Carrots and sticks
How to renegotiate energy contracts
Eager boys and girls are not the only ones waiting for Santa Claus to arrive.
Older ones around the Capitol—particularly those involved in California’s energy policies—are fretting about the dismal state budget and hoping Santa or some similar savior will squeeze down the chimney to fill state stockings with less expensive long-term power deals.
The jolly old fellow that many hope will deliver goodies on the energy front is the beardless David Freeman, chief of the new California Power Authority (CPA) and the guy who oversaw many of the contract negotiations.
Yet there are those who believe in Freeman about as much as they believe in Santa Claus, people who believe that the carrot he is offering power companies will be less effective in cleaning up this mess than if the California Energy Commission (CEC) opts to wield a stick.
If CEC were to flex its bureaucratic muscle, “It would bring a few people to the table,” said Bill Marcus, an economist with JBS Energy.
Undoing the deals
The state Department of Water Resources (DWR), under Freeman’s lead, earlier this year signed $43 billion in power agreements to cover the supply gap left by cash-strapped Pacific Gas and Electric Company and two other investor-owned utilities as the state’s deregulated energy market kicked in.
They are now considered bum deals because of the price tag, with the average 10-year contract cost being $69 a megawatt hour (MWh), compared to today’s figure of about $30 MWh. One MWh can fuel more than 750 homes for 60 minutes.
And that high price tag comes at a time when California officials are faced with having to bridge a budget shortfall of about $12 billion anticipated in the next fiscal year.
In addition, DWR admitted after the buying binge earlier this year that it bought more electricity than it needed and has been selling the excess off at a fraction of its cost.
Not surprising, Governor Gray Davis and DWR have been pressured to renegotiate the pricey deals, made behind closed doors, to protect consumers and the state coffers. Reducing the tab and decreasing the quantity of electrons California must buy would also make room for renewable power squeezed out by the oversupply of fossil-fueled generation, improve air quality and reduce greenhouse gases.
The only problem is that the deals have already been signed, so the power companies have to agree to renegotiate the deals on terms less favorable to them. How do you do that? Well, you can coax them back to the negotiating table, as Freeman is trying to do, or force them back, as some think the CEC should do.
During a legislative hearing on the issue, Freeman unveiled his approach. He wants to offer low-interest CPA financing to the generators that signed multi-year agreements with the state. The power companies would get access to cheaper financing for their power plant projects in exchange for dropping the cost of the energy they sell to DWR.
Since that pronouncement at the end of November, there has been no action by Freeman on that front—in no small part because his budding CPA has yet to be funded. But there is growing support for another idea.
The CEC, which licenses power plants, could demand that applicants cut the cost and amount of electricity they’ve contracted to sell the state. It could make renegotiations of the energy agreements a condition of a power plant license under the California Environment Quality Act authority, which requires the CEC to look at the big picture and assess a generating project’s cumulative economic and environmental impact.
In essence, the CEC could tell the power generators: You scratch our backs and we’ll scratch yours.
Coaxing new contracts
After months with little movement on the renegotiation front, DWR managed to get the price of one small contract lowered last week. It was able to get a better deal with the Bonneville Power Authority, not because it decided to play hardball, but because the contract included an option for ending the deal, said DWR spokesman Oscar Hildalgo. Yet no other state contract includes that option.
Only two power companies have stated publicly they would consider reworking their power agreements: Calpine, the San Jose-based generator that is the biggest power plant builder in the state; and Sempra, an affiliate of San Diego Gas and Electric.
Nearly one-third of the DWR contracts are with Calpine, while Sempra holds the distinction of having locked in the highest power price. Company officials said they would see what the state had to offer in exchange for altering the deals.
Hildalgo declined to comment on the status of renegotiations but noted, “It will be a difficult task.”
Whether Freeman is able to deliver remains to be seen, but the job could be made a lot easier if coupled with CEC’s regulatory muscle to prod Sempra and Calpine along. Both have power plant license applications at the CEC, as do a couple of generators that made deals with DWR.
The proposition that projects before the CEC that will provide expensive power to the state should not be licensed as proposed is the heart of the argument made by opponents to one of Calpine’s projects under review at the CEC.
The first year, Calpine’s Los Esteros plant will supply 180 megawatts of juice to the state at times of high demand at a price more than four times higher than CEC’s estimate of what similar deals should cost. The opponents, which include The Utility Reform Network and Environmental Defense, urged the CEC to reject the application for the project slated for San Jose because it is void of economic benefits and would worsen air pollution.
When asked about the feasibility of linking CEC certification conditions to contract renegotiations, three of the CEC commissioners—Robert Pernell, Robert Laurie and Michal Moore—said it could be done if a link between the condition and signed power deal could be shown.
“It boils down to whether we are prepared to force the issue,” Laurie added.
Taking economics into consideration when making a plant siting decision wouldn’t be a major stretch for the agency. CEC often requires power plant developers to pay impact fees, including for schools and fire departments, to make the facilities more palatable.
However, after bending over backward to accommodate developers to bring new generation on-line, particularly during the declared energy emergency, the CEC doesn’t seem inclined to place more restrictions on building new plants.
“Over the years, the commission has avoided getting into profitability and financing arrangements of projects,” said Bob Therkelson, CEC deputy director. He added the CEC may consider looking at the price impacts of project licensing but only “on a generic basis,” if at all.
The commission has not always been so reluctant to take a stand to protect the public.
In 1989, a Republican-controlled CEC delayed and killed power projects because there was too much electricity and at too high a price, Marcus said. “Suddenly they are saying we can’t protect ratepayers in 2002, and it is a Democratic commission.”
Sandra Spelliscy, an attorney with the Planning and Conservation League, added the CEC is narrowly interpreting what it can do. “Everyone knows that something is wrong with what is going on with plant siting, that there is too much gas fired power, and that the contracts are screwed up.”