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 contracts.

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

©Copyright 2001 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.