New York Times - 16 Jun 01

Prof. Robert B. Laughlin
Department of Physics
Stanford University, Stanford, CA 94305
(Copied 8 May 09)

Long-Term Power Deals Scrutinized in California

Published: Saturday, June 16, 2001

Aides to Gov. Gray Davis today released details of the $43 billion in contracts that California has signed with 18 companies to supply much of its power over the next decade, prompting a debate over whether the contracts have managed to stabilize the state's electricity market or whether Mr. Davis has locked residents into overpaying for power for years to come.

Speaking to reporters at a news conference here, David Freeman, Mr. Davis's energy adviser, said the contracts were one of the reasons electricity prices have plummeted in the past two months. With so much electricity now under long-term deals, he said, the state will be forced to buy far less power in the volatile daily spot market, and that has lowered prices drastically.

"Our strategy was to lock up about half the electricity in the state," Mr. Freeman said. "We are quite pleased that strategy is working."

Mr. Freeman and other aides to Mr. Davis said that the deals explained why the state, which in January had been paying $275 per megawatt-hour of electricity bought on the spot market, was now paying $121 per megawatt-hour.

But critics of Mr. Davis said that other factors would likely account for much of the recent decline in electricity prices, and they say the contracts mean that residents may wind up paying far more for their power later this decade. They also noted that Mr. Davis has not released the full contracts, as some key details of terms were blacked out in the copies released today.

"It seems like people are going to get ripped off for the next 10, 15, 20 years," said Tony Strickland, a Republican state legislator who sued the governor in March to force public release of the contracts. "He looked long-term for what was a short-term solution."

More than 70 percent of the electricity covered under the contracts over the next 10 years will be provided by new power plants, and aides to Mr. Davis said that the construction of efficient new generation facilities would help ensure the state does not face a crisis in future years.

Many California plants are fueled by natural gas, and about half of the contracts have clauses adjusting the price for electricity depending on the cost of natural gas, which has fluctuated wildly in the past year.

"If gas prices rise and plants aren't built, that means the state is exposed to more uncertainty," said David Bodek, an analyst at Standard & Poor's in New York. "It is a double-edged sword."

Michael Zenker, a California-based director at Cambridge Energy Research Associates, said the state might have made a mistake buying so much power at the top of the market. "The real question is, with the condition the energy markets were in earlier this year, whether that was the time to go out and sign long-term contracts," Mr. Zenker said.

Mr. Zenker agreed the contracts have had some limited effect in bringing prices down recently. But he said most of the decline was due to factors like power plants coming back on line, and he predicted power prices would move higher soon.

But Mr. Freeman chastised critics of the contracts, saying that without the long-term deals the state would still be paying extraordinarily high prices for electricity.

"We have reduced the amount we have to buy by "putting much of it under long-term contracts," Mr. Freeman said. "You can't then turn around and say, 'Whoopee, the long-term contracts caused prices to go down, so we ought to tear up all the contracts and buy in the spot market again.' "

Mr. Freeman added: "The only insurance against prices going back up again is to have a bunch of your power under long-term contracts."

Jim Brulte, the leader of the Republicans in the California Senate, has been critical of Mr. Davis' handling of the energy crisis, but he said it was impossible to know whether the contract prices will turn out higher than what the state would have otherwise paid for power. "They may and they may not," Mr. Brulte said. "Anyone who can tell you with certainty what power prices will be five years from now is either a psychic or a fool."

Just which companies got the best deals will get sorted out over the next few days as consumer groups, legislators and competing energy companies sift through the 38 contracts, which total 600 pages.

The companies that have signed deals with the state include many of the largest independent power sellers and generators, like the Calpine Corporation, Dynegy, the El Paso Corporation, Mirant, and the Williams Companies.

Terms vary greatly. For example, Mirant will be paid $148.65 per megawatt hour for electricity it began delivering this month under a contract that ends in December 2002. Meanwhile, a unit of PG&E Corporation, -- the parent company of Pacific Gas & Electric, the state's bankrupt utility -- will receive $58.50 per megawatt hour under a contract that begins in October and ends in 2011.

Mr. Freeman said that electricity prices could still rise sharply once hotter weather arrives, unless the Federal Energy Regulatory Commission agrees to clamp down harder on wholesale prices. Unless the Federal Energy Regulatory Commission "puts a firm cost-based ceiling on prices," he said, "we are in imminent danger of these prices going through the ceiling."