Edison Dangles Long-Term Contracts

Acknowledging pressure to budge on its preference for short-term resources, Southern California Edison said in hearings this week at the California Public Utilities Commission that it will float a proposal as part of its long-term procurement plan to consider 10-year power-purchase agreements. But Edison?s terms?chiefly its insistence on the ability to nix the deals if market conditions change?beg the question of whether there would be takers for such pacts. Despite calls for utilities to execute power-purchase agreements in order to get new generation built, only Pacific Gas & Electric has plans for such deals. Even so, PG&E would sign contracts with third-party developers for only one-half of new power plants, building the rest on its own. San Diego Gas & Electric said it won?t need to seek new generation before 2011 beyond its renewables quotient. Edison proposed contracts for nonrenewable power to last only three years. The utility maintains it still favors contracts with a maximum five-year life, but it will bend if certain ?safeguards? are put in place for long-term contracts ( Circuit , September 10, 2004). ?We?re not sure? whether sellers would sign contracts that Edison could cancel, admitted Colin Cushnie, Edison director of regulatory affairs. Specifically, the contracts would be subject to termination after five years if the utility?s market base shrinks because some customers choose direct access over the utility?s bundled service. Utilities predict load declines because of the availability of direct access ( Circuit , July 16, 2004), with PG&E forecasting a loss of 4,000 MW worth of customers. According to Cushnie, the utility believes it has adequate baseload, including power from nuclear facilities and coal-fired plants, and doesn?t need additional long-term resources. Edison?s Mohave coal plant, however, may be shut down. Its San Onofre nuclear facility will not last through the end of the decade without an investment of $700 million for new steam generators?a bid currently being considered by the commission. Recognizing that state officials don?t share Edison?s rosy generation outlook, Cushnie said the utility is willing to put out a solicitation for these deals. Edison insists resolution of debt-equivalency concerns are required before it commits to long-term deals. When a utility enters into a contract for power with an outside provider, it goes on its books as a debt instead of an asset. Conversely, if a utility builds a power plant, it becomes an asset on the books. Because power contracts affect utilities? debt-to-equity ratios, credit agencies can derate them, and thus the cost of borrowing money can increase. As a result of its acquisition this spring of the output from the Otay Mesa plant and the procurement of the Palomar facility, SDG&E reports that it is flush with generation through 2010. In CPUC hearings, the utility reaffirmed its goal of having 20 percent of its energy portfolio covered by renewables by 2010. By contrast, PG&E has identified a need for new resources by 2008. The utility said it plans to conduct two solicitations this fall, one for power-purchase agreements up to 20 years, and the other for utility-owned generation. PG&E hopes to reap 1,200 MW from these contracts and to secure an additional 1,000 MW by 2010.

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Edison Dangles Long-Term Contracts

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