No blackouts are in store this holiday season. Trees and displays will blaze forth in a reaffirmation of Americana. Indeed, the state government has bought so much power that at times it sells it off at a steep loss. And wholesale prices are much lower than they were. Yet the aftermath of the electric-power deregulation scheme in California continues to be very ugly.
In fact, California is at an energy impasse. The billions of state dollars taken from the general fund to pay for power on the open market is still not repaid. The biggest-in-U.S.-history state bond sale that would repay the treasury and cover future state power purchases is still on hold, months after it was to have gone through. Many state programs are threatened as an energy-budget crisis threatens to piggyback on top of a looming state budget crisis, estimated at a $14 billion--to--$20 billion shortfall for next year.
And, unless drastic measures are taken, the share of California‘s power supplied by renewable energy sources in this age of the greenhouse effect will go down rather than up.
How are all these horrible prospects even possible? One reason, and one only: a massive portfolio of long-term state power contracts -- clandestinely negotiated earlier this year and wrapped in a shroud of secrecy for months -- that can only be described as egregious and horribly unwise. These contracts, once touted by Governor Gray Davis and his advisers as the silver-bullet solution to the energy crisis, are proving instead to be the white elephant of the crisis.
The contracts, some $44 billion worth -- 70 percent of which went to companies represented by the same firm, Navigant Consulting, that advised the state on its power purchases -- are already a major issue in next year’s governor‘s race. Republican front-runner Richard Riordan offers them as Exhibit A of his case that Governor Gray Davis is a bad, shortsighted manager. ”These contracts will haunt California for years,“ says Riordan, a former leveraged-buyout artist and L.A.’s mayor for eight years ending this past July. ”They should be renegotiated by people who understand business.“
Many progressives agree. A private report by William Marcus, an energy economist who works for consumer and environmental organizations, identifies and analyzes in detail a veritable Dirty Dozen of the worst contracts. They include those with San Diego‘s Sempra Energy (a whopping $7 billion contract at short-term prices nearly three times higher than the Davis goal), San Jose’s Calpine (whose contracts are said to be generally much more expensive than any other comparable deals), Williams Energy, Constellation Energy, Coral Energy, Pacificorp, El Paso Merchant Energy, Alliance Colton, Mirant, Morgan Stanley (a Wall Street firm well-networked among top Democrats), and Dynegy, which recently dropped its bid to take over the disgraced Enron Corp. Ironically, some of these companies -- whose contracts account for more than 60 percent of the energy and costs in the entire state contract portfolio from 2002 to 2011 -- are among those excoriated by Davis as the worst gougers earlier this year.
”These are contracts negotiated by the state under duress and in some cases by state officials who may have had conflicts of interest, both of which raise questions about their validity,“ notes Center for Energy Efficiency and Renewable Technologies director V. John White. ”The problem with them is not simply that they are overpriced. They commit the state to buy too much power, virtually none of it green. We‘re proposing a contract-renegotiation strategy which sheds some unneeded natural-gas-fired power, increases renewable energy within existing contracts, reduces onerous ’take or pay‘ provisions, shifts some of the gas-price risk back to the contractor and reduces prices to something a lot closer to the market.“
After months of insisting the power contracts were a triumph, Davis has been forced to retreat and look to redoing them, as he finds himself at war with his own Public Utilities Commission (PUC), which rejects his plan -- in the form of the rate and revenue agreement that must underlie the power bonds -- to have the Department of Water Resources buy power without any review. But to date, he doesn’t seem to have much of a strategy. The arguments of Marcus and White, however, could provide the legal rationale he needs to clear the decks of this mess before the election.
For his part, Riordan told the Weekly that he thinks the rate agreement before the Public Utilities Commission is wrong and that consumer rates should go down now that market prices have dropped. But when reminded that rates will have to remain higher than they would be otherwise to finance the Public Utilities Commission‘s compromise bailout of Southern California Edison -- which will cost several billion less than the bill Davis failed to get through the Legislature, and retains state regulation that would have been lost in the Davis bailout bill -- Riordan didn’t disagree. So how much should rates go down? ”I don‘t know,“ admits Riordan, who leads Davis in the polls.
At last month’s California Power Authority retreat at UC Davis, the across-the-board impasse caused by the contracts was acknowledged by many participants, though often not in so many words out of deference to Power Authority chairman Dave Freeman, who, as then--chief energy adviser to Davis, presided over their negotiation. Privately, some were more forthcoming.
