LITTLE CHOICE BUT TO SIGN LAST WINTER, LYNCH SAYS, BUT CALIFORNIA NEEDS TO RENEGOTIATE

Modesto Bee

In hindsight, state Public Utilities Commission President Loretta Lynch doesn’t think Gov. Davis had much choice but to sign a batch of expensive long-term contracts for electricity last spring.

California’s energy market was essentially “the Wild West,” Lynch said. The sheriff, in the form of the Federal Energy Regulatory Commission, had left town.

“At the time, there wasn’t anything else to do,” she said. “We were dying of thirst in terms of not having enough electricity.”

But as the year of the California power crisis comes to a close and Davis embarks on his re-election effort, the Democratic governor is under increasing pressure to unravel many of the deals he brokered in an effort to solve the problem.

Lynch, like others now urging the Davis administration to renegotiate the contracts, argues that what happened wasn’t fair — and perhaps wasn’t legal. Energy generators agreed to quench the state’s immediate thirst, she said, but “only if we agreed to buy a thousand gallons of water a year for the next 10 years.”

“We were taken advantage of for a variety of reasons,” Lynch said, “and we should use this opportunity to get a better deal.”

While the peak of the energy crisis appears to have passed, the state remains on the hook and under fire for the more than $40 billion worth of long-term electricity contracts it signed in an effort to bring stability to last spring’s volatile market.

LOOKING FOR A WAY OUT

Having rushed last winter to reach those deals to cope with the crisis, Davis has reluctantly begun exploring ways to escape them.

At issue is a portfolio of 57 contracts for power over the next 10 years, the bulk of which were signed at the height of the crisis — a time when electricity prices were at a historic high and the state’s bargaining position was weak.

A sympathetic yet scathing review of the contracts released Thursday by California’s independent state auditor contains this conclusion: “Most of the contracts that the Department (of Water Resources) has entered with power generators do not include the terms and conditions that one would expect to see in agreements that ensure the reliable supply of energy.”

The weaknesses, the report says, extend well beyond price. On the one hand, the majority of contracts call for the state to pay for power whether it needs it or not. On the other, the contracts don’t provide enough electricity for times of peak demand on hot summer days.

The audit, GOP gubernatorial candidate Bill Simon said, is “the clearest evidence yet that Gray Davis should be fired by the voters for gross incompetence.”

“Californians are finding out that we’re not only stuck for 10 years paying the highest electricity rates in the nation, but the contracts still don’t shield us from blackouts and further price spikes,” he said. “This was a clear example of panic management.”

NOT PRETTY, BUT IT WORKED

While they acknowledge that the contracts aren’t perfect, Davis advisers said the criticism ignores the fact that electricity prices have declined dramatically — in part because signing the contracts eased the pressure on the spot market. Despite dire predictions, they noted, no summer blackouts occurred.

And they pointed out that the state has little leverage to bring energy companies back to the bargaining table.

To renege outright, Davis political adviser Garry South said, would have “enormous implications for the credibility and the creditworthiness of the state,” and invite lawsuits from the generators involved.

Republicans, meanwhile, say the biggest mistake made by Davis’ appointees to the PUC — including Lynch — was not giving the utilities enough latitude to sign long-term contracts sooner. Signing contracts when prices were lower would have helped the companies — Pacific Gas & Electric Co. in particular — avoid bankruptcy protection, they say.

“The governor, by virtue of his procrastination and timidity, drove them into that position,” said Secretary of State Bill Jones, one of the three Republicans who will spend January and February critiquing Davis’ handling of the energy crisis as they seek the GOP gubernatorial nomination.

“It’s fine for Loretta (Lynch) to say it’s the only thing we could have done,” he said. “But (she’s saying) don’t worry about all the mistakes we made before that.”

Lynch has long countered that utilities were given the power to make long-term deals — subject to a later review that utilities said created too much uncertainty. Critics note now that the state’s own contracts were not subject to such review.

Calls for renegotiating the contracts also are coming from those who want renewable energy sources to have a piece of the energy pie.

The audit found that only six contracts totaling 2 percent of the electricity purchased are from renewable energy sources.

“Just because we were in a tough spot and some mistakes were made, doesn’t mean we should throw up our hands in defeat,” said V. John White, director of the Center for Energy Efficiency and Renewable Technologies. “What we need to do is to negotiate a solution that can work.”

Times have changed, he said, a situation most starkly illustrated by the fact that it was energy giant Enron — not Southern California Edison — that followed PG&E into bankruptcy protection this year.

Consumer advocates also are solidly on the side of abandoning the contracts.

“The power industry has done a good job of controlling Governor Davis through fear tactics, and he bites every time,” said Doug Heller of the Foundation for Taxpayer and Consumer Rights.

“What he was afraid of January through April were blackouts. Now he’s afraid that he’s going to be sued by the power companies? That should be a badge of honor.”

Controversy over the contracts also is preventing Davis from repaying the state’s general fund the more than $6 billion California spent buying spot-market electricity on the utilities’ behalf.

Early this year, Davis and lawmakers assumed that the state general fund would be repaid quickly. Legislation authorizing the long-term contracts stipulated that the money should be repaid “as soon as practicable.”

Plans were laid for a major bond sale, the proceeds of which would repay the state. Ratepayers would pay off the bonds over time.

A year later, however, the bond deal is no closer to completion.

The PUC balked at approving a rate agreement to facilitate the sale, objecting to terms Lynch said would lock in the long-term contracts indefinitely.

Auditors said the resulting delay has caused the state’s financing costs to escalate by about $800 million, and the state has yet to find a compromise that would satisfy the PUC, the energy generators and Wall Street.

While criticism of the contracts and the need to repay the state for its energy purchases are Davis’ most immediate problems, they aren’t the only ones.

POWER DEALS RUNNING OUT

The federal order that helped calm the electricity market by capping wholesale prices expires Sept. 30. The state’s authority to purchase power expires in January 2003.

How California’s electricity will be bought and paid for after that remains unclear.

“There are a ton of fundamental questions about energy policy, and we have a clock ticking,” Lynch said. “After that, we’re back to the wild, wild West unless we change the system.”

Although California’s peak power needs have declined through conservation, Lynch noted that a state which paid $7.4 billion for power in 1999 will pay as much as $50 billion this year.

“One of the hardest problems is how that payment is going to occur, and on who it’s going to fall,” she said. “That’s why I’ve stuck my hand up and said, ‘What about the contracts?'”

Lynch herself, meanwhile, is refinancing her home mortgage. When it comes to navigating the next stage of California’s electricity saga, she thinks the state should take a similar approach.

“The market in which we bought those contracts has changed,” she said. “While it’s a much more expensive market, it’s a stable market.

“Now we have to make it a reasonably priced and stable market.”