Calif. May Be Stuck With $43B Power Contracts For Now
By JASON LEOPOLD and JESSICA BERTHOLD
OF DOW JONES NEWSWIRES
LOS ANGELES -- California's effort to void or renegotiate $43 billion in electricity contracts could drag on into late 2002 or beyond, despite an effort by Gov. Gray Davis this week to end the contracts, and earlier assurances that the state was moving along on restructuring them.
Energy companies that hold contracts with the state say it's done little to advance talks on restructuring the deals.
Williams Companies (WMB) had "one short face-to-face meeting" in December with a Davis administration official, and hasn't been contacted since, said spokeswoman Paula Hall-Collins. The company holds a 10-year power contract with California to supply up to 1,400 megawatts of electricity at a cost of more than $3 billion.
The California contracts have been at the center of a long-running dispute between the companies, regulators and lawmakers. Until last week, they were seen as the biggest obstacle preventing the California Public Utilities Commission from passing a settlement that laid the groundwork for an $11 billion power revenue bond sale intended to help pay back debt the state incurred during the power crisis.
Last week, the CPUC approved the settlement.
On Monday, Davis and the CPUC filed a complaint with federal regulators claiming the contracts are overpriced by $21 billion. In fact, a majority of them are priced two to three times higher than the current spot market for power, about $20 a megawatt-hour.
The complaint is aimed at getting the U.S. Federal Energy Regulatory Commission to void the deals because, it claims, wholesale power prices the state locked in last year are "unjust and unreasonable."
It's unlikely FERC will rule that the contracts are overpriced because the agency itself told California before the deals were signed last year that a "just and reasonable" contract price was $74 a megawatt-hour, according to FERC commissioner Nora Brownell.
Dynegy, Sempra Met With State A Few Times
In the meantime, a few energy companies that hold contracts have had more contact than Williams with regulators on the issue of renegotiation, but not much more. Sempra Energy (SRE) and Dynegy Inc. (DYN) have said they met with state officials two or three times, beginning in late December.
Dynegy Inc. (DYN) was first contacted by state officials in mid to late December, said Dynegy spokesman David Byford. It had the first of three meetings in early January and talks are continuing, Byford said. "I know we recently had a meeting and we continue to have ongoing discussions," said Byford. He declined to detail the talks.
Many contracts were tied to new power plants. Companies went out to secure natural gas to fuel the plants, and in the case of Calpine Corp., bought a natural gas company to hedge against price spikes in the future. Calpine, of San Jose, holds $13 billion in contracts.
Barry Goode, the governor's legal adviser, rejected the argument that the natural gas investment by Calpine or the construction of new power plants justifies the high cost of power contracts. He's demanding that companies prove they invested in power plants and natural gas as a result of the contracts.
"We're not trying to be draconian," Goode said. "But it's one thing for someone to say to you that they've changed, they've done those things and another to have done it."
Goode contends the state did make a good faith effort to renegotiate the deals, and that it's possible some of the contracts may be renegotiated before FERC reviews the filing.
What led to the FERC filing -- in effect, an effort to fast-forward through negotiations?
Davis two weeks ago authorized CPUC President Loretta Lynch to file a complaint with FERC to get the state out of the deals. His authorization was contingent on the CPUC approving the bond sale settlement, according to two CPUC commissioners and others.
"In order to get Lynch and the CPUC to cave in to his demands, Davis had to throw Lynch a bone. (The filing) is it," said Peter Navarro, an economics professor at the University of California at Irvine.
Davis' support of the FERC filing was part of an elaborate give-and-take between his office and the CPUC, Navarro added. Davis, a Democrat campaigning for reelection this year, has been hurt at the polls by the energy crisis.
By filing a complaint with FERC, an agency villified by the governor for failing to rescue California from sky-high power prices in 2000 and 2001, Davis can continue to blame the agency if it doesn't rule before the November election, according to Navarro. Implanting the idea in voters' heads that FERC inaction created a bad environment to negotiate contracts is also part of Davis' reelection strategy, he added.
"Look for mailers and TV ads touting Davis as the guy leading the charge to undo the horrible contracts at the Evil FERC...," Navarro said.
Political Strategy Backfires
The strategy has already backfired. The governor was criticized in news stories that reported on the FERC filing, largely because he and his advisors had lauded the contracts when they were signed a year ago. The governor said at the time that the deals "broke the back" of the volatile spot electricity market and "will provide reliable electricity for consumers for years to come."
The state didn't have a plan for restructuring the power pacts, according to several people who took part in the handful of renegotiating talks. Davis officials only knew they wanted to shorten the terms and get a lower price, they said.
A Sempra Energy official confirmed this, saying "it was clear early on they weren't focused on what changes they wanted."
Calpine has held a number of meetings with the state, one last Saturday, to discuss restructuring its contracts. Calpine officials also said people who took part in the talks on behalf of the state just wanted to void the deals and start over.
"It's not that simple," the Calpine official said. "We have a legally-binding agreement. We're not worried about the filing at FERC because we think it's a weak case."
Calpine has a provision in its contract which says once the contracts are signed by the state it cannot be challenged before FERC.
-By Jason Leopold, Dow Jones Newswires; 323-658-3874; jason.leopold@dowjones.com
(Jessica Berthold contributed to this story)
Updated February 28, 2002 10:37 a.m. EST |
