COMPANY LOOKED FOR ALLY : DEPUTY MAYOR PRESSED TO VOID ENERGY DEAL BEFORE LEGAL LEAK KEELEY CAUGHT BETWEEN COMPANIES.

Byline: Chip Jacobs and Patrick McGreevy Daily News Staff Writers

Hoping he would help scuttle a controversial energy deal and shift the business to it, the California Energy Co. Inc. turned last year to Deputy Mayor Michael Keeley, records and interviews show.

In the month before he leaked confidential legal documents to California Energy's lawyers, Keeley was lobbied heavily by the company, which wanted his intervention in declaring the Department of Water and Power deal illegal.

California Energy officials said in an interview Thursday that they appreciated Keeley's willingness to consider that the DWP's deal with another company, the Calpine Corp., might be a bad one for the city.

``It's clear we had (in Keeley) somebody we could talk to,'' said Dale Schuster, vice president of California Energy.

``His primary concern was that there wasn't a whole lot of value in the (Calpine) deal to the city, and it would be a nuisance and time waster.''

Joe Ronan, Calpine's general counsel, said that when Keeley ``became involved in this personally'' it gave California Energy special access.

``We were told they had a meeting with Keeley. We asked (for a meeting) but never got one,'' Ronan said. ``It became apparent to us that we were in a political arena. It became very difficult and very frustrating to complete the contract.''

Keeley declined comment Thursday pending completion of an investigation into his conduct by Mayoral Chief of Staff Robin Kramer and former City Attorney Burt Pines.

Correspondence and memorandums obtained by the Daily News indicate that California Energy bombarded Keeley, the DWP and other city officials with letters attacking the Calpine deal.

The records indicate a flurry of activity in the month leading up to Sept. 8, 1995 - the date Keeley leaked confidential legal documents to California Energy's lawyers:

On Aug. 8, 1995, the Board of Water and Power commissioners transmitted to the City Council its recommendation that the council approve a contract between the DWP and the Calpine Corp. to develop geothermal energy plants near China Lake. The transmittal indicated that the mayor had given his verbal approval to the deal, but a legislative aide in the Mayor's Office struck that out and said the mayor was still reviewing the deal.

That same day, John R. Shiner, a lawyer and board member for California Energy - whose bid for the leases had been rejected by the DWP - sent a one-page letter to the City Attorney's Office protesting the lease deal as illegal because of amendments made after the bid process. A copy of the letter was sent to Keeley.

On Aug. 16 California Energy President Thomas R. Mason sent a four-page letter directly to Keeley, insisting that the contract with Calpine should be declared illegal and the leases reopened to public bid.

On Aug. 21 Keeley wrote to Councilwoman Ruth Galanter, chair of the committee considering the leases.

Noting California Energy's concerns - but not taking a position on whether he agreed with them or not - Keeley wrote that any benefit from the agreement ``is illusory if the proposed agreement is not legal.''

``Although the City Attorney's Office has indicated orally that it is comfortable with the legality of the proposed contracts, I have not seen its analysis in writing,'' Keeley wrote.

``I am uncomfortable making a recommendation to the mayor on this matter without benefit of the city attorney's written legal analysis,'' he wrote.

On Aug. 24 Mason, the California Energy president, sent a three-page letter to Keeley, praising his willingness to consider the company's argument - unlike the DWP, which ``has refused to listen.''

``We are encouraged that you are willing to seriously consider our concerns regarding the illegality and illogic of the proposed DWP-Calpine arrangements, and look forward to discussing the matter with you or anyone else you would like to have attend,'' Mason wrote.

Mason's letter indicates that California Energy had placed a $4 million offer on the table for the leases - but was turned down by the DWP, which estimated they were worth between $8 million and $30 million.

Mason disputed those estimates, and said he was so sure he was right he was willing to make a ``binding offer to the city'' to test the value in a winner-take-all public auction of the leases.

``If a public auction is held for the leases within the next 45 days, and the city closes a cash sale of the leases within 45 days of the auction for an amount in excess of $5 million, then (California Energy) will pay the city $5 million in cash within three business days of the closing,'' he wrote.

