The Dozen Rip-offs

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.

”I don‘t know why the governor signed these contracts, but he did,“ says one high-ranking state official. ”They’re turkeys. They are blocking everything we are trying to do.“

Not long after, Freeman reversed his monthslong stance of defending the contracts and acknowledged that some needed to be redone. And he agreed with the vision for the Power Authority laid out on the retreat‘s second day by State Treasurer Phil Angelides, that instead of trying to do a great many things, the Authority a should focus ”like a laser“ on fostering renewable energy and conservation. ”We need to get California back to where it was a quarter-century ago,“ he says, referring to the administration of Governor Jerry Brown, ”when it was the world leader in renewables and conservation.“

One thing that all the players, from the Power Authority and the other state energy agencies, agreed on is the need for a renewable-energy portfolio standard, which would require utilities to nearly double the state’s use of renewable power to 20 percent by 2010. A bill to require this was killed earlier this year by L.A. Assemblyman Rod Wright, a Democrat close to the old-line energy industry who has used his position as chairman of the Assembly‘s energy committee to frustrate progressives. However, unlike outgoing Assembly Speaker Bob Hertzberg, also of L.A., incoming Speaker Herb Wesson, yet another Angeleno, favors the renewable portfolio standard. And, should the Legislature fail to move next year, the PUC is contemplating a renewable standard of its own, using a decade-old bill by then-Assemblymen Tom Hayden and Byron Sher.

The agenda of the Power Authority has changed since it launched last summer. Then Freeman laid out an aggressive program of buying natural-gas-fired ”peaker“ plants to help the state through what he described as possible shortages next summer, as well as major programs to buy renewable energy and finance conservation. But since then, in part due to the influence of board member Sunne McPeak, now the agency’s vice chair, whom some progressives distrusted as a shill for corporate and fossil-fuel-energy interests, the Power Authority has moved emphatically away from Freeman‘s plans to buy still more natural-gas plants. And while Freeman held out the Power Authority as the way to reverse the Green Blackout of renewable energy perpetrated by the long-term contracts over which he presided (virtually all their power is from fossil fuels), the ongoing impasse over the rate agreement, and a growing belief that the state has too much surplus power, have blocked the Power Authority’s plans to bring wind and other renewable power online.

What are the prospects for resolving the problems generated by the long-term power contracts? Davis press secretary Steve Maviglio, who in September said he saw ”no evidence“ of any movement against the contracts, now says that the process of reworking them is ”coming along.“

Maviglio confirmed that a two-and-a-half-hour meeting took place last week to try again to work out a rate agreement that the Public Utilities Commission will accept. Sources say the deal under discussion, pushed by PUC chief Loretta Lynch, would allow for approval of the bonds only, with the contracts left for later disposition. Maviglio says there is no deal on the shape of the rate agreement, ”but we‘re hopeful.“


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