California officials announced Friday the state has reworked a relatively small 50 MW, $209 million power deal with Morgan Stanley that reduces its volumes and price, along with various terms, equating to a $41 million savings to the state and an option to purchase future natural gas tied to the electricity contract at indexed prices.

A senior energy advisor to the state’s governor said California has now reworked 33 of its 56 original long-term power deals for an estimated direct savings of $6.3 billion and an indirect benefit of another $2 billion tied to more favorable structuring of the deals to mitigate against market manipulation.

The original deal with Morgan Stanley called for 50 MW over five years at an average price of $95/MWh, according to the governor’s senior legal affairs deputy David Bowles, who led the state’s negotiations on the deal. The new contract dropped to 40 MW at a still-to-be-finalized price of about $81/MWh, and the volumes drop further to 35 MW on Jan. 1, 2004. The five-year deal has about 2-1/2 years still to run, ending at the end of 2005.

An added feature of this reworked contract is that the state’s Department of Water Resources (DWR) also has an option on up to 30 MMcf/d of natural gas at an indexed Southern California border price.

Given federal regulators’ reluctance to order the renegotiation of the contracts, Richard Katz, a former state lawmaker and now senior energy adviser to the governor, said the state has been able to get the gas option and shave about 20% off the contract costs. He said the options on the gas volumes represent enough fuel to produce 216 MW from a combined-cycle plant for 16 hours daily over three years.

“This underscores the willingness of the state and the generators to sit down and take a look at these contracts and renegotiate,” said Katz, who noted that the state has 13 contracts valued collectively at $9 billion with six different suppliers that are still being worked on. He and other officials refused to give any details on those renegotiation efforts, which include a major deal with San Diego-based Sempra Energy worth about $6.6 billion for up to 1,900 MW over ten years. Of the original 56 deals, nine have expired and one was terminated, Katz said.

In response to a question on a conference call about the use of indexed gas prices on the natural gas option part of the reworked deal, Erik Saltmarsh, general counsel for the California Electricity Oversight Board, said that in light of allegations that arose in various forums about attempts to manipulate national energy price indices, the state is “doing things to try to ensure that pricing going forward is vastly more transparent and vastly less subject to manipulation than has been the case.”

Saltmarsh added that it was “an area of concern” for California officials, but “in reality, unless we were to lock-in a price, the other alternative is to have a firm availability of gas with a price that floats as an index, and in order to do that you have [to] necessarily rely on some kind of index. And it has nothing to do with Morgan Stanley, but we are separately going to be continuing our actions to ensure that there can’t any longer be any wash trading in gas or falsifying of gas prices to various indices.

“We think that has been a problem. We think it is somewhat less of a problem now. FERC has taken some actions, and we’re going to try to get them to take more.”

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