What remains of national independent power plant operator Calpine Corp.’s sinking ship was battered on both coasts Monday, prompting a California-based business columnist familiar with the once-high-flying Silicon Valley-based company to write its business epitaph. Calpine had no immediate reaction to the latest turn of events in the company’s continuing financial struggles; a spokesperson reiterated that no bankruptcy filing had been made yet by the company.

After an adverse Delaware Supreme Court ruling late last Friday upholding a lower court order against Calpine, the company was hit with a petition Monday by California’s super-aggressive Attorney General Bill Lockyer, whose office petitioned the Federal Energy Regulatory Commission to compel Calpine to continue to fulfill one of its long-term electricity supply contracts with the state’s Department of Water Resources (DWR) calling for 1,000 MW through 2009 at a fixed price of $59.60/MWh. Under the contract, Calpine must provide 1,000 MW of electricity to the Pacific Gas & Electric (PG&E) service territory, 24 hours a day, seven days a week, through 2009.

Ironically, one of Calpine’s recent problems is that because of its compromised credit and other market factors, it cannot sign any long-term contracts for the majority of the output from its fleet of plants in California, which comprise nearly one-third of its 27,000 MW spread over 21 states. The situation worsens the company’s increasingly dire financial prospects, as the Los Angeles Times‘ business columnist Michael Hiltzik observed Monday in his weekly column on major state issues.

“Questionable creditworthiness has compounded Calpine’s problems,” Hiltzik wrote. “Its customers — primarily utilities — won’t sign contracts for power unless Calpine guarantees the deals by pledging letters of credit or cash collateral; they fear, quite reasonably, that any long-term contracts that provide them power at a decent price would be abrogated in a bankruptcy filing.

“As a result, Calpine can’t sell all of its electricity at a profit. In the first nine months of this year, its power plants operated [nationally] at a combined 46% capacity, a disastrously low level. In that period, the company lost $684 million.”

While Calpine’s new CEO Robert May, a turnaround specialist from other industries who was named by the board a week ago, has still not announced what direction the company will take, speculation following the Delaware court ruling continued to point toward a bankruptcy filing. Columnist Hiltzik speculated this could lead to the company’s ultimate extinction, and an even more firm return to utility owned and operated power generation in California and elsewhere.

Delaware’s highest court upheld the lower Chancery Court’s order that Calpine return about $313 million in proceeds from a sale of the company’s once vast oil/natural gas assets last summer to the trustee for its first and second lien holders. The court, however, also denied the petition of bondholders requesting that Calpine be forced to repay the money three weeks earlier (Jan. 3) than the lower Chancery Court had ordered (Jan. 22).

Back in California, the state, as articulated in the AG’s filing to FERC, wants to hang on to its contract — originally signed in 2001 under much duress and criticism, but four years later in the current market provides power supplies substantially under current wholesale bulk power prices. Lockyer said in his filing that California estimates it will save $625 million over the current market prices throughout the remaining life of its Calpine contract.

Noting if Calpine files for bankruptcy, which Wall Street now sees as inevitable, the power supplier likely will try to get out of the California DWR contract among others, Lockyer’s FERC petition argued that losing the contract would “force California consumers to pay significantly higher prices in the market,” a spokesperson for Lockyer’s AG Office said. Additionally, according to the petition, if Calpine stopped providing power under the contract, California could return back to the conditions that significantly contributed to the 2000-01 energy crisis, namely over-reliance on the spot market during times of tight supply and high natural gas prices.

Lockyer filed Monday’s petition jointly with DWR and the California Electricity Oversight Board (EOB). “The petitioners want the contract to remain in force not only to protect ratepayers’ potential savings, but also to help preserve the stability of the electricity markets and the grid,” the Lockyer spokesperson said.

The petition cites PG&E as particularly vulnerable since 11% of its power supplies in the first nine months of this year have come from the Calpine contract, and the Lockyer petition tells FERC that if Calpine abandons the contract, the large PG&E electric utility “may be forced to rely on the electricity spot markets, including, in particular, the more volatile real-time market of the California Independent System Operator (CAISO) to cover its load.”

The California AG’s spokesperson said that Calpine has three other power contracts with the state other than the one that is the subject of the FERC petition, one of which involves providing 1,000 MW an hour, around the clock, seven days a week, to the PG&E territory through 2009. State officials project this contract could offer more than $625 million savings over the life of the contract.

In contrast to the contract in the FERC petition, however, Calpine “services this other contract through a single-purpose entity unlikely to be included in any bankruptcy proceeding,” said the spokesperson, adding that for the other two contracts, Calpine is unlikely to want to back out of them because they are at prices above current market rates and one of the two expires early next year (March 7, 2006).

In summing up Calpine’s current dire straits, columnist Hiltzik in his LA Times commentary said he thinks current developments indicated “independent power producers like Calpine are getting squeezed out of the market as utilities move back into generation.

“Calpine, if it survives, may well end up back where it started, as the operator of a [geothermal] power farm, The Geysers, in northern California. The bulk of the electricity sold by Southern California Edison Co. and PG&E’s utility may be generated by their own plants.”

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