Options in the Eleventh Year for Interim Standard Offer Number Four Contracts

The Interim Standard Offer Number Four Contracts (ISM), under which most of the geothermal industry is selling power (outside of The Geysers), has an initial ten year period of known fixed energy payments. In the eleventh year, the price goes to the Avoided Cost of the buying utility. The specific contract language is ''Seller will be paid at a rate equal to the utilities' published avoided cost of energy as updated and authorized by the Commission (CPUC)''. The first geothermal contract will reach the end of the initial 10 year period in early 1994, a few will end in 1995 and 1996, and the majority will end in the 1997-2000 period. This is beginning to be focused upon by the utilities, lenders and, of course, the operators themselves. The prime reason for focusing on the issue is that avoided costs of the utilities directly track the delivered cost of the natural gas, and most forecasts are showing that the price of gas in the eleventh year of the contracts will be significantly lower than the last year of the fixed period of energy payments. There are many forums in which the predication of natural gas prices are discussed. In the State of California, the agency responsible for the official forecast is the California Energy Commission. Every two years, the CEC holds hearings for input into its biennial Fuels Report (FR) which establishes the forecast of natural gas prices in addition to other parameters which are used in the planning process. The attached Exhibit I is an excerpt out of the 1991 Fuels Report (FR91). Figure 1 compares the forecast of FR89 and FR91 for the Utility Electric Generation (UEG) in PG&E's service area, and Figure 2, the forecast in the SOCAL service area. The FR91 SOCAL service area forecast indicates a bottoming of the gas price in 1994 at $2.50/mmbtu. Recent prices in 1992 are already at these levels. Converting this to an avoided energy cost brings about a price of 2 to 2-1/2 Cents/kWh. The 1992 energy price in the IS04 contract is 9.3 Cents/kWh.