State Wants Calpine to Honor Contracts
California Atty. Gen. Bill Lockyer asked federal regulators Monday to prevent financially teetering Calpine Corp. from reneging on a key state electricity contract if the power plant operator filed for bankruptcy protection.
“This contract helps maintain the stability of our electrical supply, and we need that safeguard to help protect ratepayers from suffering a repeat of the energy crisis,” Lockyer said in a statement.
He joined with the state Electricity Oversight Board and the Department of Water Resources to file a petition on the issue with the Federal Energy Regulatory Commission.
San Jose-based Calpine, which operates 38 power plants in California, is running low on cash. Its newly installed chief executive is considering a bankruptcy filing as well as other restructuring options to stabilize the company’s finances.
Compounding matters, the Delaware Supreme Court ruled Friday that Calpine must repay bondholders $313 million in misspent funds by Jan. 22 -- a payment it would be hard-pressed to make, several industry analysts said.
Although companies in Chapter 11 typically continue normal day-to-day operations, they routinely try to nullify long-term contracts of all sorts.
California, which has four power contracts with Calpine, is most concerned about a pact the company struck with the water resources agency in the midst of the state’s energy crisis in February 2001. The agreement requires Calpine to supply 1,000 megawatts of electricity around the clock -- and at a fixed, below-market price -- to areas served by PG&E; Corp.’s Pacific Gas & Electric through 2009.
Because Calpine has to buy natural gas at today’s soaring prices to fuel its power plants, it is currently losing money on the fixed-priced contract with the state.
But for years, Lockyer said, it was Calpine that was getting the better deal, collecting an estimated $400 million in profit when market prices sagged below the contracted price.
If the contract was canceled, and the state forced to buy power on the open market, California customers would have to pay an additional $625 million for electricity, Lockyer said.
What’s more, PG&E;, the state’s largest utility, has been relying on that contract for more than 10% of its power needs, said Erik Saltmarsh, executive director and chief counsel of the Electricity Oversight Board. “It’s an important contract for reliability in the sense that it’s difficult to make up for.... And if went away rather suddenly, it would require some real scrambling.”
Lockyer said Monday that without that contract, PG&E; “may have difficulty obtaining adequate supplies to cover its load, with appropriate reserve margins, during the peak hours of the 2006 summer season.”
Calpine did not return calls for comment.
Saltmarsh said he believed that many of the company’s California facilities would continue operations as usual if there was a bankruptcy, “but there are some others where we are not quite sure.” Even so, he added, “customers shouldn’t feel like their service is imperiled.”
In its petition, the California group asked the federal commission for an emergency order requiring Calpine to continue providing power to the state under the contract’s terms. Saltmarsh said the move was designed to prevent Calpine from blocking FERC’s involvement in power contract issues once the company is in Bankruptcy Court.
Lawyers for Mirant Corp. won an injunction in Bankruptcy Court preventing FERC from exercising control over its power contracts. The 2003 decision was challenged, and the dispute is still pending.
