CITY COULD LOSE BIG ON STEAM PLANT.

Byline: Chip Jacobs Daily News Staff Writer

Los Angeles taxpayers have spent $20 million that would be lost, along with millions more in potential revenue, if a proposed geothermal energy plant now at center stage in the Michael Keeley furor is not built by next year, according to the City Attorney's Office.

City water and power officials have been investing steadily in the controversial project since the early 1980s, according to a memo drafted Monday by Assistant City Attorney Charles E. Dickerson.

Yet despite the $20 million investment, the project has not so much as broken ground - even though the city faces a deadline next year for completing the plant and producing steam energy from it.

If the deadline is not met, the city could lose its lease on the land and forfeit not only the money invested to date, but anticipated profits that could total tens of millions of dollars over the next three decades.

``If the production of the geothermal energy has not commenced by 1997, the city could lose the lease and the asset would revert back to the federal government,'' Dickerson wrote.

The memo was written at the request of City Councilman Mark Ridley-Thomas, who asked for a ``rough analysis of the economic impact of the current litigation'' at the center of the controversy involving Deputy Mayor Michael Keeley.

William McCarley, general manager of the city Department of Water and Power, acknowledged Tuesday that the agency is mired in a losing deal.

``Who knows if it will ever get built?'' McCarley said. ``The department has obviously incurred expenditures. Any investment by a utility is paid for by its customers.''

The proposed Coso Geothermal Project lies at the heart of the political uproar ignited Friday when City Attorney James Hahn accused Keeley of leaking sensitive legal documents to a law firm suing the city on behalf of California Energy Co., an Omaha, Neb., firm.

California Energy's suit claims that it lost the contract to turn steam energy into electricity to San Jose-based Calpine Corp. because competitive bidding rules were breached when an earlier agreement was updated.

City water officials were excited about the prospects of geothermal power when they leased nearly seven acres of federal land in Inyo County in 1981 when energy prices were high.

The $300 million to $400 million Coso project, located 150 miles north of Los Angeles within the U.S. Naval Weapons Center at China Lake, is roughly three years behind schedule, energy officials say.

In his memo, Dickerson said the Mayor's Office was responsible for slowing down the energy project in October 1994 when Riordan recommended the ``asset be sold at the time.''

Mayoral spokeswoman Noelia Rodriguez said she would not comment on the memo because Riordan's office hadn't seen it.

Besides the potential loss of the $20 million already spent, DWP engineers estimate that delays in tapping into the underground steam reserve have cost the city an additional $16.9 million in sales between October 1994 and today, according to the memo.

Ridley-Thomas said the memo points to a cozy relationship between the Mayor's Office and businesses tied to it.

``It gets to be very, very problematic in whether the Mayor's Office is working in the best interests of the city or some other interests,'' said Ridley-Thomas.

McCarley said that when he became DWP general manager, he tried his best to get the project under way.

``My concern was to get something moving: It was obviously stalled,'' he said.

Ironically, Los Angeles' problems have benefited California Energy, according to the Dickerson memo. The company operates geothermal plants adjacent to Coso and has tapped into an estimated $15 million in steam power the DWP-Calpine project might have capitalized on, he wrote.

Calpine's general counsel, Joe Ronan, said his company is surprised by the revelations of leaked documents and is reviewing its legal options.

``We've been pretty frustrated,'' Ronan said. ``(And) the city has lost a tremendous amount of revenue from the fact that the development is being delayed. This is the city's resource.''

Calpine was selected to build the 150 megawatt geothermal plant by city water officials in January 1992 after a lengthy competition. The plant is supposed to generate electricity to serve 200,000 to 400,000 Los Angeles residents.

In 1994, the DWP concluded the project shouldn't go forward because of a drop in its energy demands, as well as changes in air quality rules and industry deregulation, according to court records.

DWP officials amended the contract last spring so the city no longer was obligated to buy the energy, but just had an option to do so. The city-owned utility would earn royalties when the firm sold electricity to third parties.