JUDGE REJECTS DWP STEAM ENERGY CONTRACT.

Byline: Chip Jacobs and Patrick McGreevy Daily News Staff Writers

Throwing a controversial city steam energy contract into limbo, a Superior Court judge has ruled in favor of the company to which former Los Angeles Deputy Mayor Michael Keeley leaked documents last September.

Judge Ricardo A. Torres ruled in favor of California Energy Co., saying the Department of Water and Power violated competitive bidding procedures by giving a rival firm, Calpine Corp., a contract to develop a geothermal power plant near China Lake.

City Attorney James Hahn said Keeley's decision to fax the city's confidential legal strategy memo to the law firm representing Cal Energy probably contributed to the DWP's courtroom defeat two weeks ago.

``The bottom line is that regardless of whether the outcome was determined by the memo, it certainly didn't help,'' Hahn said. ``When you're trying to represent a department against legal attack, you're trying to keep the other side from knowing what you're up to.''

Keeley said Friday that he secured a copy of the court transcripts and concluded there is ``no evidence'' that his release of the city memo hurt the city's case.

In fact, Keeley said the attorneys for Cal Energy cited court cases not addressed by the city in its memo, but which the judge found more relevant to the case. He laid the blame on Assistant City Attorney Stan Snyder, who handled the city's case.

``Stan Snyder made to the court all the arguments made in the memo I released and the court just didn't buy those arguments,'' Keeley said. ``I released the memo because I had low confidence in Stan Snyder, and it appears now there was reason to have low confidence.''

Hahn made the leak public last spring, and Keeley ultimately resigned under fire. The episode gave Mayor Richard Riordan a political black eye and widened his rift with Hahn.

Snyder said depositions taken during the trial proved his suspicion that Cal Energy shifted its tactics once the firm's lawyers had his memo outlining the city's legal position.

That, he believes, gave the company an advantage because it decided to pursue a less difficult strategy that would require them to prove abuse of official power.

``They obviously took the memo, huddled around and changed their strategy,'' Snyder said. ``People in war die to get the enemy's plans, but it's not fair to blame it entirely on Keeley.''

Keeley justified the leak last spring by saying it would convince Cal Energy that the city's legal position was so strong any lawsuit would flop.

In the wake of the court ruling, DWP officials say they are unsure whether they can enact their high-stakes plan to convert geothermal steam into energy in the China Lake area.

The ruling does not scuttle the DWP's original contract with Calpine in which the utility buys all the energy the company produces.

But it does bar the amended contract that would have allowed Calpine to sell the energy to third parties and give the DWP a share of the royalties.

As a result, the court ruling could force the DWP to buy energy it no longer needs, said Kenneth Miyoshi, DWP chief engineer.

City officials have not decided whether to appeal and are seeking a clarification from the judge on the city's options.

``The question is how to resolve this in the best interest of our'' ratepayers, said DWP General Manager William McCarley.

Time is running out, though. If Calpine doesn't have its turbines at China Lake running next year when two federal leases expire, city taxpayers could lose the $20 million that the DWP has invested so far, plus an estimated $30 million in steam sale royalties, officials concede.

Councilwoman Laura Chick was frustrated that the city utility might have to eat a $50 million loss.

``As we struggle to make ends meet, to provide the very basic and essential services that our residents and businesses need, to be faced once again with a multimillion-dollar lawsuit penalty is just overwhelming,'' Chick said.

Council members Jackie Goldberg and Mark Ridley-Thomas said they might seek legal advice on whether Keeley can be held liable for the loss.

In his ruling, Torres sided with Cal Energy's argument that the DWP violated city contracting rules when it ``materially'' amended its agreement with Calpine Corp. to develop the Coso Geothermal Project near China Lake, about 150 miles north of Los Angeles.

Cal Energy had long coveted the DWP contract and is selling steam-generated electricity nearby.

``As a matter of law, a public works contract may not be substantially modified without further competitive bidding under the L.A. City Charter,'' Torres wrote. ``DWP has provided no facts showing the competitive bidding of the amended contract would be impossible of undesirable.''

Originally, the DWP had planned to buy all the steam Calpine could harness as part of a statewide push to develop alternative energy sources in the aftermath of several Mideast Oil shocks and the ``green'' environmental revolution.

The DWP won the rights to the high-temperature gas after it signed a 7,000-acre lease with the federal government in the early 1980s.

But when oil prices plummeted, utility deregulation talks began and the city's energy demands fell years later, DWP brass realized they didn't need the steam anymore, Miyoshi said.

After Calpine threatened to sue the utility if it pulled out of the agreement, a compromise was fashioned: The city wouldn't be obligated to buy a watt of the Coso energy, instead agreeing to take royalties when Calpine sold the energy to third-party buyers.

By late October, both the council and the Mayor's Office approved the amended agreement.

Since the DWP tapped Calpine over Cal Energy and other bidders in January 1992, Cal Energy executives heatedly lobbied city officials - Keeley in particular - to rethink the deal, the Daily News has reported. The company asserted it could pull the steam far cheaper than rival Calpine, and at one point offered to buy some of the DWP's property rights or conduct a joint venture with Calpine.

In an Aug. 24 correspondence, company President Thomas R. Mason wrote to Keeley, praising his willingness to ``seriously consider our concerns regarding the illegality and illogic of the proposed contract,'' records show.

Mason called Torres' decision a vindication for his company - and a costly lesson for Los Angeles.

``The people of the city of Los Angeles are clearly the losers in this,'' Mason said. ``The City Attorney's office has been demonstrated in this ruling to be totally inept.''

Neither Mason nor John Shiner, a Cal Energy board member and Morrison and Foerster lawyer who represented the company in the case, would comment on the impact of Keeley's memo.

Hahn, meanwhile, said he wouldn't respond to ``name calling.'' He said his office believed that the DWP could legally alter the contract because it was done as a request-for-proposal and not based solely on cost.

Calpine lawyer Joe Ronan said his firm would work with the DWP under the original contract and weigh its ``legal options'' if its rights are curtailed.

``We've been working in good faith for 4-1/2 years and spent $3 million,'' Ronan said. ``We're not just going to walk away.''