- The Washington Times - Wednesday, May 14, 2003

Today, a Federal Energy Regulatory Commission (FERC) panel is expected to hear arguments on whether or not to allow California’s politicians to back out of about $17 billion worth of power contracts. It shouldn’t. Allowing politicians to break contracts and short-change power companies would not only be wrong, it would set a terrible precedent.

The problem started at the peak of California’s energy crisis, when Gov. Gray Davis was desperate to lock in energy prices cheaper than the $330 per megawatt hour that the state was then paying. Mr. Davis eventually signed about 40 long-term contracts, calling them “the bedrock of a long-term energy solution.” For instance, Mr. Davis signed a contract with Allegheny Energy for power priced at $61 per megawatt hour. Now that the power crisis has passed, Allegheny sells power in the $30 range. So the state wants out of what at the moment seem highly overpriced contracts.

However, allowing California to abrogate its good-faith agreements would undermine the contract process. Both sides of a deal are expected to live up to the terms they’ve agreed to. Besides, canceling the contracts would set a terrible precedent. If FERC sides with California now, then will it allow power companies to negotiate for better contracts when prices go up? Probably not. In the meantime, why would companies invest in California with no certainty of an investment return.

California claims that the situation is unique, brought about by Enron-style market distortions. However, allowing the state to back out of the contracts would be fair only if the companies with which the state signed long-term contracts were gaming the market and, in doing so, were profiting from the distorted value of the contracts. Yet, it appears that both politicians and power producers were dealing with the same set of market mirages. None of the negotiating parties knew how badly the data points were off, which way the prices would go or when the crisis would pass.

Besides, many of those power contracts have been renegotiated. While at one point, about $45 billion was in dispute, now “only” about $17 billion is. Despite its gargantuan deficit, the state should be able to renegotiate the rest to something more palatable to the legislators while being acceptable to the creditors.

What California really needs is greater energy production. However, Sen. Dianne Feinstein recently voted against the Republican-backed energy bill, because the bill did “nothing to combat global warming.” Her colleague, Sen. Barbara Boxer, supports Sen. Jim Jeffords’ costly Clean Power Act of 2003, which would treat carbon dioxide as a pollutant.

This highlights the fact that California doesn’t so much have an energy problem as a political problem, one that won’t be ameliorated, much less solved, by allowing California’s politicians to escape responsibility for their actions on the energy front.

FERC should insist that California’s politicians stick to the bargains they made. Doing otherwise would shortchange not just a few companies, but the entire energy contract process.

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