State energy contracts reworked;

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Davis Sees $3.5 Billion Saved In Decade; Effect On Consumer Bills Unclear

San Jose Mercury News

Under fire for overpriced electricity contracts, Gov. Gray Davis announced eight renegotiated deals Monday with San Jose’s Calpine Corp. and four other energy companies that he said will shave $3.5 billion off the state’s power bill over the next 10 years.

The agreements follow five months of closed-door bargaining over contracts Davis defended as “reasonable” when they were signed a year ago at the peak of California’s power crisis, but which consumer advocates and other state officials denounced as rip-offs.

“They brought back a better product for less money,” Davis said in a statement. “The state has gotten the power it needs, where it needs it, when it needs it, and at a more competitive rate.”

It is unclear, however, whether the state’s power consumers will see any of the savings reflected in lower bills. Consumer advocates reacted coolly to the new deals, uncertain whether they represented much of an improvement because they had little time to scrutinize the late-afternoon announcement.

“We’re glad the governor has gone after this, but the problem is that it’s not that substantial in a lot of ways,” said Doug Heller of the Foundation for Taxpayer and Consumer Rights in Santa Monica. “The big problem is that we were being sold power at two to three times the reasonable price, and for the most part, that hasn’t changed.”

As part of the deals, state officials agreed to drop all their lawsuits and complaints before federal regulators that allege these eight contracts were unjust and unreasonable. The state also agreed not to challenge the contracts again.

Calpine agreed to pay $6 million and High Desert, a subsidiary of Constellation Power Source of Maryland, $2.5 million as part of the deal to settle claims by the state attorney general. Of that, $2.75 million will go to a state solar power fund.

‘Relieves uncertainty’

Renegotiating them helps the company look good, Highlander said, and removes a question mark over its future cash flow. Calpine’s stock has taken a hit in the aftermath of the Enron collapse as analysts questioned its business.

“It’s good customer relations,” Highlander said. “It relieves all the uncertainty over the contracts. That should be good news for our investors. For the next eight years, we now have a certain revenue stream. We know what’s coming in.”

It’s also good for Davis, whose reputation as a cautious steward of the state’s finances was tarnished by the contracts. Voters give him low marks for his handling of the energy crisis. And Republican Bill Simon, whom Davis will face in the November election, has made the high cost of the contracts one of the chief issues in his campaign.

The Davis administration signed 56 electricity contracts early last year worth $43 billion over more than a decade. The renegotiated deals, originally worth $15 billion, will now cost $11.4 billion, a 23 percent reduction, administration officials said.

The savings generally came from shortening the duration of the contracts and cutting the price of the power.

For the two largest contracts, both with Calpine for up to 1,000 megawatt-hours around the clock, negotiators shortened them from 10 years to eight, and dropped one from $61 to $59.60 per megawatt-hour, for a total savings of $2.19 billion, administration officials said. Negotiators shortened another Calpine deal for 495 megawatt-hours over 20 years to a 10-year deal, saving $800 million, the administration said.

Other benefits came from closing loopholes in the fine print that critics said forced the state to take power when it was not needed and did not guarantee that companies would build essential power plants, administration officials said.

All four Calpine deals were adjusted so that the state is not forced to buy unneeded power. Two of the deals also require Calpine to build power plants to supply the electricity, including the 600-megawatt Metcalf plant in San Jose, rather than simply buying it on the open market and reselling it to the state.

Among those who were renegotiating the contracts were a dozen attorneys who pointed out their flaws in a critical state auditor’s report in December, and S. David Freeman, chairman of the new state power authority, who oversaw the original deal-making.

Freeman said the original deals, signed at a time when the state was paying $300 per megawatt-hour in the daily spot market to avoid blackouts, were “the best we could do under the circumstances.” The new deals, he said, “represent a vast improvement.”

Today’s prices

Consumer advocates said that in light of today’s prices, the renegotiated deals don’t appear to offer much improvement.

“If they’re gouging us for eight years instead of 10 years, they’re still gouging us,” Heller said.

State officials hope other energy companies will follow suit now that some have agreed to renegotiate.

But Nettie Hoge of The Utility Reform Network worried that the renegotiated deals may set a poor precedent.

“We’re a little bit worried,” Hoge said. “We don’t know if he’s set the bar high enough.”

It remains to be seen whether the state’s savings will trickle down to ratepayers, who are paying inflated bills thanks to record rate increases approved last year as California’s deregulation experiment spun out of control.

State officials said two unresolved issues could threaten consumers with higher energy costs: Pacific Gas & Electric Co.’s bankruptcy, and federal regulators’ insistence on an Oct. 1 deadline for removing the price caps they imposed last summer.

Loretta Lynch, president of the California Public Utilities Commission, said PG&E‘s plan for emerging from bankruptcy would allow the utility to evade state regulators and raise rates. And without the Federal Energy Regulatory Commission’s price caps, Lynch predicted the state’s energy markets will go haywire again.

“I can’t tell you that rates are going down until we win the PG&E bankruptcy case,” she said. “If PG&E is successful in getting its regulatory jailbreak, rates will rise. If FERC lifts those boundaries on our market, the prices are going to go out of control.”

Contact John Woolfolk at [email protected] or (408) 278-3410.

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