Power Markets Week
California has finally started the process of renegotiating $43-billion worth of long-term power contracts and the state announced early last week that the Dept. of Water Resources reworked eight new deals with five companies to cut its contracts costs by $ 3.5-billion. Four of the eight contracts were with Calpine; the others were with Constellation Energy subsidiary High Desert Power, and renewable energy providers Capitol Power, Cabazon, and Whitewater Hill.
The new deals, however, may not be as sweet as they seem because the savings stem more from reducing the length of the contracts rather than a cutting the price per MWh, a consumer group said.
The state signed long-term contracts with these companies and others last summer in an attempt to bring down soaring power prices. Critics of the contracts have argued that the contract prices were too high because the deals were signed during a period in which the Federal Energy Regulatory Commission has deemed the spot market was seriously flawed. FERC last week set some contracts for hearing, but said the burden of proof on California is ”a very heavy one” and urged the parties to negotiate (see story, page 14).
At a press conference last Monday, state officials said the renegotiated contracts would reduce the state’s electricity bill to $ 11.4-billion from $ 15-billion. Barry Goode, Gov. Gray Davis‘ (D) legal advisor, said the state is continuing to work with other companies in an effort to revise their deals. Goode said that the newly renegotiated deals are ”set in stone” and will not be renegotiated at a later date.
The companies, in turn, will be released from an ongoing lawsuit the state filed at FERC to overturn the deals because they are not just and reasonable. Goode cautioned the ”new contracts do not mean that [FERC] should shirk its responsibility to California. Californians are still owed billions of dollars in refunds.
Allegations of market manipulation need to be thoroughly investigated in a timely fashionAnd for the remaining generators that refuse to renegotiate contracts signed when the market were dysfunctional, we’ll see them in court and at FERC.”
Although they touted the benefits to Californians, state officials said that the majority of the contract cost-reductions were the result of reducing the length of the contracts, rather than any significant reduction in the agreed upon price per MWh. For instance, one Calpine contract price was reduced by over $1-billion by cutting the contract length from 10 to 8 years, but the price dipped only slightly-from $ 61/MWh to $ 59.60/MWh. Another Calpine contract was reduced from 20 years to 10 years but did not have its price changed. Other contracts were reduced by pegging prices off of cheaper natural gas prices and by reducing capacity payments, officials said. Last year gas prices into the state soared, but those prices have plunged along with the price of wholesale power.
Jim Macias, Calpine’s executive vice president, chief operating officer and lead company negotiator on the contracts, in a statement said the ”restructured agreements resolve questions and uncertainty surrounding our contracts. The state is assured electricity will be available under more flexible terms when supplies will be critically needed. Calpine continues to benefit from solid, long-term power contracts and increased revenue and cash flow in the early years.”
Separately, during a conference call with analysts Wednesday, Macias said that the new deals would not harm the company’s financial situation. ”I am very confident that, between now and 10 to 15 years from now, prices will go up and we’ll sell that power at very attractive prices…We don’t feel we have given up much,” he said.
But a California consumer group criticized the savings as ”vastly overstated” in a letter to Davis outlining their objection to the new deals.
”To provide consumers with real relief from these exorbitantly priced contracts, the largest contracts — two, 10-year deals signed with Calpine, each for 1,000 MW of power — should have dropped in price by approximately 60%,” the Foundation for Taxpayer and Consumer Rights said. ”Instead, one contract was reduced a mere 2%, from $ 61/MWh to $ 59.60/MWh, while the other was not reduced at all and remains at $ 58.60/MWh. These renegotiations appear to be little more than a fig leaf that does little to cover the obscene electricity rates Californians continue to pay.
”If companies will not agree to substantially reduce the price of the contracts as well as the length, then Californians would be better served by an aggressive litigation strategy rather than continued backroom negotiations that result in deals such as those you announced yesterday,” the letter said.
Moreover, for to claim that the $ 59.60/MWh contract with Calpine is now just and reasonable, while the $ 61/MWh is not, the state may have added significantly to their already heavy burden of proof to demonstrate the contracts were unjust and unreasonable in the first place, said Gary Ackerman, executive director of the Western Power Trading Forum.
The just and reasonable standard is a ballpark figure and not an exact price, Ackerman said, and if a $ 59.60/MWh price fits the standard, the state will have a ”difficult job” trying to prove that a slightly higher price does not.