DWP May Have Profited Unfairly From Energy Crisis

Although Texas companies have gained the most notoriety for their role in California’s energy crisis, more evidence is emerging that the Los Angeles Department of Water and Power may have violated state regulations by profiting unfairly from trading practices.

DWP officials have denied gaming the market.

But a summary of sealed evidence filed with federal regulators this week by California officials said the DWP and several smaller municipal utilities were willing partners in a congestion scheme known as “Death Star.” The ploy allegedly involved scheduling nonexistent transmissions to create the appearance of congestion so that utilities and power generators could collect payments to relieve it.

The report also said state investigators had uncovered evidence that the DWP cooperated with private power providers to hinder the detection of “ricochet” transactions, in which energy companies moved electricity back and forth across the state border to increase its price.

Meanwhile, a state Senate investigator disclosed on Tuesday that California’s power grid operator reported to the state attorney general last summer that the DWP’s ricochet trades violated state regulations against manipulating the electricity transmission market.

The July 23 report by the California Independent System Operator, which has not been released publicly, found that the Los Angeles utility aggravated congestion during the fall of 2000 by moving power to the Oregon border to inflate its price, said Scott Chavez, the consultant for the state Senate select committee on the energy crisis.

The system operator took no action against the DWP over the alleged violation but turned its report over to federal regulators as well as to the state attorney general, Chavez said.

Transcripts obtained by the committee appear to show DWP traders discussing ricochet activities.

In one transcript, a DWP trader coaches another firm’s trader on how to describe a Nov. 11, 2000, transaction that had been rejected by Cal-ISO as a prohibited ricochet.

According to the transcript, the DWP bought 50 megawatt-hours from the unregulated trading arm of Pacific Gas & Electric Co. for $70 each, moved it to the Oregon border, then sold it back for $95 a megawatt-hour. The PG&E; trader, in turn, sold it for $250, which was then the state price cap.

In the tape-recorded conversation, the DWP trader scolded the PG&E; trader for saying PG&E; bought the power “back” from DWP.

“Don’t say ‘back,’ because back is a bad thing,” the DWP trader said. “Just say, ‘Listen -- I’m buying this from you.’ ”

When the other trader repeated the phrase again, the DWP trader interjected, “No -- I’m telling you not to say the word ‘back!’ ”

Later he expanded: “It’s very important that you’re buying from me, you know, not this back stuff or whatever.... It kind of throws problems into the issue.”

DWP officials said they already had refuted the charges of market gaming in an independent audit completed last month and that they were aware of nothing new in this week’s filing. The audit, by law firm VanNess Feldman, said that the trade described in the transcript was not an illegal ricochet designed to defeat price caps.

DWP officials say the power never left California and that the agency simply was selling capacity on its transmission line.

The law firm’s report also said that the DWP “would not necessarily be aware” that its transmission capacity was being used for such ploys.

The state attorney general’s office, two other state agencies and the state’s two largest electric utilities filed the allegations against 70 energy companies and municipal utilities Monday with the Federal Energy Regulatory Commission. The coalition is seeking $9 billion in refunds for alleged electricity overcharges during the energy crisis.

The companies and municipal utilities are disputing the allegations. Even so, the inclusion of the DWP -- as well as utilities for Glendale, Pasadena, Anaheim and other cities -- is rekindling a debate about how municipal utilities should balance their responsibility to the state in an emergency with their charge to reap returns for their ratepayers.

Michael Peevey, president of the California Public Utilities Commission, called the allegations against the municipal utilities “deeply troubling,” although he had not seen the evidence of questionable trades.

“Obviously, DWP always had the ability to participate in these things in a significant way,” he said.

State Sen. Bill Morrow (R-Oceanside), the select committee’s vice chairman, maintains that the DWP should be held to a higher standard than other power generators because it is a public entity. Morrow said evidence that the DWP engaged in some of the same ploys used by Enron Corp. emerged during hearings by his panel last summer and that it strains credulity to suggest that DWP didn’t know what was going on.

“I don’t know how you do these things without knowing it,” Morrow said. He said that there was “a reasonable argument that there was a violation of law” by the DWP.

The DWP’s trading practices have been under scrutiny since the 2000-01 energy crisis.

As energy prices soared in the state, DWP officials announced a policy in late 2000 of providing power at only 15% above cost. But an internal audit the next year showed DWP made profits exceeding 50%.

The VanNess external audit last month attributed the discrepancy to the use of computer models, instead of real-time information, to establish power bids.

Morrow, who handled the Senate committee’s investigation of municipal utilities, led an 18-month campaign to extract documents from the DWP, whose resistance he described as “shameless.” DWP executives in June produced transcripts of trader conversations but left out damaging comments. DWP officials later conceded that their transcriber inadvertently omitted the remarks.

Dubious of that explanation, the committee asked Cal-ISO to investigate. Cal-ISO found a violation of trading rules but did not release the finding publicly because it contained confidential bidding information, said Chavez, the panel’s consultant.