San Diego Business Journal

Audit: State Pays Too Much for Too Much Power

Energy: CPUC Weighs Plan to Pass Costs on to San Diego Ratepayers

Staff Writer

The state paid too much money for excess power when it doesn't need it, and still doesn't have enough power for the times it does need it. And that power will cost consumers more money.

A report released last month by the Bureau of State Audits noted pressures have eased, but cost risks remain.

And ratepayers are going to foot the bill, as the California Public Utilities Commission weighs a plan to allocate those costs to utility customers statewide.

The two issues center on 57 long-term contracts set up by the state's Department of Water Resources during 2001. The contracts are worth about $42.6 billion for about 10 years' worth of power, according to the state audit.

But based on present forecasts, the department has already procured more power than consumers in Southern California need, up until the first quarter of 2005. These contract amounts are "nondispatchable," meaning the DWR must pay for the power whether or not it is used, the audit said.

What's more, the portfolio provides year-round energy but has no emphasis on delivery during peak-demand hours. This may force the DWR to scramble to meet high demand during times of supply shortages, the audit stated.

Contracts One-Sided

The report also said the DWR cannot terminate or assess penalties under most of the contracts, even if generators repeatedly or intentionally fail to deliver power during severe shortages. Instead, the department can only recover the difference between the contract price and the cost of the replacement power.

In addition, some contracts don't require new power plants to actually make their power available to Californians, even when the state pays a premium for their construction. Also, the DWR didn't bargain for the right to inspect facilities taken out of service due to alleged mechanical difficulties, according to the audit.

In addition, the state could end up facing costs usually paid by generators, like governmental charges and environmental compliance fees.

The audit doesn't fully blame the DWR for the situation. It noted that the department was forced to rush in, unprepared, to purchase electricity in the midst of a crisis.

Although the DWR was able to enter into contracts with the desired goal of calming prices, the department was already unprepared and in a weak bargaining position against market-savvy generators.

The audit noted the DWR had greatly improved its ability to negotiate by March 2001, and later contracts were much improved. However, the bulk of the deals , $35.9 billion worth , were inked before March 2.

A Second Look Needed

These contracts deserve a second look, now that the crisis has eased. The legislature and the governor should conduct a legal review of the contracts as it renegotiates the deals, the audit advised.

In the meantime, the CPUC is weighing how to distribute the costs the DWR has taken on. This could subject San Diego Gas & Electric Co. customers to a "huge and inequitable" rate increase, according to a statement from SDG & E.;

The potential rate increase would be a follow-up to an earlier increase that went into effect in October to pay the DWR's costs. Originally, the CPUC was planning to impose the increase in a "postage stamp" fashion, said SDG & E; spokesman Ed Van Herik.

That means utility customers throughout the state would end up paying roughly the same price for the DWR's added expenses. However, this failed to consider the costs of transmission, since it costs more money to deliver that power to Northern California, he said.

That would make San Diegans subsidize the expensive transmission costs for Pacific Gas & Electric Co. customers, Van Herik said.

The CPUC seemed to move away from the postage stamp approach in a draft decision reached Sept. 4, using a more cost-based formula. However, an administrative law judge announced Jan. 8 that he would revert to the postage stamp approach. This could cost SDG & E; customers an additional $300 million over two years, Van Herik said.

'We'll Pay For It'

Michael Shames, executive director of the Utility Consumers' Action Network, summed up the situation.

"We don't have as much power as we think we have. We don't have it for the times we need it. We have too much power for the times we don't need it," he said. "And we'll pay for it."

The real issue is not the postage stamp allocation, but renegotiating the DWR's power contracts. It's these contracts that created the statewide debt in the first place, he said.

For example, one contract alone , with SDG & E;'s parent company, Sempra Energy , is $7 billion. If the costs for that power were reduced, that would substantially lower the costs faced by state ratepayers, Shames said.

Shames added that he would release a more extensive review of the state audit Jan. 11. The review, with specific actions the state should take, was not available as of press deadline.