Calpine deal seen as near

San Jose Mercury News

After four months of closed-door talks, state officials are close to agreement with Calpine on what would be the first and most important deal to cut the cost of the controversial multibillion-dollar electricity contracts the state signed last year at the height of the energy crisis.

“It’s very close,” said Bill Highlander, director of public relations for San Jose-based Calpine, the state’s largest contractor for power. “We’re feeling pretty good.”

For consumers, a deal that reduces the state’s costs could eventually help keep rates in check. For Gov. Gray Davis, who is seeking re-election, a deal could more immediately help deflect criticism that his administration recklessly bought overpriced electricity.

However, several consumer groups and observers have questioned whether a new deal would require more upfront payments as a kind of bailout for Calpine, which is working to stabilize its finances after the market deflated its stock in the wake of the Enron scandal.

Highlander dismissed the suggestion that Calpine is looking for a bailout.

He said the agreement could include shortening the duration of some of the four Calpine contracts, which have come under fire for locking the state into high-priced power for one to two decades. He declined to be more specific about the new terms.

Michael Kahn, who has participated in the administration’s negotiation efforts, said state negotiators are trying to fix problems with the contracts identified in a scathing report by the state auditor last year, including high prices and failure to guarantee construction of new power plants. Kahn predicted a deal within days.

“I hope we’re closer than we’ve ever been before,” Kahn said.

Calpine, which developed a close relationship with Davis during the height of the energy crisis last year, locked up deals worth about $10 billion. The state signed approximately $43 billion in total contracts.

The company offered the state lower prices on some of the deals than did other generators. But the contracts have still come under intense fire from the state auditor and from independent analysts.

Conditions Criticized

In a complaint filed with the Federal Energy Regulatory Commission in February, the state also alleged that it was forced to accept high prices and onerous conditions that generators such as Calpine imposed on the state during the energy crisis.

Consumer groups have complained that the contracts will burden consumers for a decade.

Calpine denied asking for some of the most criticized conditions, claiming that many were proposed by Davis’ negotiators, led by S. David Freeman, the former head of the Los Angeles Department of Water and Power. Freeman would not discuss Calpine’s accusations.

Several of these conditions have become the focus of the new negotiations.

Calpine’s largest “peaker” contract, which provides electricity to the state during periods of high demand, has been attacked for requiring the state to pay very high “capacity payments” to have the power available whenever the state needs it. Even if California buys no electricity under this contract, it must pay Calpine $90 million a year for the next 10 years and $80 million a year for the remaining 10 years of the 20-year contract.

Independent analyses of the contract have suggested the state could save more than $700 million by simply cutting the contract in half. William Marcus, chief economist at JBS Energy, rated that contract as the fourth worst of the 57 the state signed.

In the state’s complaint with federal regulators, the Public Utilities Commission also complains that the capacity payments are unfairly high.

A smaller peaker contract linked to a proposed power plant in North San Jose has also been criticized because of its cost and because the state signed it long after it had locked up most of the power it needed. Several environmental and consumer groups have called on the state to scrap it completely.

Independent observers have identified fewer problems with Calpine’s two largest contracts, which promise 2,000 megawatt hours of power every hour for the next decade. A megawatt hour is enough electricity to power about 750 homes for an hour.

The two deals offer some of the best prices the state was able to secure. But because the contracts force the state to take power even at periods of low demand such as the middle of the night, independent observers have urged the state to insist on more flexibility.

Possible repercussions

A resolution of these problems would almost certainly mean an end to the state’s complaint against Calpine now pending with the Federal Energy Regulatory Commission.

But if the deal also involves more payments to Calpine in the next few years, it will undoubtedly attract attention. Consumer groups already fuming at how the Davis administration negotiated the long-term contracts promise to scrutinize the new deals, especially given the historically cozy relationship between the governor and Calpine.

“Neither California consumers nor taxpayers should be bailing out Calpine, one of the energy generators that took us to the cleaners last year,” said Doug Heller, a consumer advocate with the Foundation for Taxpayer and Consumer Rights.

Hard times for Calpine

Calpine, which a year ago was enjoying record profits and the warm embrace of Wall Street, has seen its fortunes sink in recent months with Enron-induced questions about the energy industry and the company’s accounting.

Earlier this year, Calpine announced plans to dramatically scale back its aggressive power-plant construction program, including its controversial plant in San Jose’s Coyote Valley. And the company has been working hard to shore up confidence even as its credit rating has been downgraded.

But Calpine’s Highlander insisted Thursday the company is not looking for a bailout. “More money upfront is always a good thing,” Highlander said. “But we don’t need it.”

Davis negotiator Kahn would not discuss how the state might restructure its payments to Calpine but said the state is in a much better position to get a good deal today with energy companies facing regulatory threats, lawsuits and financial uncertainty.

The Davis administration has already begun pressuring other companies with long-term contracts.

“We are in a completely different environment,” Kahn said. “The markets are under control, the energy companies are in a far less strong position. I can do this in a way that’s thoughtful.”

Contact Noam Levey at [email protected].