PG&E Criticizes Calif. Contract Change

California's largest utility company is criticizing the Department of Water Resources for canceling a $525 million-a-year electricity supply contract that the state signed at the height of the energy crisis to help financially strapped utilities.

Pacific Gas & Electric Co. said Wednesday the cancellation could backfire on the department and force taxpayers to cover hundreds of millions of dollars in additional costs.

"We are deeply troubled and puzzled as to why your agency would literally give away up to hundreds of millions of dollars of value in a power purchase contract that (the department) is required by law to preserve for the benefit of California consumers and taxpayers," the company's chief counsel, Christopher Warner, said in a letter to the department.

The department said the move amounted to amending the contract with Calpine Energy Services and would save $1 billion while reducing the state's role in buying power for California by about 20 percent.

"The department got into that business (of buying electricity) as a temporary, short-term measure," said Richard Grix, an assistant to one of the department's deputy directors.

The state was roundly criticized for the prices it paid under those agreements, Grix noted, and since then has been attempting to renegotiate the agreements to reduce costs.

Over the last seven years, the utilities have recovered financially and "there's no reason for the state of California to be providing 25 percent of power that investor-owned utility customers need right now," he added.

The original Calpine contract, signed in February 2001, required the state to pay Calpine $525 million a year through 2011 for 1,000 megawatts of around-the-clock electricity. It was amended in 2002 to terminate in 2009.

A megawatt is enough power for about 750 homes.

The Calpine agreement was among dozens of contracts of varying lengths and terms that the state signed to keep electricity flowing in California after prices skyrocketed and the state's three major utility companies had trouble buying power on their own.

Power provided by the Calpine contract was used to help supply PG&E, which serves about 15 million people in northern and central California.

In place of the 1,000-megawatt contract, the department said it had negotiated an agreement under which it would pay Calpine $4.4 million a year for up to five years to provide 180 megawatts of "peaking capacity" for PG&E's use during periods of extremely high electricity demand.

A PG&E spokesman, Jon Tremayne, said the department's termination of the 1,000-megawatt contract would force the company to buy replacement power at much higher rates instead of continuing to reimburse the state for a portion of the contract cost.

He said those additional costs could amount to "hundreds of millions of dollars."

In his letter to Deputy Director Timothy Haines, Warner suggested that state law could require the department to cover any additional costs faced by the utility in replacing the Calpine contract.

Grix said he didn't know if that was the case, but he said he doubted that PG&E would have to replace all of the power provided through the Calpine contract. "There have been times when PG&E has sold off portions of the Calpine power," he said.

He said the department offered to let PG&E take over the contract but the company didn't want to assume the full cost.

Currently, PG&E reimburses the department for 42.2 percent of its power-buying costs. The rest is paid by the state's two other major investor-owned utilities _ Southern California Edison and San Diego Gas & Electric Co.

Grix said the department plans to ask the state Public Utilities Commission to reconsider the utilities' cost split and to start a process that would turn over the department's remaining power contracts to the utilities.