Contract

Dan Walters:
Perhaps third time will be the charm for Davis on power contracts

(Published Oct. 23, 2001)

California could have locked in oodles of long-term power supplies at around a nickel a kilowatt-hour last year, had Gov. Gray Davis and his handpicked Public Utilities Commission president, Loretta Lynch, acted as the state's financially strapped utilities and others urged. But they didn't move aggressively on long-term contracts then, which is at least half the reason why California was clobbered by a complex, devastatingly costly power supply and price crisis this year.

Belatedly, this year, Davis agreed that long-term contracting would smooth out the topsy-turvy price structure that left the utilities and the state with many billions of dollars in debts from expensive power purchases. However, by the time the Democratic governor and his energy team finally negotiated 56 long-term contracts covering roughly a third of California's power demand, the spot price had plummeted back to pre-crisis levels. Under the contracts, California would be paying suppliers more than twice as much as the current spot market price for electricity and 40 percent more than the long-term prices available to the state last year.

It has been a masterpiece of bad timing. The governor and his minions didn't act when they should have last year and then jumped into the contracting game at exactly the wrong time this year. If nothing else, they should have known that if generators were willing to sign long-term contracts this year at firm prices, it meant that they saw their underlying costs dropping and the opportunity to lock in big profits.

Now Davis wants to renegotiate those contracts, knowing that their existence could haunt him during next year's re-election campaign and that costs must be reduced if the state is to market a much-delayed power purchase bond issue. Without those bonds, the state's general fund will be on the hook for at least $6 billion in unpaid power bills, and recapturing the general fund money is critical to Davis' hopes of weathering a burgeoning state budget crisis.

If all of this sounds complicated, it's because it is. And the politics of the situation are even more so.

For weeks, Davis and state Treasurer Phil Angelides have been demanding that Lynch and the PUC approve a "revenue requirement" that would allow the state to skim off a large share of the ratepayer revenue stream to repay the bonds and finance future power purchases. The official party line, often chanted by Davis' new energy czar, David Freeman, has been that although the long-term contract prices are higher than the current market, they represent vital insurance for the state against future spikes in short-term power prices. It is, ironically, exactly the same argument that Davis and Lynch rejected in 2000.

The oddity now is that Lynch, who once marched lock step with Davis on energy policy, has denounced his long-term contracts as unconscionably high and demanded that they be renegotiated. She and other PUC members have not only stalled the administration's request for a guaranteed share of the rate revenue stream, but have specifically attacked the long-term contracts in presentations to the Federal Energy Regulatory Commission. And last week, the Davis administration changed its line, saying it now wants to renegotiate the contracts it was praising just days before.

It's still unclear whether the split between Davis and Lynch is real or contrived, but the administration's newly revealed intention to ask power suppliers to ratchet prices downward lends credence to the latter interpretation. Davis can seek renegotiation on the premise that without lower prices, the PUC will hold up its approval of the bond issue. And without the PUC's sanction, the contracts are nearly useless because there's no money to pay for them. That would relieve Davis of the political onus of admitting that the contracts are too generous to suppliers -- that he and his administration made the mistake that just about everyone knows they made.

Maybe the third time will be the charm for a governor who has difficulty getting it right on the role that long-term contracts should play in California's power supply situation.

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The Bee's Dan Walters can be reached at (916) 321-1195 or dwalters@sacbee.com