s surplus sales as reasonable. Utilities commonly sell some power as they try to match supplies to demand.

Surplus sales will be more worrisome in 2004, when the amount of electricity purchased under the DWR contracts will peak, auditors predicted.

Auditors also concluded that the average prices in the contracts -- roughly $68 per megawatt-hour after renegotiation -- are too high compared to market forecasts. From 2003 to 2010, for example, the average price of round-the-clock power purchased under DWR’s contracts is $15 higher than projected market prices.

It appears, said auditors, “that the state has had little success in convincing suppliers to lower the prices they are charging for power.”

State Sen. Debra Bowen, (D-Marina del Rey), said that’s not surprising given that the Federal Energy Regulatory Commission, the nation’s sole overseer of wholesale electricity prices, has refused to punish energy companies for manipulating the market California tried to create under a 1996 deregulation plan.

For contractors such as Dynegy Inc., Sempra Energy and Allegheny Energy Inc., “There’s not a lot of incentive to sit down with DWR to renegotiate a contract, no matter how unjust and unreasonable the rates are,” Bowen said.

In February 2002, the California Public Utilities Commission petitioned federal energy regulators to break dozens of DWR’s long-term contracts because they were signed at a time of widespread market manipulation by energy companies.

Last week the FERC stopped short of granting that petition, even though a staff report concluded that “market dysfunction” affected contract prices.

DWR turned day-to-day operations back to Edison, PG&E; and SDG&E; on Jan. 1. But a crew of more than 100 department employees continue to manage the long-term contracts and handle lawsuits stemming from the electricity crisis.

Spokesman Oscar Hidalgo said DWR officials are happy with the auditor’s report.

“Overall, it does a nice job of describing some of the complexities that we faced,” he said. “I hope there’s some better understanding of what the last two years were like here.”