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Industry News

California Paid Too Much for Long-term Power

LCG, Sept. 10, 2001--The long-term fix worked out by California Gov. Gray Davis and his consultants for the state's short-term power crisis will cost electricity consumers dearly for years to come, according to a report in yesterday's San Jose Mercury-News.

The California Department of Water Resources, negotiating long-term contracts with independent power producers on behalf of the state's cash-strapped electric utilities, committed the state's consumers to pay $43 billion for electricity that could have been had for less than half the price, the paper said.

"Advisers to (Davis), relying on their own estimates, negotiated contracts at prices that ranged as much as 2 times higher than what some independent forecasters predicted energy would cost," the Mercury-News story said.

In 2003, for example, California will pay an average of $81.25 per megawatt-hour for electricity purchased by the water agency under contracts negotiated at a time when a forecast prepared for the governors of Washington, Oregon, Idaho and Montana predicted that power during peak demand in 2003 would cost about $36 per megawatt-hour.

It turns out that the forecast prepared by the Northwest Power Planning Council was right on the money, with Portland General Electric Co. reporting last week that power was being offered at $38 per megawatt-hour for delivery during peak demand periods for 2003.

The state relied on estimates from Navigant Consulting, a provider of consulting services to electric and gas utilities that lost $7.9 million on revenues of $120.3 million during the first six months of 2001. The Mercury-News talked to some other consultants, including Dr. Rajat K. Deb, who is publisher of EnergyOnline Daily News.

Of the forecasts relied on by the state, Deb said simply "They are way off."

Richard Lauckhart, director of regional market analysis for Sacramento consulting and forecasting firm Henwood Energy Services, said he thinks the state relied on overly high estimates for the price of natural gas, which is used to fuel almost all of the state's conventional power plants.

Barbara Barkovich, an energy consultant to large industrial concerns, believes the high prices could be around for a decade. "You can infer from the contracts that they had to agree to buy power out for eight or 10 years," she said. "They've bought an awful lot of power and it's expensive."

Jeff King, the forecaster for the Northwest Power Planning Council, said that early this year, while the power contracts were being negotiated, prices were expected to drop for a number of reasons, including a decline in natural gas prices and increased power supply as new plants were commissioned. He said his computer models told him in January and February that prices would average less than $39 per megawatt-hour and wouldn't rise much higher.

In fairness to Navigant and the California Department of Water Resources, it should be noted that the state was suffering rolling blackouts well into May of this year and electricity was selling for an average of more than $300 per megawatt-hour on the open market as the contracts were being negotiated.

The cost of the power under contracts arranged by the water agency will average around $91.25 per megawatt-hour next year, and then drop off to about $70. But as early as March, Deb was predicting prices of $62, dropping to $45 over the next 10 years and Lauckhart's company forecast prices of $75 next year, dropping thereafter to $39.50.

Navigant's Robert Yardley Jr. pointed out that the state had to act quickly to build a power portfolio where none had existed, and said the contracts are not as simple as they are sometimes made to seem. Some provide lower prices if natural gas prices decline, he said, and others are at high prices because they are for delivery only during hours of peak demand.

Severin Borenstein, an economist with the University of California Energy Institute, pointed out that the contracts were an "insurance policy." "You're locking in a price over time to avoid the risk that you might get stuck with higher prices," he told the Mercury-News.

But Gary Ackerman, spokesman for the Western Power Trading Forum, a group that represents the power producers, 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 period."

Bill Marcus, a Sacramento economist who advises consumer groups, agreed. "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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