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Power Debate Heats Up as Davis Reveals Contracts

Los Angeles Times

After months of resisting disclosure, Gov. Gray Davis on Friday released 38 long-term power contracts that aides said show the administration is deftly managing the energy crisis, but that critics warn contain clauses and costs that may burden consumers with unpredictably high prices for years.

Provisions in some of the contracts protect generators from new state taxes, shield them from potential action by federal regulators and give them a break on environmental costs. At the same time, the documents are so heavily censored in crucial areas that it is impossible to fully assess their impact on the state and its residents.

State officials insist that the complex agreements, extending as much as 20 years and costing an estimated $43 billion, already have slowed the hemorrhaging of state spending on power and sheltered consumers from wild electricity price swings in the future.

"These provide a major building block for lifting this energy crisis," Davis' top energy advisor, S. David Freeman, said as a 600-page stack of agreements was made public in response to a court order. "That was our longer-term strategy. We implemented it, and it's worked."

The governor, questioned after a public appearance at Mather Air Force Base, echoed his advisor's optimism, but added: "I'm under no illusions. I think the summer is going to be hot and the peak prices will spike up."

For months, Davis has publicly vilified the generators with whom his administration has now become contractually bound. Asked whether his nemeses negotiated in good faith, the governor said: "I do not think the generators have our best interests at heart. . . . They're laughing all the way to the bank. My job is to fight back."

Davis has a heavy political investment in the pacts, which the state began negotiating in January as blackouts hit, power prices soared and the state's large utilities slipped toward insolvency.

Crediting the contracts, Davis aides noted the state was paying an average of $332 a megawatt hour for power in January, but only $179 this month. The contracts call for an average price of about $85 per megawatt hour over the next five years and about $69 over the next 10 years.

Critics have noted that the state's current average costs under the contracts exceed those now available on the daily market. But Davis contends the current reduced prices are largely a result of his contracting strategy.

Partly because of the secrecy Davis imposed on the deals, they have become a focal point of suspicion over his handling of the crisis. News organizations--including The Times--and Republican officeholders sued to get them. Consumer groups, meanwhile, complained about being hit with historic utility rate increases for deals no one could examine.

The controversy seemed to intensify Friday, despite efforts by the governor's team to portray the agreements as a major tactical victory against out-of-state power marketers who exploited the state's flawed deregulation scheme.

GOP Leader Attacks 'Sweetheart Deals'

Assembly Republican Leader Dave Cox of Fair Oaks, whose staff pored over the documents, attacked the governor for brokering "sweetheart deals for the generators."

Even a key Democrat, state Sen. Joe Dunn (D-Garden Grove), expressed serious concerns about a number of provisions in the deals that seem to offer special relief to generators.

Some lawmakers and consumer groups pointed to provisions that would allow generators to shift the cost of new taxes to the state and possibly exempt the firms from a windfall profits tax.

"It ups the ante as far as the ultimate burden that the contracts will place on the shoulders of California ratepayers and taxpayers," said Dunn, who is heading a special committee investigating alleged manipulation of the state's energy market.

The senator said he also is concerned about provisions such as one negotiated with GWF Energy, which prevents the state from pressing any future claims with federal regulators regarding the company's profits.

"It is very disconcerting that we would willingly give up the right to challenge any of these [prices]," Dunn said.

Consumer advocate Harvey Rosenfield called some of the contract terms outrageous. Rosenfield, who heads the Foundation for Taxpayer and Consumer Rights in Santa Monica, said it was "bad enough" that the long-term contracts resulted in "high rates for Californians for a decade." He said Friday's disclosures pointed to other "giveaway" perks.

Freeman, who formerly headed Los Angeles' Department of Water and Power, insisted that generators won no special windfall profit protections. The only tax increases generators can pass along to the state, he said, are those directly tied to production of the power in the contracts, such as new taxes on natural gas.

"I'm not going to say some lawyer won't argue" that the generators will not claim they are exempt from a windfall profits tax. "But the contract is very clear and the law is very clear."

