From: jeff.dasovich@enron.com
To: f..calger@enron.com, tim.belden@enron.com, richard.shapiro@enron.com, jeff.richter@enron.com, david.parquet@enron.com, pat.shortridge@enron.com, susan.mara@enron.com, paul.kaufman@enron.com, d..steffes@enron.com, linda.robertson@enron.com, michael.mcdonald@enron.com, barry.tycholiz@enron.com
Date: 2001-10-29 21:23:41+00:00
Subject: Governor wants to cut costs of power

Governor wants to cut costs of power 
Tough sell for Davis as suppliers balk 
By Steve Geissinger
SACRAMENTO BUREAU 
SACRAMENTO -- With an economic "perfect storm" and an election looming, Gov. Gray Davis wants to renegotiate several of the state's expensive long-term power contracts -- a move that could translate into a big break for Californians. 
But the generators who signed the multibillion-dollar contracts to supply the state will be a tough sell on the notion, even though many have indicated they will at least listen to the state. 
"If the politicians were to make all these contracts go away, ... who the hell is going to meet with the state and negotiate any (new) contracts?" asked Peter Cartwright, president of San Jose-based Calpine Corp., a major supplier of California power. 
And many experts and analysts are skeptical about Davis' chances of getting generators to substantially lower the price of power they sell to the state, which, in turn, supplies California customers through various utilities. 
"Good luck!" former Republican Gov. Pete Wilson sarcastically declared upon hearing of the Democratic governor's plan. 
Davis, however, has suddenly thrust the idea of renegotiating some of the costly power-supply contracts to the center of a wildly complex tangle of fiscal, political and legal issues tied to the energy crisis, the ailing economy and their impact on the growing state budget deficit. 
The outcome could affect the pocketbooks of energy consumers and taxpayers alike for years, perhaps decades. 
"This could save billions of dollars," said Doug Heller of the Foundation for Taxpayer and Consumer Rights, one of the consumer groups that has embraced Davis' power contract renegotiation plan. 
Barry Goode, Davis' legal affairs secretary, said the administration is "not targeting every contract" because the pacts have been "extremely valuable in keeping the market stable." 
The governor's aides refused to reveal which generators they will approach or the arguments they intend to use on the companies, whose contracts don't require them to reopen negotiations with the state. 
The governor signed more than 50 long-term contracts -- worth more than $40 billion -- with about two dozen generators at the height of the energy crisis earlier this year. 
The state made short-term purchases to supply California after soaring wholesale prices shattered utilities, then entered the longer-term pacts that provide about a third of the state's power demands. The contracts range in duration from a few months to 20 years. 
Though the contracts provide power at an average $69 per megawatt-hour over the next decade, the current market has dropped to less than half that rate. And the contracts provide more electricity than the state needs at times, forcing California to sell the excess at multimillion-dollar losses. 
The long-term contracts, harshly criticized by Republicans seeking the GOP gubernatorial nomination, have become a political liability for Davis as he heads into a re-election bid next year. 
The liability is compounded due to the pacts' potential role in what experts at a recent economic summit at Stanford University termed a brewing "perfect storm" of fiscal calamities. 
The state Public Utilities Commission, principally citing a desire for less costly power, has refused to allocate a revenue stream -- generated from recent electricity rate hikes and anticipated bond proceeds -- to finance the long-term contracts. 
The standoff has pitted Davis and Democratic state Treasurer Phil Angelides against another of the state's most powerful Democrats, Senate leader John Burton of San Francisco, who sided with the Democratic-controlled PUC. 
Burton has called "for Californians to be freed from egregious, unreasonable and expensive provisions contained in these contracts." 
The deadlock is holding up a $12.5 billion bond sale intended not only to help fund California's future power costs but repay state coffers for the billions of dollars spent earlier this year on emergency, short-term electricity purchases. It would be the largest municipal debt sale in U.S. history. 
Without the bond issue, a projected general fund deficit of up to $14 billion next year could grow to a staggering $20 billion-plus, forcing Draconian cuts in essential government services, according to state finance officials. 
The projected deficit of up to $14 billion in California's annual budget of about $100 billion stems from lagging tax revenue in a cooling economy, further chilled by the Sept. 11 terrorist attacks on the East Coast. 
Against the backdrop of fiscal woes, analysts said successful renegotiation of some long-term power contracts could conceivably wind up sparing Californians electricity rate hikes, tax increases or both. 
But some analysts are pessimistic, like Wilson. The former governor is widely blamed for legislation that triggered the energy crisis, and yet he in turn blames Davis for not acting quickly enough to head off power woes. 
The Western Power Trading Forum, a group representing suppliers and brokers, has made it clear generators will expect the state to give them something substantial in return for any changes in the pacts. Such incentives might include settling disputes over power buys or the state dropping lawsuits against suppliers. 
"We're not going to say no. We'd certainly sit down at the table with them and say, 'Let's see, maybe we can do this, maybe we can do that,'" said Calpine's Cartwright. 
If state officials simply broke some of their contracts, not only would penalties be "very, very severe," but also "they would have completely blown their credibility, and no one would negotiate with them," Cartwright said. 
His comments coincided with reports that Calpine's third-quarter profits more than doubled, despite a sharp drop in short-term electricity prices in California, one of its main markets. Analysts said Calpine's performance can be largely attributed to its long-term contracts with the state. 
Heller, one of the state's most vocal consumer advocates, said Davis "is right to look back at the environment in which these contracts were signed and demand that the power companies come to the table and renegotiate, or even throw out many of the contracts." 
"Last spring," Heller said, "power companies had a gun to the governor's head and, with staff that already had conflicts of interest, the administration signed some terrible deals."