Water agency said to be in over its head as a trader David Lazarus, Chronicle Staff Writer Sunday, March 18, 2001 ©2001 San Francisco Chronicle

URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/03/18/MN159243.DTL

Sacramento -- The last line of defense in coping with California's energy crisis is a narrow, windowless room in a former department store on the outskirts of the state capital.

There, a handful of men and women huddle over computer screens on a couple of folding tables for as long as 14 hours a day. Junk-food wrappers and bags of candy share the cluttered space with detailed charts and analyses.

The numbers flash across the monitors -- offering prices from power companies stretching from Canada to Texas. There is little time to think. Within seconds, the traders are committing millions of dollars in public funds to secure enough electricity to keep California's lights on.

This is, most people agree, not a good way for the state to be buying electricity.

"I'm sure we've made a lot of mistakes," said Thomas Hannigan, director of the state Department of Water Resources, which has been delegated by Gov. Gray Davis to purchase power on behalf of near-bankrupt utilities.

By nearly all accounts, the luckless bureaucrats at the DWR are being torn to shreds by professional energy traders, who see in California's power- purchasing plan a golden opportunity to make off with billions in extra profits.

"It's like being in a lion cage or a snake pit, however you want to define it," Hannigan said. "We've definitely gotten burned. That goes without saying."

In fact, state officials estimated last week that the DWR is shelling out roughly $350 million a week on the volatile electricity "spot" market and will have spent almost $4 billion by the end of the month.

At this rate, the state will use up by the end of July the entire $10 billion authorized by the Legislature for power purchases.

CALPIRG CALLS IT GOUGING "The state is clearly being taken advantage of," said Dan Jacobson, consumer program director of the California Public Interest Research Group. "It looks like the power generators are gouging us for as much as they can."

Leading power companies deny that they are artificially driving electricity prices higher or that they are gouging California consumers. But not one was willing to speak on the record about how well the DWR is doing in the frequently cutthroat energy business.

Several industry sources said they had been advised not to discuss the DWR's performance since a trading manager at Bonneville Power Administration in Portland, Ore., was quoted as saying that California's new electricity buyers "agree to prices that make you wonder."

The manager, David Mills, told the Wall Street Journal that the DWR is so out of its depth that he has instructed Bonneville's traders "to cut California some slack" by occasionally offering cut-rate prices.

A Bonneville spokesman said last week that Mills had been misquoted, but the damage already was done: The DWR is now widely perceived in energy circles as a pushover.

'NO LEVERAGE IN THE MARKET'

This does not sit well with DWR workers, who insist they are doing the best they can under highly difficult conditions.

"We have done a good job considering that we have no leverage in the market, " said Viju Patel, executive manager of the DWR's power systems department. "We are dealing with very aggressive traders, and they have the advantage. It's a seller's market."

This is new for the DWR, which oversees the state's water assets -- aqueducts, dams, irrigation -- and until now has confined its power buying largely to long-term contracts needed to keep pumps operating during electricity shortfalls.

That changed in December when the Independent System Operator, manager of California's power network, contacted the department during a shortage and asked the DWR to buy about $20 million worth of juice to help avert blackouts.

Subsequent purchases placed the DWR almost $43 million in the hole. It has yet to recoup its costs from the ISO and the utilities that ultimately used the power for customers -- and which subsequently have defaulted on paying their power bills.

"We made that deal only on a handshake," said Hannigan, the DWR's director. "But we couldn't say no, could we?"

As California's troubles worsened, and as Pacific Gas and Electric Co. and Southern California Edison grew increasingly unable to meet customer demand, the governor realized a state agency would have to ride point in tackling the energy crisis.

Davis turned to the DWR. Simply put, the department's admittedly limited experience in the electricity market was still the most extensive he could find.

"This was all new to us," Hannigan said. "When the crisis landed in our lap,

we reacted basically by applying a flood-management mentality to it. Crisis management is crisis management."

SECRET LOCATION, INFORMATION Thus, the DWR responded to the governor's marching orders by establishing an emergency center in the brick-covered facility it shares with branches of the U.S. Fish and Wildlife Service and the National Weather Service.

The so-called Joint Operations Center occupies a renovated department store in an otherwise mundane Sacramento shopping mall.

DWR workers deliberately ask reporters not to say where exactly the facility is located. They're concerned that disgruntled consumers will vent their frustration over high energy prices by attacking the building, as the man who rammed a truck into the state Capitol in January allegedly did.

The makeshift "Grid Operations Center," where power is now being purchased, is tucked away behind a locked door on the third floor. Sonny Fong, the DWR's emergency preparedness manager, watched nervously as a recent visitor cast his eyes over the whiteboards on the room's walls.

The boards list all the power companies with which the DWR is trading and the prices that each is charging California for electricity.

"Don't write any of that down," Fong admonished. "It's secret information. We can't let any of that get out."

