Assemblymember Lloyd Levine Discusses Water Resources' Recently Renegotiated Power Contracts

SACRAMENTO – Prior to an informational hearing of the Assembly’s Utilities and Commerce Committee, Assemblymember Lloyd Levine (D-Van Nuys), along with representatives from The Utility Reform Network (TURN) and California utilities, today discussed the ramifications of the Department of Water Resources’ (DWR) recent action to replace a power purchase agreement with Calpine Corporation for 1,000 megawatts of firm load with a contract for 180 megawatts of peak power.

“During the height of the energy crisis, DWR was forced to buy power on behalf of California’s investor owned utilities because the insolvent and bankrupt utilities lacked the credit ratings they needed to sign new power purchase agreements,” said Assemblymember Levine, the Chair of the Assembly’s Utilities and Commerce Committee. “Today’s hearing will delve into how DWR proposes to make up for the lost power from the Calpine renegotiation, and whether or not California ratepayers can expect to see an increase in their utility bills due to these renegotiated contracts.”

In 2001, DWR signed over 56 long term contracts for electricity on behalf of the state’s investor owned utilities. While these contracts were necessary at the time to get electricity prices under control, DWR was roundly criticized for signing them with no input from the utilities or consumer groups. Many of the contracts were set at prices that most experts agreed were above market prices.

In response to public criticism, DWR was able to renegotiate many of these contracts. Most of the renegotiations occurred as part of a global settlement agreement where the State of California agreed to drop lawsuits against the parties to the contracts in exchange for new terms. A report by the State Auditor concurred that the renegotiated contracts addressed many of the problems caused by the original contracts.

Today, thanks to the renegotiations and the natural expiration of some of contracts DWR has reduced the number of contracts to 26. These current agreements represent 20 percent of total electricity supplied in California; 26% of PG&E’s load; 28% of Southern California Edison’s; and 28% of SDG&E’s.

One of these contracts is referred to as “Calpine 2.” This contract requires Calpine to deliver 1,000 megawatts of electricity to California 24 hours a day, 7 days a week for a fixed price of 5.9 cents per kilowatt hour. Given the fact that PG&E or any other utility would have to pay 6.8 cents per kilowatt hour on the futures market today, the Calpine contract is a good deal for California ratepayers, saving them $158 million over two years. 

The Calpine 2 contract was so beneficial to ratepayers that DWR fought efforts by Calpine to void the contract in bankruptcy court. Those filings noted that the old contract would have required Calpine to sell 1,000 megawatts of power at prices that are below market costs for electricity in 2008 and 2009 and that the contract was needed for system reliability this summer and next summer.

After DWR was successful at preventing Calpine from voiding this contract in court, they almost immediately turned around and asked Calpine to renegotiate the contract. The contract went from a contract for 1,000 megawatts of firm power to a contract for 180 megawatts of capacity. The electricity from the original contract was allocated to PG&E, so now PG&E is forced to scramble to purchase at least 820 megawatts of new electricity to replace what was lost in the old contract.

“This all seems like an unsettling repeat of the 2001 DWR contract debacle, when DWR acted hastily with minimal outside counsel in signing the original electricity contracts that turned out to be bad deals for ratepayers,” Levine said. “Today, DWR is again acting with no outside input, or ignoring the input they have been given, to renegotiate contracts that do not fit the utilities’ needs and could result in higher rates for all ratepayers.

DWR officials have stated they intend to get out of the power business by the end of this year. This means terminating or assigning to the utilities 26 contracts worth close to 10,000 megawatts of electricity that serve over 20% of the state’s power needs. If DWR left all the contracts in place they would all steadily and predictably expire on their own terms in the next two to four years.