Seeking to put a positive spin on the state’s first foray intolong-term bulk electricity contracts, Gov. Gray Davis Tuesdayannounced that the state has reached agreement for the commercialterms on an unspecified number of contracts between the state waterresources department and bulk power suppliers, with volumes phasingupward from 500 to 5,000 MW over several years.

New bids from a subsequent state auction were due in by 5 p.m.Tuesday, and San Diego Gas and Electric Co. separately announced ithad struck a deal with the state department for some of its futureelectricity supplies. Specific terms of the still-to-be-signedstate long-term supplies were not divulged.

“I am very satisfied that this first round of proposals has metour expectations,” said David Freeman, the on-loan head of the LosAngeles Department of Water and Power (LADWP) who was tapped lastmonth as a special advisor to negotiate the contracts. “These powerpurchases are a critical first step as we begin to build a balancedportfolio of contracts.”

“Our negotiating team has reached agreement with generators onthe basic commercial terms of price, quantity, and term for powercontracts totaling about 5,000 MW, terms ranging from three to 10years,” Freeman said. He said there are nonprice issues remainingthat require more time to finalize the contracts.

At the same time the governor made his formal announcement,Sempra Energy’s SDG&E utility issued a statement that it hassigned a deal with the state that the utility claims “should reducecustomer costs over time and also limit the growth of the utility’sbalancing account for under-collected wholesale power costs,”something that has driven California two other major private sectorutilities to near insolvency.

Under SDG&E’s agreement with state water resources, the utilitywill draw its supplies first from its 20% interest in the San OnofreNuclear Generating Plant, majority owned and operated by SouthernCalifornia Edison, and next from its purchase powercontracts. SDG&E’s contract with the state was made possible by anew state law (AB 1X) passed just last Thursday on an emergency basis(see Daily GPI, Feb. 2).

While still under the pall of a Stage Three power alert for the22nd consecutive day Tuesday, California energy officials and thegovernor were not concerned about the expiration at midnight of thefederal emergency order mandating western suppliers sell to theCalifornia market. A White House spokesman, Ari Fleischer, confirmedthat the Bush Administration would not extend the order any further,presumably for electricity or natural gas supplies. Unlike the stateofficials’ attitude toward power supplies, Pacific Gas and Electricwas expressing concerns on the impact on gas supplies from theexpiration of the emergency order (See related story).

Major merchant generators, while acknowledging theirparticipation in the long-term contracts bidding, separately onTuesday expressed continuing concerns about being able to continueserving the California market without more credit assurance. Thisprompted a spokesperson in the governor’s press office to expresssurprise and concern that the generators at this stage — giventhe recent state moves — would have any reluctance to sell intothe state.

The generators drew short of saying they would pull backsupplies after midnight when the federal emergency order expires,but their spokespeople expressed continuing doubts about whetherthey were going to get paid.

“Our intent is to continue to sell into the California market,and the bottom line is that we need adequate credit assurances inany transaction and our intent is to get those credit assurances,”said a Duke spokesperson, Jeremy Dreier. “We intend to entercontracts with credit-worthy parties, and we have a fiduciaryresponsibility to our shareholders to do nothing less, andparticularly in light of the fact that we are running our plantsflat out.”Drieier said one Duke generating unit scheduled forroutine maintenance presently is still operating fully at therequest of the state transmission grid operator, the Cal-ISO. Othermerchant generators are placing their focus on the state waterresources department, saying they are seeking credit assurancesfrom the agency that it will back its future power purchases.

In a separate action Tuesday, one of California’s statelegislative leaders, Sen. John Burton, introduced legislation thatwould have the state take over the private sector utilities’transmission system in exchange for the PG&E and Edison gettingstate-backed bonds to pay off their collective,multi-billion-dollar debt.

In addition to the long-term power supplies, which cover aboutone-third of the private sector utilities’ current supplies, Davissaid that a state negotiating team is close to working out anagreement between the two near-bankrupt utilities and variousqualifying facility contracts with cogenerators, who make uproughly 30 % of the supplies and include substantial renewableenergy providers using wind, solar, biomass, geothermal and othersources and who have not been getting paid.

Davis said he hopes to have an agreement to announce by the endof this week, and in any event, most of the key bailout work needsto be completed by the Feb. 12 court date in a suit brought bySoCal Edison against the state regulatory commission to force it toprovide the increased rate coverage needed to cover the currentwholesale market prices. In addition, Edison said in a SEC filingMonday that its bank creditors have agreed to hold off collectionprocesses until Feb. 13.

In exchange for a “cash infusion to the utilities to make themviable” from the state, the utilities should give something ofcommensurate value to the state, the governor said.

“I’ve expressed my preference before that it be in the form ofstock options or warrants,” said Davis. “It could come in the formof tangible assets. It could be some combination of both. Whatmatters is that the value assigned to the assets or financialbenefits the state takes are of comparable value to the cash theutilities have been provided. And we want a third party to make avaluation that there is, in fact, comparability. What we’re doingnow is negotiating out exactly what concessions utilities willmake, and in what form they will come.”

Under questioning from media again this week, Davis has said hehopes to pull off the stabilization of California’s electricityindustry without additional retail utility rate increases.

“That will take good, sharp bargaining in terms of our long-termcontracting and making a good arrangement with the utilities, whichI believe we’re well on our way to doing.”

In addition to the emergency legislation still expected thisweek to deal with the utility bailout and perhaps the developmentof a state power authority, the California Assembly’s leaderannounced that beginning today energy oversight hearings will begin”to sift through the facts, determine how (the state) got in thispredicament and assist with compiling the information we need tomake sure that Californians do not find themselves in thissituation again,” said Darrell Steinberg, chairman of the energyoversight subcommittee.

Monday, Edison and Pacific Gas and Electric were taking steps toshore up their finances. Edison, in particular, removed two largeparcels of land suitable for new power plants from the sales block.Although an Edison official said “everything was potentially inplay,” none of the property — including 307 acres of coastal landin Ventura County between existing power plants sold to merchantoperators and 1,700 acres of high desert land near the town ofBarstow — was close to being sold.

On the regulatory front, Edison, PG&E’s utility andSDG&E began an accelerated process, using workshops, to pindown the details of how they will interface with the state waterresources department under the department’s new authority topurchase long-term power supplies and sell them to retail customersand municipals. The latter would be restricted to those who don’tsell power in excess of their own needs, which prevents the largestof them, LADWP, from buying any of the supply.

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