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California's Power Gamble: Long-Term Contracts, Locked-In Risk
In his annual "state of the state" address, California Governor Gray Davis outlined his view of the electricity crisis. "Make no mistake," he said. "We will regain control over power that is generated in California and commit it to the public good. Never again can we allow out-of-state profiteers to hold California hostage. Never again will we allow out-of-state generators to threaten to turn off our lights with a flip of their switch."
Was Davis threatening a state takeover? His words led one power industry insider to quip, "It sounds like condemnation. That's unrealistic."
Regardless, that is exactly what Davis says he is prepared to do.
"If I have to use the power of eminent domain to prevent generators from driving consumers into the dark and our utilities into bankruptcy, then that's exactly what I will do," says the Governor. Davis wants energy companies and California consumers to know that as governor of the Golden State, he holds the power - and is prepared to use it - to make certain that customers aren't left in the dark, even if that means repossessing the state's generating plants.
That strategy began to take shape on Feb. 1. That's when Gov. Davis signed new legislation into law (Assembly Bill 1-X), granting authority to the California Department of Water Resources (DWR) to issue bonds in amounts up to $10 billion, to enable the state to negotiate long-term contracts to buy power and then sell it to users at cost (plus expenses for transmission, delivery and administration).
Later, on March 5, the Governor announced that the DWR had obtained a portfolio of 40 long-term contracts with power generators, based on bids received from an Internet auction held on Jan. 23. The 40 contracts together would supply an average of 8,886 megawatts (MW) of power per year over the next 10 years, at an average price of $69 per megawatt-hour (MWh). The price came in a bit higher than the $65 figure the Governor had said he wanted, but well below the $200 to $500 prices paid this past winter in the spot market. However, the 40 contracts average out at $79/MWh for the first five years. (At the same time, the Governor announced that the DWR had signed 11 short-term contracts, slashing the DWR's average cost of short-term power purchases for the month of February from $330/MWh to $228 per MWh.)
Earlier, the Governor had unveiled several new initiatives to boost power generation throughout the state, including a crash program to alleviate energy shortages predicted for this summer by allowing "peaking" power plants to run longer hours. These smaller, less efficient facilities - which are used during power shortages to avoid rolling blackouts - will be allowed to pollute more in exchange for offsetting pollution elsewhere. Under the plan, if a peaking plant exceeds its imposed pollution limit, it will pay a mitigation fee to help clean up facilities or other mobile sources. For example, if a peaking plant expels more emissions than allowed, it would pay a fee that could be used to install a