California to hand back energy purchasing to utilities

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San Jose Mercury News

California’s costly two-year venture into the electricity business officially comes to an end New Year’s Day when the state’s major utilities resume buying power for their customers.

Two years ago, state leaders thrust the California Department of Water Resources into a chaotic energy market in a desperate move to avoid prolonged blackouts when the major utilities could no longer afford skyrocketing energy prices.

Critics ever since have charged that the state’s overwhelmed electricity buyers got soaked by seasoned power traders and committed ratepayers to years of inflated bills.

The hand-off, a milestone in the state’s struggle to regain control over its out-of-whack power market, is a significant step toward a return to normal, but consumers probably won’t see the result they really want — lower bills — for at least a few more years.

That’s because most of the power that the utilities would ordinarily buy has already been lined up for the rest of the decade in long-term energy contracts the state signed for $43 billion at the height of the crisis.

Utilities will be buying only about 10 to 15 percent of their total power needs.

”Whatever cost savings we’re able to get there only represents a small amount of the total that customers are paying,” said John Nelson, a spokesman for Pacific Gas & Electric Co.

The amount of power supplied by the controversial contracts, which Gov. Gray Davis‘ administration has been working to renegotiate, peaks in 2004 then gradually trails off, so utilities will be buying more and more of their power.

Davis has promised consumer rates will come down in two years. But how much they fall depends on renegotiating the contracts and getting federal regulators to refund an alleged $8.9 billion in electricity overcharges from the energy crisis, he said.

The state has renegotiated 21 of the 59 long-term contracts, saving about $5.1 billion.

But the refund fight has been vexing. A federal regulatory judge earlier this month said the state’s consumers deserve just $1.8 billion in refunds — a figure so small it means energy companies will actually have to be paid $1.2 billion because they are still owed $3 billion in unpaid bills.

The move to return power buying to utilities is largely symbolic, said consumer advocate Doug Heller of the Foundation for Taxpayer and Consumer Rights.

”It’s like giving a prisoner yard privileges when it’s raining — you can’t use it,” Heller said. ”The real important question is what’s going to happen to all that contracted power. Are we going to be stuck with those prices?”

While the state won’t be buying electricity for consumers, its power team will continue to monitor compliance with the long-term contracts, which include commitments by some energy companies to build power plants.

And although the utilities will be back in the power-buying business, they have not fully recovered from the crisis. PG&E remains in bankruptcy and had to post $150 million in collateral in order to buy power. Edison‘s deal with state regulators to repay its debts remains under court challenge.

State leaders chose the water resources department to buy power for the utilities because the agency already had an energy unit managing the power needs of the State Water Project, which uses electricity to pump water.

But buying power for 9 million utility customers was overwhelming. More than 30 people were added to the original energy team of eight, but they entered the market at a distinct disadvantage.

The state’s flawed deregulation plan discouraged utilities from buying long-term power contracts, so the state had to buy almost all of its power in the daily spot market, where average prices in early 2001 were $355 per megawatt-hour — 10 times today’s price.

The state was spending about $60 million a day for power in early 2001, a figure that has since fallen to $11 million. Long-term contracts helped lower the spot market price. But the average contract price of about $70 per megawatt-hour is still almost double today’s prices.

”It’s been a pretty tough two years in terms of the challenges we faced in the market and the challenges the generators presented us with, with all of their tricks or whatever you want to call it,” said Water Resources Department spokesman Oscar Hidalgo.

Critics said the department not only paid too much but bought too much, forcing the state to sell substantial amounts of unneeded power for as little as $1 a megawatt-hour.

State officials say the department did the best it could under difficult circumstances, but won’t miss playing utility.

”We’ve learned a lot, but also we realized what the options were, and that they were very limited at the time,” Hidalgo said. ”At the end of the day, we want to go back to water.”


Contact John Woolfolk at [email protected]

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