Posted on 09/09/2001 10:54:05 AM PDT by runningbear
Published Sunday, Sept. 9, 2001, in the San Jose Mercury News
Power deals under fire State bought too much power when prices were high, instead of waiting for prices to drop, some analysts say.
BY ERIC NALDER, BRANDON BAILEY AND CHRIS O'BRIEN Mercury News
While state officials were committing California consumers to pay $43 billion for electricity in contracts negotiated last winter and spring, energy consultants up and down the West Coast were forecasting a dramatic drop in prices as early as next year.
But advisers to Gov. Gray Davis, relying on their own estimates, negotiated contracts at prices that ranged as much as 2 1/2 times higher than what some independent forecasters predicted energy would cost.
Several analysts contacted by the Mercury News said the state Department of Water Resources bought too much power when prices were high, instead of waiting to negotiate after prices declined.
Despite continued questions over the state's energy spending, the California Public Utilities Commission appears poised this week to ratify an agreement that would drastically reduce its power to scrutinize energy contracts and protect consumers from excessive rates.
Cheaper prices
And although experts say computer-driven forecasts can be unreliable, at least one independent electricity-price forecast appears on the mark so far.
The forecast, prepared last winter for the governors of Washington, Oregon, Idaho and Montana, found that average power prices at peak demand times in 2003 would be about $36 a megawatt hour.
Officials at one Western utility, Portland General Electric, said Friday they are seeing power offered for about $38 a megawatt hour for delivery during peak hours in 2003.
Under its long-term contracts, California will pay an average of $81.25.
The average cost of the state's contracts will be $70 a megawatt hour over the next 10 years, according to state officials, who defend the deals by noting that spot market prices were averaging more than $300 a megawatt hour when they started negotiating last winter.
``Those long-term contracts are the foundation of a whole set of programs that are bringing those prices down,'' said S. David Freeman, the state's senior negotiator.
At least one expert agrees. The contracts succeeded in breaking the suppliers' market power -- their ability to charge as much as they wanted on the spot market -- by securing much of the available supply at a fixed price, said economist Severin Borenstein at the University of California Energy Institute.
But while the contracts may have helped, prices were already expected to go down for other reasons, including a decline in natural gas costs and increased output from new generating plants, said Jeff King, the forecaster for the Northwest Power Planning Council who did the forecast for the four governors.
Three other independent consultants told the Mercury News they also predicted much lower prices while the state was negotiating.
California had its own forecasting firm, Navigant Consulting. Its projections showed prices dropping off in future years, but not as steeply as other forecasters.
Was California like an unlucky stock investor, betting on a bull market when savvier folks on the sidelines knew a bear market was coming?
Richard Lauckhart, director of regional market analysis for a consulting and forecasting firm in Sacramento, thinks so. He believes the state used high gas price estimates.
``They are way off,'' agreed Rajat Deb, another energy consultant and forecaster based in Los Altos.
Many experts are cautious about price forecasts, even those that use sophisticated computer programs to account for such variables as fuel costs, weather and consumer demand. Just a few years ago, some analysts predicted electricity would sell for $20 to $30 a megawatt hour for the foreseeable future.
And some say that even if the forecasts prove true, the state had no choice but to take whatever deals it could get earlier this year.
At the time, California's utilities were teetering on the brink of insolvency. Federal regulators were refusing to offer much help. And some analysts were predicting hundreds of hours of rolling blackouts this summer.
``The state obviously was in a bind,'' said Robert Michaels, an economist who studies energy markets at California State University-Fullerton.
California officials were operating under extraordinary circumstances, with virtually no legislative or regulatory oversight. And today, critics are concerned that the PUC is preparing to abandon its traditional role of reviewing energy costs and deciding how much consumers should pay.
As spot market prices have fallen, a number of critics -- including consumer advocates, GOP lawmakers and Democratic state Controller Kathleen Connell -- complained that negotiators agreed to pay too much.
But if the utilities commission adopts a proposed agreement with the Department of Water Resources, it will be obliged to endorse whatever consumer rates the department says are needed to cover the state's spending.
Commissioners say they have little choice, since the agreement is required under emergency legislation that put the state in the energy business last January.
Davis aides say they need the agreement to reassure Wall Street that the PUC won't interfere with the department's ability to repay $12.5 billion in bonds that will be used for energy purchases.
