Calpine Profits from CA Turmoil in Electricity Markets

San Jose, CA-based Calpine Corp. last week unabashedly touted its successes in the past 15 months of turmoil in California's energy markets, noting it is a litmus test for the soundness of its corporate strategy nationally. Senior officials with the merchant power plant developer/operator also declared that the state in which it sees "tremendous opportunity" is no longer in a crisis mode.

Calpine confirmed it is on track to have 12,000 MW operating in the state by the end of 2005, most of those supplies already sold in forward contracts that cover up to 45% in '04 and '05, and closer to 90% now. The overall portfolio in California alone represents about $16 billion in revenues over the next five years, according to Calpine, which holds several 10-year deals with California's Department of Water Resources (DWR) for baseload and peaking supplies.

Unlike other state long-term contracts, Calpine officials said its DWR contracts are not open to renegotiations, and it does not think the state has any interest in trying to change that.

With much of its natural gas supplies locked in through its own sources and longer-term contracts, Calpine has an average spark spread of $26.50 for its California plants.

"For the past 15 months this (California) has been a very tumultuous market, but it has been one that has helped validate Calpine's overall corporate strategy," said Peter Cartwright, Calpine's founder/CEO. By the start of next year, he anticipates demand and wholesale power prices to reverse their current downward trend and head back up.

Regardless of the outcome in current efforts to rescue Southern California Edison Co. from being taken into bankruptcy, Calpine will not be impacted, according to Jim Macias, Calpine senior vice president for power and industrial marketing, noting it has no money owed to it by Edison. And for Pacific Gas and Electric Co., which is already in Chapter 11 bankruptcy court proceedings, Calpine has an agreement to get all of its $267 million for qualifying facility (QF) bills at the time the PG&E utility's reorganization plan is approved by the federal court.

In addition, Calpine has what Macias calls "attractive fixed-price terms" for its QF contracts with PG&E over the next five years.

"So we're emerging from this crisis with virtually no lingering issues," said Macias, noting that Calpine has very little exposure for the prospective federally ordered generator refunds later in the year and very small unpaid bills from the state transmission grid operator, Cal-ISO. "We have no involvement in any of the dozens of investigations or civil litigations under way. This means not only that we have no risk exposure, but also that our management can concentrate on growing future opportunities."

A key to Calpine's success so far, Macias said, was its timing of locking in up to 90% of its production in California for the next two years at the higher prices that existed earlier this year and late in 2000.

"The California crisis -- although not desired -- has been a tremendous opportunity for us to advance our business plan for repowering America," said Macias, who said the price-supply crunch has allowed the company to "stand up and show what we stand for." And, he added, political, regulatory, environmental and consumer leaders have all praised his company for its efforts.

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