Power Chief Softens on Reopening Contracts

After months of defending the $43 billion worth of long-term electricity contracts he helped negotiate on behalf of the state, S. David Freeman suggested for the first time Monday that the contracts be renegotiated, perhaps through the new public power agency he now chairs.

“There seems to be pretty general agreement that these contracts need to be renegotiated,” said Freeman, noting that critics of the contracts include Gov. Gray Davis, the president of the Public Utilities Commission and the leader of the state Senate.

Freeman said he is still proud of his work negotiating the contracts with companies Davis labeled at the time as gougers and pirates. But California’s energy picture is vastly changed since January, he said.

In a daylong legislative hearing about what sort of role the 3-month-old California Power and Conservation Financing Authority should play, Freeman also seemed open to the idea of putting the vast hydroelectric network of Pacific Gas & Electric in public hands. The utility has proposed spinning off dozens of Northern California dams and reservoirs to an unregulated company that could charge market prices for what has long been one of the cheapest sources of power in California.

Called away from the helm of the Los Angeles Department of Water and Power last January to help Davis manage an emergency of soaring power prices and blackouts, Freeman told the Joint Legislative Audit Committee that his focus has shifted from crisis to the long-term shape of California’s energy industry.

The 75-year-old public power guru, appointed by Davis to chair the new agency, said the state could give private energy companies a financial incentive to renegotiate the electricity contracts. The agency’s ability to borrow money at below-market interest rates, Freeman said, should be attractive to the companies, which must finance the construction of power plants that may cost hundreds of millions of dollars.

In return for teaming up with the public power authority to get cheaper financing, he said, the companies might be willing to cut the prices in the contracts, some of which last 10 years, or give the state more flexibility in the timing and quantity of electricity that must be taken under the deals.

Critics say the state’s batch of 54 power agreements are too expensive. By requiring the state to buy power at times of low demand, such as early morning, the contracts also force the state to sell surplus power at a loss, they say. Davis defended the contracts until recently, when he agreed with critics that some should be renegotiated, but no serious talks about amending the contracts are underway.

Freeman suggested that his new agency and the Public Utilities Commission take another stab at getting power companies to the negotiating table.

“If one party has 6% money and the other party’s cost of money is double or triple that, there is the makings of a deal,” Freeman said.

“It’s a whole lot more incentive than saying, hey buddy, let’s renegotiate,” he said, and that 70% of the contracts involve the construction of new power plants.

The end result of renegotiations, Freeman said, would be savings for the 27 million people served by Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric. The state, through the Department of Water Resources, has been buying power for those financially crippled utilities.

Joe Ronan, vice president for Calpine, which has signed two 10-year contracts with the state for large amounts of power, called Freeman’s idea “innovative.”

“I think a number of companies would find that very attractive,” he said, “to enter into partnership with the state and construct new power facilities.”

But Calpine has finished three new power plants since June and does not need financing help, Ronan said.

“This wouldn’t be anything Calpine would use,” he said.

Davis spokesman Steve Maviglio said, “The governor said he wants to renegotiate the contracts and this is certainly an option.”

But Maviglio said the governor was not familiar with the idea of using the public power authority to take over PG&E;’s dams and powerhouses.

Assemblyman Fred Keeley, (D-Boulder Creek), chairman of the Assembly audit committee, suggested that the state find a way to keep PG&E;’s hydroelectric assets in public hands. Not only have PG&E;’s customers paid for the facilities, he said, the powerhouses provide electricity at just a few pennies per kilowatt-hour. PG&E; seeks through bankruptcy court to sell those assets to a subsidiary outside state regulation.

Freeman said he agreed that such a move could prove disastrous to California consumers.