Attorney General Lockyer Takes Action to Compel Calpine to Keep Providing Electricity Under Long-Term Contract with State
Contract Boosts Stability of Power Supply; Ratepayers Could Realize Substantial Savings
(WASHINGTON D.C.) – Attorney General Bill Lockyer today petitioned the Federal Energy Regulatory Commission (FERC) to compel Calpine to continue providing electricity to the state under a long-term contract that strengthens the reliability of the state’s power supply, and could save California ratepayers an estimated $625 million through its expiration date of 2009.
“This contract helps maintain the stability of our electricity supply, and we need that safeguard to help protect ratepayers from suffering a repeat of the Energy Crisis,” said Lockyer. “The contract also could provide ratepayers substantial savings over its remaining term. Calpine profited by more than $400 million when the prices it received under this contract exceeded market rates. Now that the tide has turned in the opposite direction, Calpine must hold up its end of the bargain.”
Lockyer filed the petition jointly with the California Department of Water Resources (CDWR) and the state Electricity Oversight Board (EOB). Lockyer represents the people of California and also will serve as counsel to CDWR. The California petitioners want the contract to remain in force not only to protect ratepayers’ potential savings, but also to help preserve the stability of the electricity markets and grid.
The contract at issue originally was entered by Calpine and CDWR in 2001, at the height of the Energy Crisis when CDWR was buying power on behalf of Pacific Gas & Electric (PG&E) and other investor-owned utilities. The contract was renegotiated in 2002, pursuant to a global settlement that resolved the state’s Energy Crisis-related claims against Calpine.
Under the contract, Calpine must provide 1,000 megawatts (MW) of electricity to the PG&E service territory, 24 hours a day, seven days a week, through 2009. The contract sets $59.60 per megawatt-hour as the fixed price Calpines receives for the power. Current market rates are higher. California officials estimate that, compared to current market rates, the $59.60 fixed price would save the state – and ratepayers who ultimately bear the state’s costs – roughly $625 million over the remaining term of the contract.
Calpine has encountered financial difficulties. If Calpine files for bankruptcy protection under Chapter 11, California officials expect the firm to try and get out of the contract by seeking a court order to prohibit the state from enforcing its terms. To preempt such a move, Lockyer, CDWR and EOB filed today’s petition, which asks FERC to issue an emergency order requiring Calpine to provide power pursuant to the contract’s terms and prices.
The petition argues termination of the contract would force California consumers to pay significantly higher prices in the market. Additionally, according to the petition, if Calpine stopped providing power under the contract, California could return “back to the conditions that significantly contributed to the 2000-01 energy crisis, namely the over-reliance on the spot market during times of tight supply and high natural gas prices.”
PG&E and its customers could suffer particularly severe harm, the petition says. As one of the largest long-term contracts in CDWR’s portfolio, the Calpine contract provided 11 percent of PG&E’s electricity in the first nine months of 2005, according to the petition. The contract “has been a key component in ensuring PG&E’s ability to meet the resource needs of its five million electricity distribution customers,” the petition adds.
“If Calpine ceases to deliver this energy to PG&E,” the petition says, “then PG&E may be forced to rely on the electricity spot markets, including, in particular, the (more volatile) real time market of the California Independent System Operator in order to cover its load.” Further, according to the petition, “PG&E is concerned that without the stable 1,000 MW supply that the ... contract provides, it may have difficulty obtaining adequate supplies to cover its load, with appropriate reserve margins, during the peak hours of the 2006 summer season.”
Calpine entered three other long-term contracts with CDWR. One is another contract through 2009 to provide 1,000 MW an hour, around the clock, seven days a week, to the PG&E territory. State officials project this contract could save the state and ratepayers even more than $625 million, based on current market prices. In contrast to the contract that is the focus of the petition, however, Calpine services this other contract through a single-purpose entity unlikely to be included in any bankruptcy proceeding.
Additionally, Calpine probably would not use bankruptcy to back out of the remaining two contracts, because the prices under both remain above current market rates and one expires March 7, 2006.
While Lockyer, CDWR and EOB believe Calpine likely will not try to escape the three remaining contracts, they want the emergency order they seek from FERC to also cover those agreements. One offers the potential for more than $625 million in savings, they note, while the other two enhance grid stability and help avoid reliance on the spot market.