February 26, 2002
Move to void power pacts could backfire
By Mark Martin
Financier warns attempt may feed market uncertainty and cost consumers
Sacramento — The hired Wall Street gun who served as Gov. Gray Davis’ top financial manager during the energy crisis said yesterday that the state’s move to nullify its long-term power contracts could end up costing California consumers more in the long run.
Joseph Fichera warned that the latest salvo by the governor against energy generators could backfire by causing more instability in what was already a chaotic market. Fichera, a Wall Street financier with expertise in the energy industry, earned $275,000 a month working for Davis for part of 2001.
Two state agencies yesterday asked the Federal Energy Regulatory Commission yesterday to toss out 32 contracts the state signed last year during the peak of the crisis.
Fallout from the move was quick:
— One California energy company’s stock price fell after the news.
— Consumer groups questioned whether federal regulators would grant the state’s request.
— Energy industry representatives accused the governor of playing election- year politics at the risk of causing long-term damage.
The complaints constitute a complete about-face for Davis, who for a year has touted the contracts as a key to alleviating the crisis. Critics had blasted the terms of the deals, saying they saddled consumers with high rates for a decade or more.
Fichera said that at a time when energy companies are hurting financially and the state’s long-term energy future calls for a continued buildout of power plants, the move could be risky.
With the state attempting to back out of the contracts, the uncertainty that helped fuel the crisis in the first place may return to California’s energy markets.
“If businesses and suppliers find California a much riskier place to do business, this attempt to save ratepayers money now may in fact cost ratepayers more in the long term,” he said.
With the failure of energy giant Enron Corp. and low prices slowing growth in the energy business, companies have already announced plans to rethink power plant development. The California Energy Commission told a state Senate committee last week that market uncertainty could potentially lead to more energy shortages by 2005.
“The state goes out looking for contracts, sets the parameters of the contracts, and then tries to renege on them,” said Jan Smutny-Jones, spokesman for the Independent Energy Producers, a coalition of power companies. “This kind of thing happens in the Third World, but companies have insurance for doing business there.”
Davis, however, denied that the requests to FERC would destabilize the market.
“We want to do business with people that want to make a decent profit,” Davis said. “We don’t want to do business with people who want to drive us into the ground.”
CALPINE STOCK DROPS
But Davis’ announcement of the FERC challenge added to the woes of Calpine Corp. of San Jose, which saw its stock price drop nearly 12 percent to $6.26 at mid-day Monday before rebounding a bit to close at $6.83.
Calpine stock was hovering around $40 last July, when Davis was touting the company as one of the energy good guys and helping to throw the switches on new power plants Calpine was building to serve California.
Calpine could lose $1 billion in revenues if FERC voided the above-market contracts signed with the state, an analyst for Credit Suisse First Boston estimated in a research report yesterday. But the analyst said it was “difficult to envision a scenario where FERC abrogates the contracts.”
But Calpine later placed 34 projects on hold as electricity prices dropped and demand waned, leaving the company scrambling for capital to finish 27 plants already under construction. Five of those plants are in California.
Consumer advocates, who have led the criticism of the contracts, questioned why the governor hadn’t acted sooner. They also said they didn’t have much hope the federal regulators who did little to intervene in California during the crisis would act now.
“This is the same federal agency that did nothing to help California before, ” said Harvey Rosenfield, who heads the Foundation for Taxpayer and Consumer Rights. “It’s like asking a crook to return your wallet. Assuming these people will help us is quite a leap of faith.”
FERC has previously rejected attempted by one of the agencies, the Public Utilities Commission, to undo the contracts. But PUC lawyers said their attempts had been dismissed over technical issues, not on the merit of the complaints.
Angry power companies yesterday pointed out that just one year ago, Davis was calling the contracts the key to easing the crisis.
“These agreements are the bedrock of a long-term energy solution,” Davis said in a March 5 press release. “They provide reliability at a reasonable price. With these deals in place, California’s energy future is looking a whole lot brighter.”
Chronicle staff writers Bernadette Tansey and Zachary Coile contributed to this report.