The Tunnel Before the Light
There is a long way to go through the tunnel of judicial review and/or administrative proceedings before California reaches the light. The cornerstone of the state's response to the electricity crisis has been to execute $ 43 billion in long-term power contracts with 18 wholesale suppliers to secure an emergency long-term power supply for a significant share of its future requirements, on behalf of its insolvent utilities. This, in the long run, could prove inopportune. When both natural gas and local wholesale electric prices were at historic highs, it may not have been the time to lock in long-term deals in the market. California appeared to buy either too much or too little power during different months. The long-term (10-year) average price for future power paid by California under these contracts averages about 7 cents/kilowatt hour.
Prices of natural gas, and by consequence the marginal cost of wholesale power, had declined to 18-month lows by Labor Day 2001. Gov. Gray Davis (D-Cal.), in June 2001, conceded that the state had locked-in long-term power sale contracts at a higher price than available shortly thereafter on the spot market. Reacted state legislator Tony Strickland: "People are going to get ripped off for the next 10, 15, 20 years."1 Governor Davis responded: "We've basically won the war. [The state] is on the verge of breaking the back of the spot market."2
[Editor's Note: This is the second of two Articles by Professor Ferrey on the California electricity crisis. In the December 2001 issue, Professor Ferrey surveyed developments in California, describing the ongoing and threatened litigation. In this Article, he discusses the unresolved question of whether the common law or the Uniform Commercial Code governs disputes concerning deregulated electric markets.] Copyright 2002 Steven Ferrey.
Steven Ferrey is Professor of Law at Suffolk University Law School and Professor of Law (Adjunct) at Boston University School of Law, both in Boston. Among his 5 books (and more than 50 articles) are THE LAW OF INDEPENDENT POWER (West Publishing 2001), a 3-volume treatise now in its 18th edition, THE NEW RULES (Penwell Publishing 2001), a book on navigating through the deregulated electric market, and ENVIRONMENTAL LAW: EXAMPLES AND EXPLANATIONS (Aspen Publishing, 2d ed. 2001). Professor Ferrey has served as legal counsel or an expert witness for many private and government clients on energy and environmental issues. He has represented some of the largest and most active power market participants in asset acquisition and sale, siting, and operation of facilities. He also has consulted for various federal energy and environmental agencies, as well as for the state of California and other government entities. He consults for the World Bank on power sector privatization globally. He holds degrees in economics, law, and environmental planning, and was a post-doctoral Fulbright Fellow in London, England.
