San Diego Union-Tribune

October 3, 2001

Report critical of California's energy deals

By TOBY ECKERT 
COPLEY NEWS SERVICE 

WASHINGTON -- A new congressional report is adding to the mounting criticism of California's foray into the purchase of electricity.

The Congressional Budget Office study warns that Californians could pay a steep price for the long-term contracts negotiated by the state, given a recent
decline in electricity prices. It also faults the lack of independent oversight of the state's power deals.

"If the state cannot recover all of its electricity-related costs through retail prices, California taxpayers will have to make up the difference. . . . The state may be at risk of creating a major government-subsidized industry -- an industry that private suppliers could be at a disadvantage in competing against," the report says.

A spokesman for Gov. Gray Davis could not be reached for comment on the report. But the administration has noted that while the contract prices appear high now, they are significantly lower than what electricity sellers were charging at the height of the power crisis, when many of the contracts were negotiated.

The Congressional Budget Office is a nonpartisan agency that explores major economic issues for Congress. The concerns the budget office raised about
the state's electricity purchases are part of a 43-page report on the power crisis that gripped California for more than a year as wholesale electricity costs skyrocketed.

The report cites numerous flaws in the state's attempt to deregulate the power market and also raises the possibility that power sellers intentionally withheld supplies to raise prices.

To stem the crisis and avert blackouts, the state Department of Water Resources started buying power on behalf of financially battered utilities in
January. The crisis has abated, but the state has come under intense criticism from consumer groups that say it spent far too much on the power purchases,
which total more than $40 billion.

The budget office report echoes those concerns and faults the state for moving further away from a workable competitive power market.

"California's actions represent a blunt solution to the problems of insecure supply and volatile prices -- a solution that ultimately may present the state
with many of the same problems that (power market) restructuring was intended to solve," the report says.

It also cites a "lack of transparency" and oversight of the state's power purchases.

The California Public Utilities Commission recently asked federal regulators to review the power contracts and determine whether the prices are reasonable.

The budget office report broke no new ground on the origins of the power crisis, attributing it to a combination of factors that have been cited in other
studies. They include a flawed attempt to deregulate California's power market, a lack of adequate power generation in the state and a spike in the cost of natural gas, which is used to fuel many power plants.

The report said it was "also possible that individual sellers tacitly colluded to withhold supplies in order to push prices above competitive levels," a charge
repeatedly leveled by Davis and consumer groups.

"However," the budget office concluded, "evidence about how much, if any, capacity was withheld for competitive rather than legitimate operational
reasons is unclear."