California Gets Some Low-Wattage Bids in Energy Crisis

California Gov. Gray Davis promised cheap power and pushed the out-of-state generators to provide it. On Wednesday, the generators pushed back.

The power bids to the California Department of Water Resources, or DWR -- due at noon PST on Wednesday -- are not encouraging for Davis' bid for cheap power and steady rates for California consumers. Davis was seeking bids of 5.5 cents per kilowatt hour.

While the bids were submitted confidentially, Davis did announce Wednesday night that 39 bids were submitted with an averaged weighted price of 6.9 cents per kilowatt hour, or about $69 per megawatt hour. Under the terms of the contract, California would purchase power for up to 10 years.

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Reliant Energy REI, one of the largest owners of California generation, submitted a bid to sell just 500 megawatts of "peak load" to the state. California is seeking about 15,000 megawatts of power in the bidding process.

Reliant said it could not offer more, given the restrictions in the state's bidding specifications.

"Reliant Energy is committed to finding a long-term solution in California and working with all participants," said Joe Bob Perkins, president and chief operating officer of Reliant's Energy Wholesale Group. "Our hands were tied in the auction on how much generation capacity we could offer because of the restrictive bid parameters in this process. We have offered more attractive and competitive alternatives in the additional proposals we submitted."

Reliant did say it could provide up to 3,500 megawatts of power, nearly 25% of what the state is seeking, if certain restrictions are lifted -- including pricing that is not tied to fuel costs, delivery even in the case of unexpected plant outages, and any credit risk that might be assumed by the seller.

"[Reliant] submitted five additional proposals that offer more capacity by addressing each restriction," the company said in a statement. "In these bids, Reliant Energy makes it clear that it can offer up to 3,500 megawatts of supply if restrictions are lifted."

Duke Energy DUK also acknowledged it has submitted bids, although it would not disclose its terms. No other company -- including Calpine CPN and Dynegy DYN, two other large California generators -- could be reached for comment. Both, however, have expressed reservations about the restrictions placed on bidders.

If Reliant's bid is any indication, Davis will have to compromise if he expects to resolve the power crisis in time to keep PG&E PCG and Edison International EIX out of bankruptcy. "If this is any indication, there is a lot of negotiation yet to come," says one source close to the process. "The governor has to know the price is going to have to come up."

While Davis has yet to acknowledge that reality, his appointment of three advisers may very well be the beginning of his attempt to soften his approach.

At a news conference in Sacramento late Wednesday, Davis appointed Michael Peevey, former president of Edison International and currently on the board of Excelergy , a private retail energy consulting firm; S. David Freeman, general manager of the Los Angeles Department of Water and Power, and Frank Zarb, chairman and CEO of the Nasdaq Stock Market.

Zarb also has served as the administrator of the Federal Energy Administration and chairman of the Long Island Power Authority. In that capacity, he facilitated the merger of the Long Island Lighting Co., or Lilco, and Brooklyn Union Gas Co. and also was integral in crafting the agreement between Lilco and New York state that saved Lilco from potential bankruptcy. Recently, Zarb oversaw a review of the troubled finances of Nassau County, N.Y.

The significance of the appointments is subtle. All three have practical experience in the utility business and likely understand the importance -- especially Zarb and Peevey -- of keeping the utilities out of bankruptcy. And, in the end, that means higher retail power prices in California.

The three experts also give Davis a potential scapegoat for any rate increase. He assembles three high-profile, very smart industry people who tell him raising rates and encouraging new generation is the only hope for a solution.

They also provide Davis a way to justify any long-term financing to help the utilities pay off the nearly $12 billion in debt amassed by purchasing high-cost wholesale power that they were forced to sell at a loss, because retail rates are frozen at 1996 levels.

He listens, and solutions begin to flow in Sacramento. Nobody might notice now, but these appointments may well be the beginning of the end to California's power crisis.