CA's Chief Power Negotiator Defends Results,Leery of Summer
California still faces a very uncertain electric supply
situation during peak-demand times this summer, and a massive
conservation effort about to be introduced by Gov. Gray Davis.
Davis' plan will impact all local government and businesses
statewide, and it may be the only way to avoid rolling blackouts,
according to the state's chief negotiator for long-term power
While back at his post running the nation's largest municipal
utility, S. David Freeman said last week that longer term the state
should have a balanced portfolio of power supplies. The supplies
are roughly divided into thirds with some coming from the incumbent
utility's remaining generation assets, others from renegotiated
qualifying facility (QF) contracts and the last third made up of a
combination of the recently negotiated long-term deals (with terms
ranging from six months to 10 years) and some continuing but
greatly reduced reliance on spot supplies.
Freeman, general manager at the Los Angeles Department of Water
and Power (LADWP), just completed a five-week volunteer stint as
Davis's power supply negotiator.
It was tough getting the talks started, he said, because many of
the prospective bidders were existing suppliers who had millions of
dollars of unpaid power bills with California's utilities and the
state grid operator, Cal-ISO.
"The suppliers moved from an initial attitude of 'why should we
even talk to you, you're not paying us" to an eagerness on their
part to close deals with us," said Freeman, noting the state's team
was little more than himself and Budhraja and some "technical
people" from the state water resources department (DWR).
His only regret following the contract negotiations is that
there isn't more power under contract for this summer. However, he
does think California has locked up every megawatt that was
available, and those short-term deals will be converted to longer
term contracts in the weeks ahead.
Freeman said California now has under contract or in various
stages of pre-contract agreements more than 10,000 MW of power, $40
billion worth over a 10-year period with a mixture of lengths of
time, including five-, three-, one-year deals, along with the
10-year pacts. For this year, the six-month-and-under deals include
about 5,000 to 6,000 MW, which is about one-third of what the state
needs to avoid rolling blackouts this summer.
By itself, conservation will not fill all of the void, Freeman
said, but he thinks there are still power supplies "out there" for
the state, "they just haven't been nailed down yet."
The real power of the state's stepped up conservation efforts,
Freeman said, is "to affect the market price" for electricity,
driving it down. "We're in a supply-demand situation, and one of
the things we intend to do is change the whole psychology of the
market," he said. "Knocking 10% off the total demand, changes this
from a clear shortage situation to one where we might get by. We're
talking about 5,000 MW."
The 40 contracts signed with 20 suppliers have an average price
of $69/MWh and a range of $61 to $79/MWh. Freeman said that he
thinks "there is as good a chance that the state's new deals will
go below market prices more often than they are above" over the
lives of the various contracts.
Tossing aside criticism that California's new-found reliance on
long-term power contracts may cost consumers billions of dollars
extra for electricity over the life of the contracts, Freeman said
he thinks it is ironic that some of the biggest critics of the
state deregulation efforts are convinced that low-cost electricity
will return in a few years. Freeman is skeptical.
He brushed aside the idea that anyone can accurately predict
where electricity and natural gas prices will be in the next five
to 10 years. His experience the past 25 years has taught him that
mixing various lengths of forward, fixed price contracts with spot
supplies is the best the state or anyone can do.
"What is the factual basis that the price of natural gas is
really going to reflect present forward curves?" Freeman asked
rhetorically during a half-hour interview. "The forward curves from
two years ago look pretty stupid today. Nobody has been able to
predict what is going to happen to prices. The fact that these
companies (generators/suppliers) are willing to bet that the (gas
and electric) prices are going down in entering into contracts with
me on that basis is a good thing for the state."
Richard Nemec, Los Angeles