Allegheny to sell power to California

Maryland company's affiliate signs pact worth $4.5 billion

Delivery begins today

Company official calls agreement `win-win' situation

March 23, 2001|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

A national affiliate of Hagerstown-based Allegheny Energy Inc. announced yesterday that it has signed a $4.5 billion contract with California to provide the energy-strapped state with enough electricity for up to 1 million homes over the next 10 years.

Delivery of 150 megawatts of electricity to California will begin today. The state was hit with two days of rolling blackouts this week when warm weather, a reduction in imports, outages at several major power plants and shutdowns at alternative suppliers drastically decreased supply.

The volume of electricity delivered under the contract, signed with California's Department of Water Resources, will increase to 1,000 megawatts over the life of the contract.

Allegheny is the second Maryland energy company in recent weeks to venture into long-term, fixed-rate power contracts with California. Constellation Energy Group Inc., the parent company of Baltimore Gas and Electric Co., signed a similar deal March 12 for $3.6 billion.

"This is a win-win [situation] for both the state of California and Allegheny Energy," said Michael P. Morrell, president of Allegheny Energy Supply, the generation subsidiary of the parent company. "It should help to stabilize prices in California.

"We are currently building a 1,080-megawatt power plant in La Paz County, Arizona, that will come on line in 2005, so we will have substantial amounts of power available to us," Morrell said.

California began buying electricity in December after its two biggest utilities - billions of dollars in debt because of soaring wholesale prices - threatened to file for bankruptcy. California is expected to sell $10 billion in bonds to finance power purchased from about 20 companies with which the state is negotiating for contracts.

The state had hoped to lock in 6,000 to 7,000 megawatts to supply as many as 7 million homes for the summer, but a report released recently by the governor's office showed that California is far short of meeting that goal.

Although such contracts could prove lucrative to suppliers, California's quick fix probably will make the state's energy problems worse, according to Cambridge Energy Research Associates.

"California has signed the wrong types of long-term power contracts by agreeing to pay for energy volumes at fixed prices in the future," Lawrence J. Makovich, senior director of CERA, told the U.S. House of Representatives Subcommittee on Energy and Air Quality yesterday.

"Having signed these contracts at the height of a shortage market, California is likely to have expensive take-or-pay obligations for decades," he added. "This summer is likely to generate billions of dollars of additional wholesale power charges that will appear on the state's books and need to be paid off over an untold number of years."

In other words, if the price for electricity drops when new power plants are built and prices for natural gas decline, California could find itself still paying exorbitant rates - a situation that would insulate suppliers from any risk.

"We feel confident that the state ... will have the money necessary to discharge the obligations they are incurring," Morrell said. "But if they don't, we feel we have adequate contractual mechanisms built in that will protect us."

Last week, Allegheny bought Global Energy Markets, formerly Merrill Lynch's energy trading unit. As part of the acquisition, Allegheny gained GEM's existing contracts with output of 1,000 megawatts from generating plants in the Western Systems Coordinating Council Region. Part of that power will be going to California.

"I believe that without Global Energy Markets, Allegheny would not have had the ability to commit itself to selling power in California," said industry analyst Craig K. Shere at Standard & Poor's. "Companies like GEM are experts at marketing power and getting it to the appropriate destinations.

"It certainly makes a lot of sense for them to sell forward," Shere said. "If you can sign a contract, lock in those prices long-term, turn around and also lock in your long-term fuel contracts, you have less risk that way. And, you get to be a good corporate citizen by helping out California."

Shares of Allegheny fell $2.37 on the New York Stock Exchange to close yesterday at $42.43.

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