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California's Power Gamble: Long-Term Contracts, Locked-In Risk

High profit potential will attract new power plants, forcing prices down and stranding the state's long-term electricity purchases.
Fortnightly Magazine - May 15 2001

new, cleaner engine for a 30-year diesel school bus. In the end, California ends up with the same amount of pollution.

Nevertheless, the state's fast-track plan to add badly needed megawatts to California's power-starved grid by this summer's peak-demand season may be slowed by a shortage of generating turbines. Many of the California plants also need construction permits and have to build connecting lines to the power transmission grid and the natural gas pipelines needed to fuel the plants. So many plants are under construction around the country that there is often a long wait for delivery of the turbines, compressors and other crucial components of a power plant.

In fact, as this article went to press, the construction of certain small peaking power plants - capable of supplying 1 million homes - was stalled because of a dispute between state officials and the plant builders. It is true that Governor Davis ordered state Energy Commission regulators to roll out the red carpet for anybody willing to quickly build the small, sometimes temporary peakers needed to help the state get through next summer without blackouts. Yet plans for 29 such plants, which have been in the works since last fall, have been slowed by the state, according to the companies hired to build the plants. The problem, they say, is that the DWR, which was pushed into the electricity business on an emergency basis, is trying to amend the contracts. State officials say the original contracts gave too much to the plant builders, and DWR wants to save the taxpayers money by revising the terms. But it is likely that the governor will eventually prevail on this issue.

Transmission, the last piece to the puzzle, started to come into focus early last month. On April 9, the DWR signed a memorandum of understanding with Southern California Edison Co. and its parent company Edison International, forging a deal for the state to buy Edison's electric transmission grid for $2.76 billion. That agreement would also require Edison to sell cheap power from its retained power plant fleet on a cost-of-service basis through 2010. Of course, Edison does not have enough capacity to set the market price. Also, their plants are old, and not as efficient as new ones.

With the signing of the deal with Edison, and the Chapter 11 filing by Pacific Gas & Electric Co. (putting decisions in the hands of the federal bankruptcy judge), it remains to be seen whether the state will succeed in acquiring the transmission assets of PG&E and San Diego Gas & Electric Co. In fact, according to Paul Patterson, an analyst with Credit Suisse First Boston, the governor's most difficult task in a transmission takeover would be to persuade the legislature to sign off.

He stated that even if the Governor's plans are implemented, California will still be the screwiest, most-restrictive electricity market in the country. Independent power producers will have no easier time getting siting plans past local political activists than the current incumbents have now.

"He has talked about a lot of short-term measures