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As Cash Flows, Davis Sets Up Power Pacts

Energy: Governor and suppliers agree on contracts. But state is rapidly running through money authorized for electricity purchases.


SACRAMENTO — With the state spending at a clip of more than $1 billion a month to buy power, Gov. Gray Davis on Tuesday struck the first long-term contracts aimed at cutting power costs and stopping the hemorrhaging of the state treasury.

The contracts were announced hours before the midnight expiration of a federal order requiring electricity and natural gas suppliers to sell power to the state. Also Tuesday, a federal judge issued a temporary order requiring Houston's Reliant Energy Services to continue selling electricity to California.

Davis called the long-term contracts "a critical first step" in California's digging its way out of the energy deficit. Combined, the deals will amount over time to 5,000 megawatts--enough to power about 5 million homes--and are divided among three- to 10-year contracts.

The initial supply of power in the contracts announced Tuesday is far less. At least some companies entering into the long-term deals are constructing power plants. Those facilities will not be completed for months or years.

"Initial deliveries under these contracts are approximately 500 megawatts building to approximately 5,000 megawatts over the next couple of years," Davis said in a joint statement with his chief negotiator, S. David Freeman.

The administration did not disclose significant aspects of the deals reached Tuesday, including the names of the sellers and prices of the power.

Nor did the administration reveal the amount of power that will be available this summer, when demand traditionally is high and experts have warned that there will be blackouts.

One of the companies that reached a deal was Calpine Energy of San Jose, according to a source who spoke on condition of anonymity. The firm was offering to supply up to 1,000 megawatts over 10 years. However, none of that power would be available until the end of the year, the source said.

Freeman, on leave as general manager of the Los Angeles Department of Water and Power, said in the statement that he is "unable to discuss specifics of the contracts, because we are still in the negotiating process, and it is not in the interest of the people of California to discuss prices or terms."

State Has Spent $750 Million So Far

Davis said he hopes to lock up 10,000 to 12,000 megawatts by the time he completes the bidding process. The state called for a second round of sealed bids for long-term power contracts in an auction that ended Tuesday evening. Details were not available.

Altogether, California has spent at least $750 million in general taxpayer money on power purchases since it made its first foray into the electricity business two months ago.

The state stepped in after Southern California Edison and Pacific Gas & Electric ran up billions of dollars in debt--and said they were on the verge of bankruptcy--buying power they could no longer afford on the volatile spot markets.

Only five days after California lawmakers allocated $500 million to finance the state's entry into the long-term power business, the Davis administration sent lawmakers a letter Monday saying it is exhausting the fund, and will need an additional $500 million by Feb. 15.

"We're just burning through money," said state Sen. Ross Johnson (R-Irvine), one of the more pointed critics of the power-purchasing plan signed into law Thursday. "Clearly, the prices we are paying on the spot market are enormous."

California's power purchases have helped avert blackouts. But at the same time, the unprecedented decision by Davis and the Legislature to buy electricity on a large scale threatens to drain what had been a budget surplus estimated to be $8 billion.

For now, the money is coming from the budget's general fund--estimated at about $80 billion--which gets revenue from income and sales taxes. Under the bill approved last week, the state ultimately plans to finance its power purchases by selling up to $10 billion in bonds to investors.

The legislation says the proceeds from the first bond sales will be used to repay the general fund. However, state Treasurer Phil Angelides says the bonds probably won't be ready to go to market before May--raising the possibility that there will be a multibillion-dollar drain on the general fund.

The drain threatens to abruptly halt spending initiatives and tax cuts contemplated by Davis and legislators. The governor, for example, has proposed lengthening the middle school year by several weeks. Democratic lawmakers are hoping for a major expansion of health care for poor people. Republicans are calling for $3.2 billion in tax cuts.

"It devastates them," Senate President Pro Tem John Burton (D-San Francisco) said of such plans. "I don't want to think of it."

Davis spokesman Roger Salazar said that as the state enters into long-term contracts for power purchases, the price and supply of electricity will become more stable.

"It is our hope that this $500 million will stretch much further than the previous money," Salazar said.

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