Hahn Orders DWP to Probe Power Deals

Mayor James K. Hahn called on the Los Angeles Department of Water and Power on Friday to investigate allegations that the city-owned utility had engaged in power-trading deals aimed at elevating prices.

Saying he was disturbed by evidence uncovered by state Senate investigators this week, the mayor directed DWP’s general manager, David Wiggs, to immediately launch a thorough investigation of whether the utility had engaged in schemes dubbed “ricochets” by power traders.

Wiggs, who was not in charge of the city-owned utility during the electricity crisis of 2000 and 2001, said the agency would begin interviewing all energy traders and give DWP commissioners an update Tuesday.

Touted during California’s electricity crisis as a better, more reliable supplier of power than private enterprise, the DWP now finds its image tarnished by the same charges of greed and gaming that have dogged private energy companies.

In Sacramento Thursday, DWP officials denied that they had engaged in daisy-chain trades that match a scheme called a ricochet by Enron Corp. traders. Also known as megawatt laundering, a ricochet involves shuttling electricity out of the state, then bringing it back for sale to California grid operators at higher prices.

Some city officials defended the utility Friday.

“This is the agency that kept California running during the energy crisis,” said Councilwoman Ruth Galanter, who heads the council’s Commerce, Energy and Resources Committee. “It’s kind of painful to have them turn around and say, ‘You guys are the bad guys.’ ”

DWP officials swore to state and federal investigators last month that they had not engaged in such transactions in 2000.

But a Senate committee that has been investigating manipulation of California’s electricity market for the last year collected e-mails and phone transcripts that detail a seven-step deal on Nov. 12, 2000, that was halted after one hour by the California Independent System Operator because it was, Cal-ISO officials said, a “ricochet” that violated their rules.

In that incident, power sold to the DWP for $70 per megawatt-hour was shipped to the Oregon border and back again and eventually sold to Cal-ISO, which manages much of the state’s transmission grid, for $250 per megawatt-hour.

DWP’s power trading supervisor, Mark Ward, testified to lawmakers Thursday that the deal had not been designed to raise prices or to skirt federal price caps in California.

The utility earned only $1,250 in transmission fees, he said.

Lawmakers are expected to scrutinize the DWP’s power trading practices further in future hearings.

The investigation revives questions about whether DWP profited from the meltdown of California’s electricity market at the expense of the customers served by other utilities. Those familiar with California’s now defunct power market note that in 2000 and 2001, the DWP often delivered power that helped the state avoid blackouts--but usually in the late afternoon, as demand and prices peaked.

S. David Freeman, DWP general manager at the time, said he told his traders to sell power at 15% above cost. An audit produced by DWP after Freeman resigned in the spring of 2001 found that the company had earned an average 56% profit on its sales to the California power market, although the DWP could have earned more money than it sought, under market bidding rules.

Charges of gouging by the DWP dogged former Mayor Richard Riordan in his failed race for governor this year, and now the allegations of a ricochet scheme have delayed Freeman’s appointment to the state’s new public power authority.

Senate President Pro Tem John Burton (D-San Francisco) put off a vote to confirm Freeman until lawmakers could learn more about the allegations.

The DWP commission’s vice president, Dominick W. Rubalcava, said Sacramento politicians are looking for a scapegoat.

“People who are running state government are embarrassed, and they’re being scrutinized,” he said. “So what’s the best defense? Point the finger at somebody else.”

The agency, he said, “has probably taken hits because it has conducted itself as a business operating in the private sector, as opposed to a government agency. Had we been conducting ourselves as a government agency, we would have been short of power.”

As a publicly owned utility, the DWP chose to watch from the sidelines in 1998 as California lifted regulation from its private utilities and launched the nation’s most extensive deregulation plan.

As the market created under that plan imploded, the customers of Pacific Gas & Electric and Southern California Edison suffered rate hikes and blackouts, while DWP customers enjoyed stable prices and abundant supplies.

“There are way too many people in the state of California who find L.A. bashing a good sport, and DWP is getting a certain amount of that,” Galanter said. “This department is actually doing a wonderful job at everything but its publicity.”

Sen. Debra Bowen (D-Marina del Rey), who sits on the Senate committee investigating the DWP and many other participants in the electricity market, said, “I don’t have an indictment in my back pocket in any sense.” But a growing body of evidence indicates that power traders used publicly owned transmission lines to avoid scrutiny by Cal-ISO.

The latest allegations against the DWP once again raise the issue of how a municipal utility ought to weigh its obligation to keep costs low for its customers against the good of the state at large.

“They’re a public enterprise providing a service that a private enterprise provides in other places,” said Steven Erie, a UC San Diego political science professor who is writing a book about the DWP. “They have to act like a business.”

“The question is whether a ricochet goes too far,” he said. “Let’s wait until the evidence is in.”

City Councilman Jack Weiss said it would be “inexcusable” for the DWP to have overcharged or gamed the electricity market at the expense of utility customers elsewhere in the state.

“Although the city of Los Angeles has its own power source, we are inextricably intertwined with the state of California,” he said. “‘I don’t view the relationship between the city and state as us versus them. We’re all in it together.”