In an extensive review of the power portfolio purchased by the California Department of Water Resources (DWR), the state’s Bureau of State Audits found that many of the contracts purchased have to be paid for whether or not they are needed, and based on current forecasts, from the fourth quarter of 2003 through the first quarter of 2005, “the department has procured more power than consumers in Southern California need.”

The BSA’s 263-page report on California’s energy markets, which was released Thursday, concludes that even though the state’s energy crisis has passed, “there remain significant cost risks to manage.” DWR spent $10.7 billion from January through September 2001 on behalf of the investor-owned utilities, procuring 57 long-term power contracts worth $42.6 billion over a 10-year period to cover future power purchases. However, said State Auditor Elaine M. Howle, the contract portfolio “assembled in a time of crisis contains significant long-term costs that need to be closely managed.”

The report found DWR’s portfolio “leaves the department exposed to substantial market risk in high peak-demand period if supply shortages occur and to substantial market risk with surplus contract amounts in other hours of the year. The terms and conditions of the long-term contracts are also problematic because the majority of the contracts may not ensure a reliable source of power in times of tight supply and high prices, and may not ensure that sellers follow through with the construction of proposed power plants.”

Howle noted that the contracts “convey lucrative financial terms upon suppliers as a means to ensure they deliver power.” Under most of the contracts, the audit found that DWR “cannot terminate the contract or assess penalties even if the generators repeatedly or deliberately fail to deliver power at times when the state is in dire need of it.” The audit also discovered that DWR “lacks the necessary infrastructure and staff to manage properly its energy purchases in the short-term market.”

Among the recommendations of the BSA, Howle said the state legislature and the governor “need to make many decisions about the state’s future role in the power market.” The decisions include “whether the department will continue to buy energy on behalf of the investor-owned utilities; how the market should be managed; and legal risks to the long-term contracts.” The audit also recommended operational improvements to improve DWR’s management of the power purchasing program.

BSA also recommended that within 90 days, DWR should conduct an in depth economic assessment of its contracts and overall supply portfolio in conjunction with a legal review. Also, the assessment should “focus on how the contracts fit into the overall portfolio and on the costs relative to current expectations of market conditions.” BSA also recommended DWR develop a contract renegotiation strategy that “centers on improving the reliability and the overall balance and performance of the portfolio.”

The entire report is available on BSA’s web site at www.bsa.ca.gov.

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