Daily power cost dips below $30 million as state readies contract release

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The Associated Press

Gov. Gray Davis says the long-term contracts he’s releasing Friday helped put the state’s daily power purchases below $30 million for the first time since the state began buying electricity on behalf of three cash-strapped utilities Jan. 17.

The $29 million the state paid Thursday was less than a third of the record $102.3 million the state spent May 10, said Davis spokesman Steve Maviglio.

“It’s a direct result of long-term contracts and conservation,” Maviglio said.

Critics said Davis is trying to mute fallout from release of the nearly $43 billion worth of long-term contracts that will lock Californians into paying higher energy costs for years to come.

“The governor’s trying to make a silk purse out of a sow’s ear,” said Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights. “Clearly the governor’s worried that the deals he’s made look disastrous – like financial insanity.”

Davis predicted the state’s 38 contracts with 18 power producers will look “very competitive” when compared to the daily spot electricity market over the next couple of years: about 7 cents per kilowatt hour over the 10-year length of most of the contracts; about 8 cents per kilowatt hour over the next five years.

Davis’ negotiators swapped longer-term higher rates for more tolerable short-term prices, said Peter Navarro, an economist at the University of California, Irvine.

“We’d kill for 8 cents a kilowatt hour right now, but in three years when everything softens, power might be a nickel,” Navarro said. “The governor reacted to a market that was dominated by short-term price gouging. He complicated the problem by entering into long-term contracts.”

Davis said his administration knew when it began negotiations that the contractual prices would one day be higher than market rates.

“This is a bargain we’ve long since decided to make,” Davis said. “Over the long haul people will appreciate the stability and the reliability that long-term contracts provide.”

That policy decision was “a recipe for disaster,” said Michael Zenker of Cambridge Energy Research Associates.

Davis locked in the contracts while prices were “hysterically high,” Zenker said. Compounding the problem, most of the contracts will begin after this summer’s maximum shortage, just as more power plants are coming on line to increase supply and lower prices.

The 38 contracts with 18 energy producers compare particularly unfavorably with the sharply lower current prices for which Davis claims partial credit.

Contract records obtained by the Los Angeles Times show the state will pay up to $154 a megawatt-hour during peak demand periods and more than $95 when demand is low.

By comparison, the state recently bought peak power for less than $100 an hour and less than $20 an hour during off-peak hours.

That’s an unfair comparison, said Severin Borenstein, director of the University of California Energy Institute. The contract prices should be compared to the record prices in effect at the time they were signed, he said.

“The prices at which these contracts were signed are high – disturbingly high” compared to those available a few years ago, said Borenstein. But that’s not necessarily a mistake, he said, since the administration didn’t have much choice.

The contracts in essence mean California is paying its high power bills “on an installment plan,” Borenstein said. Generators are essentially agreeing to string out their profits over years instead of recouping them now.

Ten years is too long even if Davis was justified in signing long-term contracts, said Zenker. Navarro said the administration will look particularly foolish if the Federal Energy Regulatory Commission acts as expected Monday to rein in higher power prices after months of refusing to intervene.

The contracts vary widely, even for power produced by the same company, according to contracts obtained by the Times. For instance, the state agreed to pay Houston-based Dynegy Inc. up to $119 per megawatt hour starting next year, or more than double this week’s spot electricity price.

Under a different contract with the same company for the same three-year period, the state agreed to pay $21.65 per megawatt hour, but to also pay natural gas and other production costs that could vary sharply.

State negotiators said that could help the state if natural gas prices fall, even as it protects the company if prices rise.

The highest price, $154 per megawatt hour during peak demand periods, went to Baltimore-based Constellation Energy Group in a two-year contract, the Times said. In a separate eight-year deal with the same company, the state agreed buy more power even during low demand periods for $58 per megawatt hour beginning in 2003.

The state will pay one generator $80 million to $90 million a year just to be ready to produce electricity, even if it sells none of it.

Davis balked for months at releasing the contracts, despite a lawsuit by The Associated Press and other news organizations and Republican Assemblyman Tony Strickland alleging that the contracts used state money and should be open to public inspection.

However, Davis asked a state judge this week to release the state from the contracts’ confidentiality clauses, saying contract negotiations are advanced enough that the secrecy could no longer be justified.

The Davis administration and San Diego Superior Court Judge Linda B. Quinn agreed to keep some of contract details confidential. Davis also is waiting six months to release details of short-term contracts to prevent wholesalers from knowing what the state was being charged.

To date, the state has authorized $8.2 billion for power buys on behalf of Pacific Gas and Electric, Southern California Edison and San Diego Gas and Electric after retail price caps prevented the utilities from passing skyrocketing wholesale electric costs on to their customers.

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