State Looks to Rework Costly Energy Contracts
The energy contracts that saved us are now coming back to haunt us.
The state is looking to renegotiate billions of dollars worth of power contracts under which the state is paying anywhere between $58 and $249 per megawatt hour of electricity.
The price for that same electricity on the spot market now is $15 to $30.
Steve Maviglio, press officer for Gov. Gray Davis, said the state’s Department of Water Resources has been renegotiating power contracts. But he refused to discuss any specific actions the state is pursuing.
Maviglio also said the state is paying as much as $249 per megawatt hour for electricity under some deals, some of which last as long as 10 years.
But Maviglio dismissed criticism about the contracts, saying much of it has focused on the high end of the contracts’ price range. The average price the state is paying for electricity is much closer to $69, he said.
The power contracts were negotiated at the beginning of the year, at a time when spot market prices topped $500 and in some cases went as high as $3,800 per megawatt, Maviglio said.
“All your Monday-morning quarterbacking is fine,” he said. “The prices we got at the time were 75% lower than what the spot market price was at the time.”
In the original contracts, state negotiators, in some cases, gave up the state’s right to ask the Federal Energy Regulatory Commission to examine whether the prices are unreasonably high. Loretta Lynch, president of the California Public Utilities Commission, is one of the critics of the original contracts.
“From my perspective, that contractual provision is great evidence that the generators knew they were sticking it to the state,” she said. “If they thought this was a reasonable contract, why wouldn’t they want FERC to uphold the deal?”
Tom Murnane, a spokesman for San Diego-based Sempra Energy Resources, whose San Diego Gas & Electric unit serves South Orange County, said he was willing to talk with the state on potential negotiations. But, he said Sempra’s contract already was fair.
“There were, all together, 54 contracts,” he said. “Our contract (is) the lowest price of all the long-term contracts signed by the state. And given that, we think it’s a very good contract for the state and for consumers.”
Michael Niggli, president of Sempra Energy Resources, said that under Sempra’s contract, the price for power varies with the cost of natural gas,the fuel for making electricity.
If the natural gas price stays close to its current cost of $2 per million British thermal units, then the Department of Water Resource’s cost for electricity will be $41 per megawatt hour.
If natural gas rises to $3 or $4, then the cost of electricity will go up to $49 or $56 per megawatt,still lower than the other contracts, Niggli contends.
And the state has the power to lock in the price of that natural gas under additional long-term contracts, he said.
As for the clause that bars the state from taking the contract to the FERC, Niggli said Sempra did that to protect itself.
“We need to invest upwards of $2 billion to build the power plants that the state needs. The clause is there so the other party would not go back and try to change the deal, or change the transaction. Essentially, we both agreed to a reasonable transaction and we want to move forward,” he said.
Jodi Beebe, an analyst with the San Diego-based Utility Consumers’ Action Network, agreed with Lynch that the state should renegotiate its contract.
“The state maybe had gone a little too far in terms of locking in too much power at too high a price,” she said. “Looking at the fact that the state may be able to renegotiate those contracts, will probably save consumers quite a bit of money in the long run.”
But California has its work cut out for it, Beebe said.
“It depends on how well they were written, and how good the state was at negotiating those contracts with the power generators,” Beebe said.
With the energy crisis at full steam, the state entered into the original contracts at a tremendous disadvantage, she said.
“The state was basically locked in a stranglehold, in terms of the economy. And so they wanted to go ahead and really take care of the issue,” Beebe said. “The way they did that was to lock in a substantial amount of long-term contracts at a specific rate that at that time was lower than what we were paying.”
That rate, of course, was much higher than the average $30 per-megawatt-hour cost of electricity before the energy crisis began, she said.
As an added irony, the price for electricity on the spot market fell back down to $30 shortly after those power contracts were signed. And one of the reasons prices fell so quickly was that the state secured those long-term contracts in the first place, removing uncertainty from the market, Beebe said.
“(The price) not only fell, it plummeted after the state locked in the long-term contracts. And I think that really shows the effect of how much power they were locking in, and at what price,” she said.
The utility consumers group monitors the price of electricity on its Web site. The graph shows in April, when the long-term contracts went into effect, the price for electricity plummeted from more than 20 cents a kilowatt to about 6.5 cents. Since then, it has hovered between 6.5 cents and 7.2 cents per kilowatt hour.
That corresponds to between $65 and $72 per megawatt hour,roughly equivalent to what the state is paying now. But that’s up from $20 to $30 per megawatt hour before the energy crisis.
“You can see that the state has locked in long-term contracts, which have brought that market down to about 6 to 7 cents,” Beebe said. ” I can see where the state went ahead and put a tourniquet on the market by locking in long-term rates. But essentially those prices were a little bit high, and for too much power.” n
Zion is a staff writer with the San Diego Business Journal.
