Tags: Davis | Flip-flops | Power | Contracts

Davis Flip-flops on Power Contracts

Monday, 25 February 2002 12:00 AM

The California Public Utilities Commission said Sunday it would ask the Federal Energy Regulatory Commission to declare that the 32 contracts with 22 different companies were based on past market prices that were "unjust and unreasonable" and should be renegotiated.

"Federal law protects the state and the consumers of California from these kinds of contracting practices," PUC Chairwoman Loretta Lynch told reporters on a conference call.

"When the market is so out of control and FERC didn't do its job, the state did what it had to keep the lights on," Lynch explained. "That doesn't mean that what the sellers pushed the state into was legal, so we are challenging the legality of those contracts ... to make sure FERC follows federal law and protects California's consumers and economy."

The state and private energy companies negotiated billions of dollars worth of long-term contracts last winter after the power sellers began refusing to sell power to struggling utilities on the bullish short-term spot market. At the time, Gov. Gray Davis and other officials hailed the contracts as a good deal for consumers since they were priced as much as 75 percent below the spot price.

The deals may have backfired because the western spot market has plummeted in the ensuing months and left the state locked into paying prices that total about $21 million above the spot market; some of the contracts stretch as long as 10 years.

Lynch said renegotiating would probably not lower consumer electric bills for the time being, however Davis' re-election hopes would likely get a major boost if he can convince -- or force -- the power companies to renegotiate.

The Republicans vying for the nomination to run against Davis in November have portrayed the now-expensive contracts as an example of the governor's supposed mishandling of the entire energy crisis.

Richard Riordan, the Republican front-runner, told an energy industry audience last week that he would "sit down with them" and renegotiate the contracts.

"If you renegotiate the contracts, we'll be there to deliver on them," he proffered. "We want you to be successful, but we don't want you to be successful on the backs of Californians."

FERC has told the Davis administration that it cannot act on the contract situation without a formal request to do so and the PUC's request announced on Sunday sets in motion the process of obtaining such an order from FERC.

California officials, led by Davis, have repeatedly alleged that power sellers had cleverly manipulated the spot market by withholding electricity for sale until the last minute as the state scrambled to buy enough electricity to avoid the need for rolling blackouts. A shortage of supplies across the West, coupled with high natural gas prices, turned the normally sedate electricity market into a bull market that forced Pacific Gas & Electric into bankruptcy and knocked Southern California Edison back on its heels.

While the long-term contracts offered the state a better price at the time, the complaint to FERC alleges that the "better" price only looked better when compared to a market that had been "gamed" by the overly aggressive energy traders.

"We aren't alleging that the taking of those contracts at that time was an improper or imprudent decision by the people at the state side, nor are we alleging that each and every seller was somehow engaged themselves in any kind of evil behavior," said Erik Saltmarsh, general counsel for the state Electricity Oversight Board. "This happened in the context of a market that was so distorted -- largely by the actions of third-party market participants -- that it just wasn't possible to get a deal out of that market that was reflective of a deal that would come out of a fairly functioning market."

If FERC decides that the long-term prices are indeed based on a spot price that was at best improperly inflated, the agency could declare them to be "unjust and unreasonable" and have the entire contract torn up.

FERC has been generally reluctant to force its will on competitive markets, but California officials maintain that the spot market last winter was anything but fair and competitive.

The power industry has not wanted to give up contracts that insure them of attractive and tidy profits, thanks largely to plunging natural gas prices, and it was not clear Sunday if new deals would be based on potentially volatile spot market prices or might instead be pegged to the cost of production, particularly natural gas prices.

California, however, is a major power consumer and a steady market for western power producers; agreeing to renegotiate would give them long-term access to the state.

Lynch indicated there would be no hard feelings toward the power producers if FERC ruled in the state's favor.

"California is open to anyone who wants to make a fair profit," she declared, "but not an exorbitant one."

Copyright 2002 by United Press International. All rights reserved.

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The California Public Utilities Commission said Sunday it would ask the Federal Energy Regulatory Commission to declare that the 32 contracts with 22 different companies were based on past market prices that were unjust and unreasonable and should be renegotiated. ...
Monday, 25 February 2002 12:00 AM
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