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Long-term power deals to be announced today

BY JOHN WOOLFOLK Mercury News With federal aid to California expiring tonight amid a critical power shortage, Gov. Gray Davis today plans to unveil extended electricity contracts the state has negotiated in a desperate bid to ease the crisis.

But considerable concern remains that these contracts -- which lock in the cost the state pays for power -- will commit consumers to paying more for electricity now. And there's even more concern about sticking consumers with today's high prices for years to come, even if the market price of power drops.

``We're panic buying at very high prices,'' said Richard Gilbert, professor of economics at the University of California-Berkeley. ``The state doesn't have a good record as a purchaser of power, and there's reason to believe they'll do the same thing now.''

The state is under pressure to act quickly. Emergency orders requiring energy companies to continue selling gas and power to California's nearly bankrupt utilities expire at midnight tonight.

Davis was expected to announce the state's progress toward securing extended power contracts Monday.

Instead, the Democratic governor announced he was seizing a series of Pacific Gas & Electric Co. contracts that were in danger of being auctioned by the Power Exchange, the old state entity responsible for buying and selling electricity.

Davis took a similar step Friday with Southern California Edison contracts. The Power Exchange, which is owed money from the utilities, threatened to sell the contracts, which have locked in a good price for power.

The deals expected to be revealed today were negotiated by the state Department of Water Resources under legislation passed Thursday. The law allows the state to buy power for PG&E and Edison in extended contracts by issuing up to $10 billion in revenue bonds. Those bonds would be repaid with interest by ratepayers.

What remains unknown is how long those contracts run and how much power they would provide.

That leaves uncertain how much additional electricity the state would have to buy on the pricey spot market, and how long customers will be paying the contract rates.

It also is not clear whether the state can secure enough power to avoid a recurrence of this winter's rolling blackouts in the months to come.

Because power prices are expected to fall in a couple of years when new plants are completed, critics are concerned that lengthy contracts at today's prices may be a bad deal.

Assemblyman Rod Pacheco, R-City of Industry, who opposed the bill, said the state will follow the same costly road that has nearly bankrupted its utilities.

``It pushes the utilities out of the morass they were in and injects the state into that same morass,'' Pacheco said. ``It's like somebody in quicksand and they pull you in.''

An aide for Assembly Speaker Pro Tem Fred Keeley, D-Santa Cruz, who wrote the bill, agreed it's a bad time to buy power contracts but said there is little choice.

``Right now we're buying 100 percent on the spot market, so almost anything we get on contract is going to lower that cost,'' said Keeley's key energy aide, Guy Phillips.

Consumers will feel sting

Phillips said it's almost certain the state won't get all the power it needs in contracts.

But experts said that's not such a bad thing, given that the contracts aren't going to be very good anyway.

``The state shouldn't want too high a proportion of power to be signed right now,'' said Lee Friedman, a professor at the Goldman School of Public Policy at UC-Berkeley. ``Signing 10-year contracts at prices that can be negotiated today is a terrible idea.''

Friedman and other experts say it's critical that consumers feel the sting of higher rates for using too much power.

That will curb demand and soften prices.

A spokesman for President Bush made clear Monday he will not grant California another reprieve on orders that already have been extended five times. Other Western states have complained that the orders hurt their ability to secure power, said Bush spokesman Ari Fleischer.

Debts disputed

Officials at the California Independent System Operator, which operates most of the state's power grid, were uncertain what will happen when companies are no longer under federal orders to supply power. The state is in its third week of continuous Stage 3 power alerts.

Also still to be decided is how much consumers will end up paying to cover some $12 billion utilities say they are owed for power they purchased last year.

State leaders, including Davis, dispute the companies' contention that they are entitled to the entire amount. Recent state audits showed that the companies have huge debts, but they also passed on massive profits to their parent companies during the early years of deregulation.

Court decision Monday

Asked Monday if he believed the companies were entitled to the entire $12 billion, Davis said no.

``We don't accept that math,'' the governor said.

State leaders are trying to press for a solution by next Monday, when a federal judge is expected to decide whether the two utilities have the right to immediately raise rates to pay off the $12 billion.

Some lawmakers are concerned that the companies will win the case, leaving the state little leverage to work out a compromise.

``We're trying to keep a $12 billion ton of bricks from falling on the head of consumers,'' said Keeley, who warned that a loss in the courts could lead to an 86 percent rate increase for Californians.

-------------------------------------------------------------------------------- Staff writers Jim Puzzanghera and Dion Nissenbaum contributed to this report.

-- Martin Thompson (, February 06, 2001

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