Some of the pacts lock in specific prices, such as $58 a megawatt hour for around-the-clock power from Baltimore-based Constellation Energy Group. The Davis administration said those guard against price spikes in future years.

Other contracts, officials said, balance the portfolio. They include deals such as those with Dynegy Inc., which tie prices to the cost of fuel in future years.

A number of energy insiders found reason to praise the contracts.

"The point of signing long-term contracts is not to get a great deal, it's to reduce risk" from the volatility of spot markets, said Severin Borenstein, director of the Energy Institute at UC Berkeley.

Edison Cites Hedge Against Price Spike

The long-term power contracts will be an important factor in limiting the state's exposure to future price spikes, said Bob Foster, senior vice president of public affairs for Rosemead-based Edison International, the corporate parent of Southern California Edison.

"This was California's problem to begin with," Foster said. "You don't want to be buying a lot of power traded on the spot market. What we really need is a portfolio of contracts that range from one to seven years and that take out the volatility from a large percentage of the market."

Davis advisors stressed that most of the contracted power also is linked to development of new California generating plants, a key part of the governor's drive to free the state from reliance on out-of-state power trading companies.

About 60% to 70% of all the power that will be purchased in future years under the contracts will be from new plants. The agreements, Freeman said, helped developers obtain bank financing for their proposed plants.

By nurturing new plants, the state is signaling energy companies that "this gravy train of high [prices] is not going to last forever," said Vikram Budhraja, California's lead consultant in the bargaining.

But as analysts pored over the details, some challenged the governor's basic premise that the long-term deals were largely responsible for recent falling prices. They attribute the softening market to a host of other factors, including cooler weather, falling natural gas prices and more plants completing spring maintenance.

In fact, some scholars say that the current prices simply prove that the state committed to paying the power companies too much for too long.

"The governor's spin doctors claim that not entering into the contracts would have been gambling," said UC Irvine economist Peter Navarro. He said that in the years ahead, odds are are heavily against the contracts being a bargain. "That makes those contracts a long shot," he said, "which is gambling in the worst sense of the word."

Analyst Sees Too Much Uncertainty in Contracts

Reviewing contracts Friday, energy economist Robert Michaels of Cal State Fullerton said he was also troubled by the financial risks the state appears to be assuming in some contracts for power plant pollution control expenses. In some cases, he said, the state could be charged for costly emission control upgrades.

"There's such uncertainty about what future state policy is going to be in terms of cost of permits, retrofit requirements and new technology," said Michaels, who reviewed the contracts at The Times' request. "I am not familiar with any power contracts where I've seen that. It strikes me as unusual."

Assemblyman Tony Strickland (R-Thousand Oaks), who independently sued Davis to reveal the power contracts, said the public would not have been able to weigh such trade-offs if the governor had continued the secrecy.

Davis relented Tuesday, a day before a San Diego Superior Court judge was to hear the public records challenge.

Some complained the administration is still withholding key information. Attorneys for the news organizations who sued the administration will return to court later this month to argue for release of the redacted material.

The released contracts blacked out the indexes used to set natural gas prices, the amount of natural gas needed to fire specific generators and which pipelines are being used to ship the gas. That's important because gas shipped into Southern California is more costly than gas shipped into Northern California.

Additionally, the state is withholding information on whether the state or the generators should pay when there are breakdowns or congestion on the transmission system, resulting in a failure to deliver power.

Documents' Release Doesn't Stop Dispute

Experts said transmission-related provisions can be crucial to such contracts final costs.

In arguing for continuing confidentiality, Davis maintained that the disclosure of detailed contract information would undercut the state's negotiators by tipping off competing generators. On Friday, however, some critics attributed to the move to politics.

"If they were great contracts, they would have been released months ago," said Navarro of UC Irvine.

But Davis' defenders, including Assemblyman Roderick Wright (D-Los Angeles), chairman of the Utilities and Commerce Committee, said the contracts accomplished exactly what they were intended to do: stabilize the price and supply of electricity.

"If all of a sudden you dump all these contracts, and all this power went back into the spot market, guess what? We'd be in the same damn position we were in last year."