Keeping a lid on its activities has become a full-time job for the DWR. For example, Fong adamantly refuses to allow anyone to speak with the department's traders, even during breaks in the action.

"If I let you do it," he said, "I'd have to let everyone do it."

Similarly, Patel, the power systems manager, said he could not under any circumstances open his desk drawer and show a visitor one of the 40 long-term contracts signed by the DWR this month with generators.

SEEKING ACCESS TO CONTRACTS Access to the contracts, involving about $40 billion in public funds, has been sought by lawmakers, consumer groups and a number of media organizations, including The Chronicle.

In response, the governor's office has insisted that disclosure of specific contract terms would jeopardize the DWR's bargaining position and thus be contrary to "public interest."

"If I let you see them, I would have to let everyone see them," Patel said.

He did acknowledge, though, that the contracts contain so much legal gobbledygook that "you probably would not understand them in any case."

It's Hannigan, as head of the department, who has signed his name to each of the contracts. Yet even he admits he has only a loose grasp of the details, which were hammered out by teams of lawyers.

"We got the best deal we could get," Hannigan said.

He observed, however, that the DWR's negotiating stance was weakened by the generators' awareness that blackouts will not be tolerated by California's leaders -- even with a summer of dire shortages on the horizon.

This allowed the power companies to really tighten the screws in seeking the best possible sales terms.

"They know this summer will be one big barbecue," Hannigan said. "They won't stop until they drain all our resources."

LEARNING TO BE ADVERSARIAL The DWR is unaccustomed to adversarial relationships in tackling a crisis. In the event of a flood or earthquake, the department's crisis teams normally meet with full cooperation from others when organizing countermeasures.

But with the current energy crisis, the DWR is scrambling to mount a suitable offense while simultaneously playing defense against profit-hungry power companies.

"It's been a learning experience for us," said Fong, who has been helping coordinate emergency responses at the department for years. "We didn't know what we would be up against.

"With a flood," he added, "you can see the direct impact. With this, you can't really get a handle on things."

Fong and other DWR officials are quick to note that the department has brought in outside energy experts from Navigant Consulting and Deloitte & Touche.

"We may not be up to the task," Fong said. "We may not know how to play the market. But we've brought in people who do."

Dominic Young, the Deloitte partner helping guide the DWR through the jungle of the energy business, sees the department's burgeoning street smarts as a work in progress.

"Does the DWR have a trading floor like Duke or Reliant?" he asked, citing two of the biggest players in the power game. "No, they do not. If they want to stay in this business, they clearly need to improve."

NEW FACILITY The department is trying to do just that. Next week, the DWR's electricity traders are expected to move from their folding tables to a brand-new, 25,000- square-foot facility on another floor.

Whether the trades remain under the aegis of the DWR is another matter.

Hannigan said he doesn't want his department to remain in the energy business for years to come. Given his choice, he said he would prefer power purchases being made by a newly created state energy authority, as proposed by legislation now on the drawing board.

While some at the DWR appear to enjoy the department's newfound notoriety, Hannigan, 60, is not one of them.

He said he is looking forward to retirement and spending more time with his family. Being at the center of California's energy storm is clearly a headache he'd rather not have at this point in his career.

"I know we're outgunned," he said. "I just don't know how badly."

-------------------------------------------------------------------------------- The Power Cycle

1. Electricity Providers

Power companies stretching from Canada to Texas offer electricity to shortage-plagued California. They have been accused of gouging consumers by charging sky-high wholesale rates.

2. Department of Water Resources

Department of Water Resources state bureaucrats are spending $350 million a week purchasing electricity on behalf of utilities. One energy trader said the DWR willingly agrees to pay "prices that make you wonder."

3. Troubled Utilities

PG&E and Edison say they do not have enough money to purchase power for customers. So they let the DWR do the buying and then PG&E and Edison pass along the electricity -- and costs -- to millions of consumers.

4. The Consumers

California's energy woes ultimately will be born by consumers, either in the form of higher rates or higher taxes. Consumers will be accountable for all money that goes to buy electricity. Source: Chronicle research Chronicle Graphic

E-mail David Lazarus at dlazarus@sfchronicle.com.

-- Martin Thompson (mthom1927@aol.com), March 18, 2001

Answers

I predict that solar energy is going to make a massive resurgence in southern california. Until we can provide for our own energy needs on the household level, we're going to be held over a barrel. By the time they get all the natural gas plants built, the huge demand for energy will have shrunk and a bunch of them will be sitting idle. But that's unlikely because we allow unlimited illegal immigration.

-- Guy Daley (guydaley@altavista.com), March 18, 2001.

This article paints quite a different picture of the DWR guys. In the first article the traders were portrayed as steely eyed adrenaline junkies. Stumble and bumble is this viewpoint.

-- Phil Maley (maley@cnw.com), March 18, 2001.