State to Seek Renegotiated Energy Deals

SACRAMENTO —  Gov. Gray Davis is moving toward renegotiating dozens of controversial long-term contracts for purchasing electricity even as an administration official for the first time has admitted that the contracts require the state to buy more power than it needs.

Late Wednesday, energy advisors to Davis announced that they would brief reporters Friday on the administration’s strategy for renegotiating the contracts. Administration officials confirmed that plans are in the works for trying to rewrite the pacts.

As political controversy over the contracts has mounted, some of the power-generating companies involved have indicated willingness to consider renegotiating terms of the pacts. The companies have insisted, however, that the state make the first move.

The talk of renegotiation comes as Department of Water Resources Director Thomas Hannigan, in an internal memo, chided S. David Freeman, chairman of the state’s new power authority, for continuing to bargain for additional long-term electricity contracts.

“The state already has excess [power] resources,” particularly in Southern California, Hannigan wrote. Additional contracts would “exceed [the state’s] ability to absorb that power.”

“At this time [the state] is concerned that contracting for substantial additional supplies may lead to unnecessary costs for Californians,” Hannigan wrote in the memo, dated Oct. 4.

Until now, the Davis administration had strongly defended the 53 long-term power agreements signed earlier this year under which the state agreed to buy electricity for years to come.

Critics say the contracts cover more power than California needs at prices that are too high. Administration officials had denied that the contracts were excessive, calling them a reasonable “insurance policy” against future price spikes.

The memo also documents a split within the Davis administration on how best to prevent another power crisis.

The 3-month-old California Consumer Power and Conservation Financing Authority, which Freeman heads, has signed letters of intent to buy electricity from a dozen wind-energy generators.

Freeman says the state needs that power to protect against future shortages and increases in the price of natural gas, which is used to generate most of the state’s power.

Besides the wind energy, Freeman’s agency has been negotiating with solar power companies and investigating the purchase of more power from “peaker plants,” small generators used only at times of greatest demand.

But the power authority needs the Department of Water Resources’ endorsement before it can enter contracts, because the department is the arm of government that holds the purse strings.

Judging by Hannigan’s memo, the department is deeply skeptical about Freeman’s plans.

“Our assessment to date indicates that [the state] has a very limited need for new resources,” Hannigan wrote.

Freeman, the colorful former general manager of the Los Angeles Department of Water and Power, said he did not interpret Hannigan’s letter as a rebuke. He insisted that water department officials agree with him that the state needs more power to protect against price spikes and blackouts.

Pete Garris, the department’s acting deputy director, said there is room for some additional purchases, but only for specific needs. Northern California, for example, could use contracts for wind and solar power, he said, but more peaker plants are not necessarily required.

“We’ve got a pretty full plate with respect to resources,” Garris said, “and each and every one of these would have to be studied to see how it fits in.”

The state negotiated dozens of long-term power contracts beginning in January, when out-of-control energy prices threatened to bankrupt California’s investor-owned utilities. Although the contracts helped stabilize prices, they have come under increasing criticism from lawmakers and consumer activists who charge that the deals were too favorable to generators.

The state is currently buying electricity to meet about one-third of the needs of 24 million people served by Southern California Edison and Pacific Gas & Electric. But the effectiveness of conservation and the slowing of the economy may mean that the amount of electricity the state must buy for these utility customers is “substantially lower than current estimates,” Hannigan said.

In recent months, the state has already been forced to buy electricity and then sell some of it at a loss because there was not enough demand for it.

The critics contend that too many of the contracts are for power delivered 24 hours a day, seven days a week--a supply that does not match the state’s fluctuating electricity consumption. They also argue that because the contracts were signed when market prices were soaring, they are simply too expensive.

In a letter Monday to Freeman, the Consumers Union also expressed concern about his agency’s proposals.

“The power authority’s plan to build and own 2,000 megawatts of new gas-fired peaker power plants and about 1,000 megawatts of mainly wind plants . . . will contribute to a costly California power glut in the year 2003 and beyond,” preventing utility rates from falling, the organization said.

But V. John White, executive director of the Center for Energy Efficiency and Renewable Technologies, said he is dismayed that the water department opposes Freeman’s plans just as the power authority is beginning to seriously explore alternative energy sources.

“I’m concerned that the department is finding another excuse for the state not to contract with renewable-energy companies,” White said.

The proper solution would be to renegotiate many of the department’s contracts, not to cut off the authority’s alternative power deals, White said.