San Jose Mercury News

In their rush to sign $42.6 billion in long-term electricity contracts earlier this year, California authorities failed to adequately protect consumers against price spikes and blackouts, the state auditor reported Thursday.

While acknowledging that energy officials were under pressure to sign the deals quickly, the report by Elaine Howle said most of the contracts fail to supply power when demand is at its highest and insufficiently punish suppliers if they don’t deliver.

Moreover, the report said, state officials agreed to buy more power for Southern California than they needed. That’s potentially a big problem for the Bay Area, because the main high-voltage line running the length of the state is so constricted it may be impossible to ship that extra power north if it’s needed.

The audit _ the most detailed review yet of the long-term contracts _ comes at a time when criticism is mounting of the state’s costly strategy to stabilize its energy market. With demand down, prices plunging and some leading energy providers on the ropes financially, many critics have suggested that California panicked in the face of an energy crisis that has since receded. Contract prices now far exceed the cost of power on the spot market.

Gov. Gray Davis, whose popularity plummeted during the crisis and has never recovered, is seeking to renegotiate some of the contracts at a lower price. Davis conceded in a Wednesday interview with the Mercury News, however, that it is difficult to get companies to change terms that are a good deal for them.

Assembly Speaker pro Tem Fred Keeley, D-Santa Cruz, who wrote the bill that put the state into the power-buying business, said auditor Howle’s “observations are both important and accurate.”

But while thrusting the state into the power business wasn’t cheap or pretty, Keeley said. it was the lesser of evils. The alternatives were either “eight hours a day of blackouts” if the state refused to pay high prices or “a 200-percent rate increase” for consumers.

Although the 57 contracts, which span a decade, were supposed to guard against a repeat of the soaring prices and power disruptions that plagued California last year and early this year, the report said they may provide little such protection.

Most of the contracts signed by the Department of Water Resources “may not ensure a reliable source of power in times of tight supply and high prices,” the audit concluded. “Further, under most of the contracts, the department cannot terminate the contract or assess penalties even if the generators repeatedly or deliberately fail to deliver power at times when the state is in dire need of it.”

Water Resources officials denounced the report, saying it unfairly minimized their success in combating the crisis and their difficulty cutting deals at a time when demand for electricity exceeded supplies.

“The audit seems to be a Monday-morning look at what transpired and ignores the pressures and circumstances we were under at the time,” said department spokesman Oscar Hidalgo. ‘There were limited options available to us.”

Thomas Hannigan, the department’s director, agreed. In a response included with the 258-page audit, he said, “our decisions were not only reasonable, but were the best that could have been made at the time.”

Nonetheless, some consumer advocates and political foes of Gov. Gray Davis said the audit confirms their worst fears.

“The power companies held California hostage, with spiking prices and rolling blackouts as their weapon,” said Doug Heller of the Foundation for Taxpayer and Consumer Rights. “The Attorney General should be prepared to challenge these contracts outright, on the grounds that they were signed under duress.”

Secretary of State Bill Jones, who is running against Davis for governor, added that the audit “speaks volumes of the Davis administration’s gross mismanagement of the power crisis.”

But Roger Salazar, a Davis campaign spokesman, dismissed Jones’ remarks as those of someone who “is doing anything he can to keep his name in the news.”

The audit said many of the contract problems it found stemmed from the haste with which the deals were signed by the water department, noting that “it entered about 40 agreements with a value of $35.9 billion in just 30 days.” Moreover, it said the department was understaffed and lacked experience in negotiating such complicated matters.

Besides not providing for enough power during peak demand periods, the report said, the contracts at other times provide more power than is likely to be needed. Given the relatively low cost of power on the spot market, that means the state will probably have to sell the excess at a loss _ something it often has done this year.

The audit also faulted many contracts for not allowing the state to terminate them or issue fines if generators don’t provide the power they promised. In other cases, it said, the contracts failed to permit the state to pay less if there was a drop in the price of natural gas, which fuels most large power plants.

Another problem is the amount of power purchased for southern California.

The report said the deals call for the southern part of the state to get up to 2,000 megawatts more than it needs at peak hours from 2003 to 2005. That’s enough to supply about 1.5 million homes in northern California, assuming it could be shipped here.

But transmission constraints on the state’s main north-south high voltage line, could prevent that surplus power from being moved. And planned improvements to the line won’t be done until 2004.

“While the cost to consumers of this surplus will depend on many factors,” the report said, “we are concerned that it could be substantial.”