Assessment says consumers could be stuck for billions

The San Francisco Chronicle

Gov. Gray Davis and California energy officials spent too much on long-term power contracts that also leave the state vulnerable to electricity shortages during peak demand times, the California state auditor said yesterday.

The state should develop a legal strategy to renegotiate contracts with energy generators or consumers could face billions of dollars in extra costs, according to Auditor Elaine Howle.

Howle’s analysis of how the state fared in its new role as an electricity buyer credits the governor for easing the energy crisis that threatened to darken the state last spring. But consumers who will have to pay the bills for the $43 billion worth of energy contracts Davis signed got a raw deal, Howle said.

Critics have consistently blasted the governor for the contracts, but the auditor’s critique yesterday marks one of first independent assessments of the deals.

Most of the contracts “do not include the terms and conditions that one would expect to see in agreements that ensure the reliable supply of energy,” the auditor concluded.

Among the contract’s faults, according to Howle:

— The state is stuck buying power even during times it isn’t needed, and there are no penalties for generators if they don’t deliver during high-demand periods.

— Prices negotiated in the contracts are flexible and favor generators, meaning that during periods when generators’ costs are high, they can charge more.

— The state has procured more power for consumers in Southern California than is needed from the end of 2003 to the beginning of 2005.

The excess power will force state officials to sell energy at big losses. Next year, a megawatt bought for $155 will be sold at $16, according to forecasts from the Department of Water Resources, the state agency in charge of buying electricity.

Howle acknowledged that the state had faced an overwhelming task when it was forced to wade into a chaotic energy market in place of cash-strapped utilities. However, she said, officials shouldn’t have signed so many deals so quickly, noting that 40 agreements worth nearly $36 billion had been signed in just 30 days.

State officials defended the contracts, saying they stabilized an energy market so dysfunctional that officials predicted numerous blackouts this summer. They said electricity prices were low now in part because of the contracts, and that there had been few options when the deals were struck.

“People forget how difficult those times were. The lights were going to go out,” said Oscar Hidalgo, a spokesman for the Department of Water Resources. “In an ideal world, we could have taken more time and done better. But this was a crisis.”

There have been some conversations with companies about new negotiations, Hidalgo said.

New deals are key to protecting consumers from more high prices and blackouts, consumer activists said.

“If the contracts are not reformed, then California is stuck with the energy crisis for another 10 years,” said Doug Heller of the Foundation for Taxpayer and Consumer Rights.