California Hammers Out a Deal with QFs

California officials last week announced a deal with its small qualifying facility (QF) generators and progress in creating what its governor is calling a "pincer movement" between Sacramento and Washington, D.C., to force lower wholesale prices. Gray Davis was ebullient in claiming a "day of accounting" is coming for merchant generators in which they either take heavy discounts on monies owed them, or substantial decreases (federal price caps) in power prices going forward.

Davis said a deal hammered out with the QFs ultimately will save the state about $100 million annually in power costs and will add several hundred megawatts of supply this summer in California, where rolling blackouts are expected to resume when the now cooler-than-normal weather turns hot.

Representing about 30% of the state's power used daily, the QFs have agreed to a five-year deal with Southern California Edison Co. tied to the governor's proposed MOU or its replacement, locking in a natural gas price of $5.37/MMBtu and effectively dropping all legal and regulatory actions brought by the QFs or the utility. The deal, at this point, does not include Pacific Gas and Electric Co., which is in the midst of Chapter 11 bankruptcy proceedings in federal court in San Francisco.

With the California Public Utilities Commission in a special meeting voting to approve it, the QF deal, involving both renewables and gas-fired cogenerators under contract to Edison, will bring back 115 of the 150 MW still being withheld in the current state power market, and later in the summer will add an additional 100 to 300 MW from the QFs under provisions that will allow some of them to bump up their capacities.

About 150 renewables will get 10% of their past-due bills paid by Edison, and a moratorium on all of the legal and regulatory actions initiated by the parties will go into effect. "That was a major step in order to get Edison back on its feet," said Richard Katz, a former state legislative leader who Davis had help broker the QF agreement. For the natural gas-fired generators there are potential escalators and de-escalators to the $5.37/MMBtu fixed price.

Davis repeated his claim that the prices in the state's power spot market are "coming down because we locked in long-term contracts. This is Economics 101. We have shrunk the (spot) market." He acknowledged, however, that he expects spot market prices (for both gas and electricity) to be driven up by hotter weather in July and August.

"I believe the state has done a wonderful job--David Freeman in particular--in securing long-term reliable power," Davis said.

"Overall, you see a positive trend as our plan is beginning to take hold, and in Washington, DC, we have investigations of the market manipulation practices of El Paso Natural Gas, and I think that is influencing the price of gas which has come down dramatically, and we have hearings before the Senate and talk of price cap legislation in both the House and the Senate," Davis said. "In effect, we have a pincher movement between Sacramento and Washington effectively telling the energy gougers they are charging too much. The days of figuratively raping and pillaging California are over."

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