DWP Far Exceeded Profit It Reported

During the peak of California’s power crisis, the Los Angeles Department of Water and Power earned far greater profits selling electricity to the rest of the state than agency officials have previously acknowledged, according to a newly completed independent audit.

The document, obtained by The Times under the California Public Records Act, seems sure to reinforce charges by some consumer advocates that the public power company effectively helped its customers at the expense of those suffering blackouts and rate hikes.

The audit also undercuts efforts by Gov. Gray Davis and others to pin the blame for rising energy costs mainly on private, out-of-state generating companies.

For months, DWP officials have deflected questions about their prices by insisting that the agency sold power for just 15% above its costs.

As recently as July, former DWP chief S. David Freeman, who now heads Davis’ new statewide power authority, repeated that assurance in a letter to U.S. senators probing the energy meltdown.

But the audit findings show that DWP’s profits from electricity sales to power-starved areas of the state averaged 56% last year under Freeman’s stewardship.

Overall, during the worst 13 months of the crisis ending in May, records show that the DWP profited $200 million on sales of $680 million. It says it is still owed $180 million.

Beyond those higher profits, the DWP included expenses in its cost component that have little to do with generating electricity.

They include a $34-million cut for the city’s general fund--essentially a bonus for the utility’s owner--and an additional $42 million in overhead for such things as debt payment and return on the agency’s capital investments.

These overhead charges are three times higher than the amount considered reasonable by federal regulators.

In effect, unsuspecting ratepayers across the state, whose utilities have been battered by debt, are helping to pick up the tab for services that DWP consumers and city taxpayers would otherwise have to pay.

In an interview late last week, Freeman defended those costs and DWP’s profits, saying the agency went out of its way to help the state avert blackouts by cranking up its output from costly plants.

He insisted that he had issued “standing orders” to sell power at a profit of no more than 15%.

“We made a fair amount of money. It was not price gouging,” said Freeman, who contends that he led efforts to cap spiraling wholesale prices last year.

Freeman said he has not seen the audit but if profits were higher than 15%, then “I’m not embarrassed about it. It says nothing more than there’s enterprise at [the] DWP.”

The DWP’s new general manager, David Wiggs, said that his staff had found no documentation as of Friday to confirm the existence of a strict pricing policy within the agency during Freeman’s tenure.

“Maybe in hindsight,” Wiggs said, “it would have been better not to be so specific, but to say, ‘Look we’re gonna limit our recovery to a reasonable return for our customers.’ ”

Still, Wiggs said, even if the profit margin was higher than publicly stated, it was not excessive. “We charged just and reasonable rates,” he said, adding that the DWP now offers the state electricity with no profit margin.

Wiggs ordered the audit in May as questions intensified about the role of the DWP and other public power agencies in driving up the price of wholesale electricity during periods of scarcity.

Conducted by the auditing firm of PricewaterhouseCoopers, the study targeted a 13-month period beginning in May 2000. The results have provided critics with new ammunition.

“Taking advantage of residents in one part of the state to benefit residents in another part is not fair,” said Harry Snyder, senior advocate for Consumers Union. “This kind of behavior is what we expect from banks, savings and loans and insurance companies--not a public agency.”

Sen. Fred Thompson of Tennessee, the ranking Republican on the Governmental Affairs Committee, which is investigating the crisis, was one of those recently assured by Freeman in writing that DWP’s profits were limited to 15%.

“This is a cause for concern and deserves greater scrutiny,” he said after learning of the audit. “It would be ironic if it turns out that the L.A. Department of Water and Power was charging more than Gov. Davis’ ‘Texas Pirates,’ ” said Thompson.

The DWP became a key player in the energy crisis last year when the state’s deregulation of electricity began to backfire, with supply from the private generators contracting and wholesale prices exploding.

To keep the power flowing, the DWP--which had opted out of deregulation--cranked up its generating capacity and sold the extra electricity into the California market.

This helped avert even more extensive blackouts than the state experienced.

At the same time, however, the DWP and other publicly owned utilities in California and elsewhere charged some of the highest prices during the crisis, official reports would later show. Freeman repeatedly said the utility’s prices were high because it was forced to use its most costly, inefficient plants.

But the audit raises such serious questions about the DWP’s behavior that the matter has spilled into the 2002 gubernatorial contest.

Former Los Angeles Mayor Richard Riordan, a possible Republican challenger to Davis, last week moved to distance himself from the profits racked up by the DWP during his City Hall tenure.

In a letter to his successor, James K. Hahn, the former mayor said he only recently learned that the agency may have exceeded its stated profit ceiling.

If so, he said, the city should consider cutting a deal with the utilities and the state to reduce the estimated $180 million the city says it is still owed from earlier sales.

A Riordan spokesman said the former mayor deferred to the DWP to set prices for its electricity.

“The mayor never directed them to generate a profit from these sales,” said Jaime de la Vega, a senior advisor to Riordan’s campaign committee.

Freeman, now squarely in the Davis camp, disputes Riordan’s account. He said the mayor repeatedly questioned the agency’s pricing strategy.

He wanted to charge more, according to Freeman, in case the city only got a partial payment from Pacific Gas & Electric and Southern California Edison, which were slipping into insolvency.

Freeman described Riordan’s view as: “If we’re gonna continue to sell it to them, we ought to get a lot of money. He was thinking of it the way a good businessman thinks of it.”

For the most part, the Davis administration has gone light on public agencies that have profited in California’s haywire energy market. Freeman contends that other suppliers drove prices higher through aggressive bidding practices that lifted the entire market, including his agency.

But according to a report by the state’s grid operator, DWP was one of the most aggressive, along with the trading arm of BC Hydro, the government-owned utility in British Columbia.

Yet another report--this one by the state’s power-buying agency--found that the DWP and some other public utilities charged higher than average prices during the first quarter of this year.

The report said DWP charged an average of $292 per megawatt hour, asking more than many private generators.

It could not be determined how much the utility was charging per megawatt hour last year when its profit margin was even higher.

Even after the market problems cited by Freeman were corrected earlier this year, the DWP collected profits more than 40% higher than it claimed to have netted, records show.

Overall, during the 13-month period audited, profits averaged 29%, double the return the agency has publicly stated it was receiving.

Although Davis and his aides have tried to keep the focus on Texas-based energy suppliers, Republican lawmakers in Sacramento and Washington have been broadening the debate to include the conduct of government-owned utilities.

One key question is whether those agencies, like private suppliers, should be forced to refund excess profits.

The primary venue for refund orders has been the Federal Energy Regulatory Commission, which is expected to rule in December on whether the state should receive the billions of dollars it claims to have been overcharged.

DWP insists it is outside the commission’s jurisdiction. But some California legislators argue that state law may give them authority to demand refunds from public utilities.

The leading proponent of that course is state Sen. Ray Haynes (R-Riverside).

In a letter to a Senate investigating committee last month, he said he fears that the continuing disclosures about the DWP and others are “merely the tip of the iceberg relating to greed of in-state public utility agencies.”

The chairman of that committee, Sen. Joe Dunn (D-Santa Ana), said his panel will examine the activities of these agencies in the months ahead.