Power Contracts Improved After Freeman Left

California struck better long-term electricity deals after S. David Freeman stepped down as negotiator in March, say auditors who analyzed the dozens of power contracts the state signed last spring to tame a wild electricity market.

The contracts became more advantageous to the state after the Department of Water Resources took control of the negotiations from Freeman and other energy advisors to Gov. Gray Davis, concluded state auditor Elaine M. Howle.

After March, when Freeman returned to his post as general manager of the Los Angeles Department of Water and Power, the state’s negotiations slowed and focused on including more safeguards. Unfortunately, auditors conclude, few additional contracts were signed.

More than 80% of the power the state has committed to buy over the next decade was locked up in contracts the state hurriedly negotiated in January and February, according to the audit released last week.

“While the terms and conditions improved in the long-term contracts negotiated after March 2001,” auditors wrote, “the department negotiated the vast majority of the power, costing $35.9 billion, before March 2, 2001, during the period in which we found that the terms and conditions regarding reliability of power delivery were least favorable to the state.”

In particular, auditors concluded, only a few of the contracts give the state the right to terminate the agreement if a company fails to deliver electricity as promised. While that has not been a problem thus far under the contracts, it could be in the future, auditors warned.

The Bureau of State Audits summed up the state’s approach to negotiating in January and February by quoting from a water resources department employee’s notes after a conversation with Freeman and energy consultant Vikram Budhraja: “In negotiating contracts/agreements, everyone needs to realize that perfection may destroy and make processes unmanageable. Our focus should be to come out of the ‘hole’ as soon as possible.”

The audit does not mention Freeman by name, referring to him as “the energy advisor appointed by the governor.” But the audit conclusions may be raised after the Legislature reconvenes Jan. 7 and the Senate decides whether to confirm Freeman as chairman of the 5-month-old Consumer Power and Conservation Financing Authority.

Freeman refused to comment on the audit Wednesday, saying he will not discuss the contracts while they are being renegotiated.

But he has said critics should remember that the state had practically no leverage at the bargaining table. It was asking energy companies owed hundreds of millions of dollars by California utilities to begin selling the state electricity at prices one-fourth of what they could earn in the spot market, Freeman has said.

A veteran of some of the nation’s biggest public power agencies, Freeman played assorted roles through the California electricity crisis. He took a leave of absence from the Los Angeles Department of Water and Power in January to help negotiate long-term contracts for the state. He returned briefly to DWP before settling back in Sacramento in April to work for Davis.

In all, the state has signed 57 agreements worth $43 billion with private power companies, which have agreed to provide much of the state’s electricity needs for months or years at a time--an antidote to a flawed deregulation design that forced utilities to buy almost exclusively from a spot market where prices spiked to record heights.

Those prices drained billions of dollars from Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric, until in January power companies shunned them as a bad credit risk. To avoid widespread blackouts, Davis pushed the Department of Water Resources to buy electricity on behalf of the utilities and lock up power contracts at cheaper prices as quickly as possible.

While the contracts helped buffer the state from soaring wholesale electricity prices last spring, the situation has reversed itself. Market prices have collapsed to roughly $30 per megawatt-hour--less than half of the average price in the long-term contracts.