Among those calling for more scrutiny of the contracts is Randy Wu, an attorney for the Utility Reform Network, a San Francisco-based watchdog group. He said the contract prices are ``higher than anyone would have reasonably expected power prices to be over the long term.''
`They panicked'
Several experts said the state locked up more power than it needed to and thus foreclosed the opportunity to take advantage of declining spot market prices.
``They've bought an awful lot of power . . . and it's expensive,'' said Barbara Barkovich, an energy consultant to large industrial consumers.
To get reasonably priced power for the next two years, she said, ``you can infer from the contracts that they had to agree to buy power out for eight or 10 years'' at above-market rates.
Even a spokesman for power suppliers said the state may have bought too much at the wrong time.
Gary Ackerman of the Western Power Trading Forum said he wouldn't call the prices excessive. Still, he said, ``California bought at the top of the market. They felt they had to buy and pay that price. But they should not have bought 100 percent of their requirement in that short time period.''
``They panicked,'' he said.
At the Northwest Power Planning Council, King said his computer told him in January and February that prices would average less than $39 a megawatt hour next year and won't rise much higher.
Contracts defended
In California, Davis' consultants were starting to commit the state to buy power for an average of $91.25 a megawatt hour next year, more than twice King's prediction.
King was reluctant to publish his results because prices were so high at the time -- ranging to more than $300 -- and everyone was betting on a tough summer. He reported them informally to his bosses.
By March, other forecasters in California were spotting the downward trend. Deb predicted prices of $45 to $62 for the next 10 years. Lauckhart's firm, Henwood Energy Services, predicted prices ranging from $75 next year down to $39.50 in following years.
In May, Henwood was rebuffed when it tried to sell its predictions to the state. It did sell them to power suppliers.
A spokesman for Navigant, the state's consultant, defended his firm's work.
California had to act quickly to build a power portfolio where none had existed, said Robert Yardley, Jr. The contracts are complicated and involve a range of variables: Some provide lower prices if gas costs go down. Others are more expensive because they provide power only at times of peak demand.
``You don't want to just look at the price, although the price is a good starting point,'' he said.
Borenstein agreed.
``I think they're going to turn out to be high, but that alone doesn't bother me,'' he said. ``When you sign long-term contracts, you're buying an insurance policy. You're locking in a price over time to avoid the risk that you might get stuck with higher prices.''
But Bill Marcus, a Sacramento economist who advises consumer groups, said the state went overboard.
``I can see trying to dig yourself out of a hole for this summer and next summer,'' he said.
``We needed to do what they were doing. But we needed to stop quite a bit earlier.''
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Contact Eric Nalder at enalder@sjmercury.com or (206) 729-5161.
California officials were operating under extraordinary circumstances, with virtually no legislative or regulatory oversight. And today, critics are concerned that the PUC is preparing to abandon its traditional role of reviewing energy costs and deciding how much consumers should pay.
I want to know, how come PG&E went into bankrutpcy proceedings and the State did nothing to bail them out, and now the State Legislatures are bending over backwards to 'bail out' SoCal Edison? Just goes to show the people and the PSA from PG&E that the people of California, especially Northern are going to pay pay pay all the way to the legislature's pockets..... I think we really need a rally at the West Steps of the Capitol!
I would rather see you burn down everything behind the steps of the Capitol and start over from the TOP.
There will be more good articles like this I suspect.
Looking at a couple in the commentary of the Orange County Register today!
Tony Parsneau, Fresno
(Published Sunday, September, 9, 2001) email this article print this article subscribe to the daily bulletin subscribe to the print edition
I was just informed by my wife that the Pacific Gas & Electric bill for last month was $504. We have cut back on electricity to the point that we are sweating in our home, only watch TV for one hour per night and sit around in the dark. Our PG&E bill is so high that we can barely meet our monthly expenses. (I am a PG&E employee and receive a discount on my bill, so I can only imagine what everyone else is going through.)
We are a single-income family because my wife was disabled two years ago. She is still fighting for Social Security disability and to date has received nothing. I make too much money to qualify for any assistance program, so I just have to bite the bullet.
Part of my PG&E bill was the "surcharge." In fact, $129 of it was "surcharge." This is all political nonsense that Gov. Gray Davis and his buddies in the Public Utilities Commission are going to have to answer for in the ensuing months.
Even the employees are getting screwed!
It is very good regarding Davis and California!
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