California still faces a very uncertain electric supplysituation during peak-demand times this summer, and a massiveconservation effort about to be introduced by Gov. Gray Davis.Davis’ plan will impact all local government and businessesstatewide, and it may be the only way to avoid rolling blackouts,according to the state’s chief negotiator for long-term powercontracts.

While back at his post running the nation’s largest municipalutility, S. David Freeman said last week that longer term the stateshould have a balanced portfolio of power supplies. The suppliesare roughly divided into thirds with some coming from the incumbentutility’s remaining generation assets, others from renegotiatedqualifying facility (QF) contracts and the last third made up of acombination of the recently negotiated long-term deals (with termsranging from six months to 10 years) and some continuing butgreatly reduced reliance on spot supplies.

Freeman, general manager at the Los Angeles Department of Waterand Power (LADWP), just completed a five-week volunteer stint asDavis’s power supply negotiator.

It was tough getting the talks started, he said, because many ofthe prospective bidders were existing suppliers who had millions ofdollars of unpaid power bills with California’s utilities and thestate grid operator, Cal-ISO.

“The suppliers moved from an initial attitude of ‘why should weeven talk to you, you’re not paying us” to an eagerness on theirpart to close deals with us,” said Freeman, noting the state’s teamwas little more than himself and Budhraja and some “technicalpeople” from the state water resources department (DWR).

His only regret following the contract negotiations is thatthere isn’t more power under contract for this summer. However, hedoes think California has locked up every megawatt that wasavailable, and those short-term deals will be converted to longerterm contracts in the weeks ahead.

Freeman said California now has under contract or in variousstages of pre-contract agreements more than 10,000 MW of power, $40billion worth over a 10-year period with a mixture of lengths oftime, including five-, three-, one-year deals, along with the10-year pacts. For this year, the six-month-and-under deals includeabout 5,000 to 6,000 MW, which is about one-third of what the stateneeds to avoid rolling blackouts this summer.

By itself, conservation will not fill all of the void, Freemansaid, but he thinks there are still power supplies “out there” forthe 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 ofthe things we intend to do is change the whole psychology of themarket,” he said. “Knocking 10% off the total demand, changes thisfrom a clear shortage situation to one where we might get by. We’retalking about 5,000 MW.”

The 40 contracts signed with 20 suppliers have an average priceof $69/MWh and a range of $61 to $79/MWh. Freeman said that hethinks “there is as good a chance that the state’s new deals willgo below market prices more often than they are above” over thelives of the various contracts.

Tossing aside criticism that California’s new-found reliance onlong-term power contracts may cost consumers billions of dollarsextra for electricity over the life of the contracts, Freeman saidhe thinks it is ironic that some of the biggest critics of thestate deregulation efforts are convinced that low-cost electricitywill return in a few years. Freeman is skeptical.

He brushed aside the idea that anyone can accurately predictwhere electricity and natural gas prices will be in the next fiveto 10 years. His experience the past 25 years has taught him thatmixing various lengths of forward, fixed price contracts with spotsupplies is the best the state or anyone can do.

“What is the factual basis that the price of natural gas isreally going to reflect present forward curves?” Freeman askedrhetorically during a half-hour interview. “The forward curves fromtwo years ago look pretty stupid today. Nobody has been able topredict what is going to happen to prices. The fact that thesecompanies (generators/suppliers) are willing to bet that the (gasand electric) prices are going down in entering into contracts withme on that basis is a good thing for the state.”

Richard Nemec, Los Angeles

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