Davis, Calpine find positives in power contract renegotiation.

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Natural Gas Week

California Gov. Gray Davis is riding high on successful power contract renegotiations on eight of the state’s 32 long-term power contracts, cutting what had been total valuations of $ 15 billion by 23% — to around $ 11.4 billion.

The news couldn’t come at a better time for Davis’s reelection campaign during which he has railed against outside “energy pirates” and made a campaign pledge to reduce the long-term power contracts signed at the height of the state’s energy crisis.

California reconfigured four agreements with the largest supplier to the California Department of Water Resources (CDWR) — San Jose-based Calpine — and one with High Desert Power Plant, a subsidiary of Baltimore, Maryland-based Constellation Energy.

Calpine sliced 14 years of contractual obligations totaling about $3.7 billion to help CDWR reduce its long-term obligations. Constellation Energy dropped six months of a 99-month contract in which CDWR will pay Constellation $2.72 billion instead of $3.28 billion.

In the midst of the good news, Davis couldn’t resist taking a shot at the Federal Energy Regulatory Commission (FERC) — which he has accused of indifference to the state’s dysfunctional power markets — and other electricity suppliers accused of manipulating electricity costs — notably Mirant, Williams, Dynegy and Enron.

Those companies have argued that the state’s crisis was driven by growing demand, lack of supply due to then-decreased hydroelectric supply, and the burdensome efforts required to build new generation to meet demand.

“These new contracts do not mean that FERC should shirk its responsibility to California,” Davis said. “The remaining generators that refuse to renegotiate contracts signed when the markets were dysfunctional, we’ll see them in court and at FERC.”

While Davis is vowing to continue his dispute with suppliers, he is under attack in his own back yard. The Foundation for Taxpayer and Consumer Rights (FTCR) openly criticized the governor and in a letter said the revised contracts merely decrease the length of what they consider exorbitant, consumer-bearing prices.

“One [Calpine] contract was reduced a mere 2%, from $ 61/MWh to $ 59/MWh, while the other was not reduced at all and remains at $ 58.60,” the FTCR letter stated.

In fact, Calpine has four contracts with CDWR, two baseload contracts and two peaking contracts. The 2% reduction is on one of the baseload contracts, of which both were cut by two years — to eight.

Also, the length for one of the peaking contracts was cut in half and the pricing structure changed from a fixed rate of $ 73/MWh to a floating rate based on the price of gas in the market, which might be indexed on a daily, weekly or monthly term. Calpine agreed to provide an additional 12.2 million MWh in 2002 and 2003.

“This will help fix CDWR’s cost of electricity in the near-term, while providing the state with the needed flexibility to meet uncertain energy demands,” said Jim Macias, executive vice president for Calpine. “The state is assured electricity will be available under more flexible terms when supplies will be critically needed.”

Calpine and Constellation agreed to pay additional fees to the state attorney general to resolve all claims stemming from allegations of improper electricity pricing practices. Calpine will pay $ 6 million over three years and Constellation will pay $ 2.5 million.

CDWR also renegotiated three deals with Capitol Power, Cabazon, and Whitewater Hill — all renewable energy providers. The state signed power contracts with about 22 suppliers in the winter and spring of 2001 when prices were at their highest. By last fall, the state was demanding renegotiations. Wall Street responded with optimism to the certainty provided by the restructured contracts.

Calpine’s shares traded up by about 11% following the announcement; however, the stock price slid later in the week on the announcement that it would miss its first quarter earnings target. UBS Warburg said it would maintain its hold rating on Calpine until reviewing its earnings.

Consumer Watchdog
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