On Aug. 28 Deputy City Attorney Stanton J. Snyder provided Keeley with a memorandum outlining the legal issues involving the leases - and detailing how the city would respond to potential lawsuits by either California Energy or CalPine.

The memorandum was marked ``Privileged and Confidential Attorney-Client Communication.''

On Sept. 8 Keeley faxed a copy of the confidential memorandum to Shiner, California Energy's chief lawyer.

``Attached is the city attorney's analysis of our position,'' he typed on the cover sheet. ``I find this memo to be well reasoned and persuasive, and I invite you to apprise me of any opposing points of view.''

Conceding that leaking the document violated the city attorney's wishes, he asked Shiner to take precautions in the way he worded any response.

``The city attorney did not want me to share these materials with you, so if you choose to respond I'd prefer that you structure your response without a direct reference to the attached, if possible, so that the response can be shared with others as appropriate,'' Keeley wrote.

On Sept. 11 Shiner wrote a letter to the City Council, with a copy to Keeley, outlining its position on the leases - using language that echoed some of the points made in Snyder's memo.

A little over a month later, on Oct. 18, the City Council approved the leases with CalPine. Riordan approved it eight days later.

On Jan. 16 California Energy filed a lawsuit against the DWP, claiming the leases were illegal.

The matter erupted in a public controversy last week, when City Attorney James Hahn announced he had just learned of Keeley's Sept. 8 leak of the confidential legal documents to California Energy's lawyer.

Hahn demanded that Keeley be fired or step down, and said he would not share any confidential information with the Mayor's Office as long as Keeley was on the job.

Keeley over the weekend submitted his resignation - but it was rejected by Riordan, who said he wanted a more detailed investigation of what had happened.

Since then the City Council has issued a vote of no-confidence in Keeley, pressuring the mayor to force his chief operating officer aside.

In his resignation letter, Keeley conceded to ``mistakes in my work on the Coso lease dispute, especially in the way in which I handled intra-city communications.''

He said the language of his Sept. 8 cover letter to Shiner ``reflected extremely poor judgment'' - but he would not concede that it was improper to have turned the material over to Shiner.

``In fact, I had informed Stanton Snyder of the City Attorney's Office of my intention to share his legal analysis with (California Energy's lawyers) before it was sent, but I failed to inform him after the fact that I had not done so,'' Keeley wrote.

Keeley said his actions had been misunderstood - that all he was trying to do was broker an agreement that would be in ``the city's best interests.''

``My only objective was to assist in the resolution of a multimillion-dollar contract dispute,'' he wrote. ``I believe the investigations will ultimately conclude that I was at all times acting in the city's best interest.''

Keeley declined Thursday to comment on details of the investigation and his actions, saying he would have nothing more to say until Kramer's investigation is complete.

He told reporters earlier in the week that he believes he was within his rights as a client of the city attorney to waive the attorney-client confidentiality privilege.

``My goal was to get the best deal for the taxpayers, and I believe that sharing the memorandum at that time was both the mayor's prerogative and also something in the interest of the taxpayers to try to effectuate a settlement,'' he said.

``I was . . . acting in a capacity as the mayor's chief operating officer, trying to give the mayor advice about how this particular contract matter should be structured and resolved,'' Keeley added.

``My entire effort was to try to avert that litigation,'' Keeley said.

Schuster of California Energy defended his company's attempt to win the geothermal deal outright as an above-board effort.

By keeping Calpine on the job, he contended, the DWP squandered millions of dollars in revenue at a time when budgets are tight.

``What is sad in my mind is that there was some value we as a company could have seen from this process, and it would have been shared with the city,'' Schuster said. ``We saw them wasting a valuable asset.''

Los Angeles residents have spent $20 million on the geothermal energy lease deal, and that money would be lost, along with millions more in potential revenue, if the proposed plant is not built by next year, according to the City Attorney's Office.

CAPTION(S):

2 Photos

PHOTO (1 -- color) Deputy Mayor Michael Keeley put his t roubles on hold at a budget meeting Thursday.

(2) Michael Keeley meets audience members after the budget briefing.

Evan Yee/Daily News