STEAM PLANT FUELED POLITICAL BLOW-UP.

Byline: Chip Jacobs Daily News Staff Writer

Energized by Mideast oil shocks and the fledgling ``green'' revolution 15 years ago, the Los Angeles Department of Water and Power gambled on a rugged, high desert expanse with a natural treasure entombed within - thermal steam energy.

With the right drills and a dose of luck, the DWP foresaw a bountiful underground steam reserve it could convert into electricity - enough to quench the yearly power needs of 400,000 people.

Other benefits were foreseen. These included reduced dependence on volatile foreign oil supplies, while the city invested in local, renewable, smog-free energy sources the state was encouraging utilities to jump into.

By 1985, the bet appeared to be one that would pay off - when test wells drilled by the city produced superheated steam.

``You could feel the power of the fluid coming out of the ground,'' said Robert Briffett, a DWP engineer long involved with the project. ``We were excited.''

Today, the promise of harnessing the thermal energy beneath the surface of the Earth has faded - and the promising political career of Mayor Richard Riordan's right-hand man, Deputy Mayor and Chief Operating Officer Michael Keeley, has been imperiled by the fallout from that costly failure.

The geothermal steam plants the DWP once envisioned dotting their leased land 150 miles north of Los Angeles haven't been built. They may never be, despite the $20 million the city has poured into the Coso Geothermal Reserve.

The energy issues that once dominated the DWP's Coso project have now taken a back seat to its political and legal impact on the Riordan administration and a tangle of corporate lawyers pointing fingers.

Nine days ago, City Attorney James Hahn accused Keeley of leaking a confidential document - the city's analysis of its legal situation - to lawyers representing a company lobbying the city over the DWP's steam-plant deal and threatening to sue if they didn't prevail.

Keeley, under investigation by the Los Angeles Ethics Commission and the Mayor's Office, was out of town Friday and unavailable for comment. In explaining his actions, Keeley last week acknowledged he had exercised poor judgment in turning over the document. He said he only wanted to convince the company its legal position wasn't nearly as strong as the city's.

How the so-called Coso project evolved from obscurity to front-page news is one part science, one part business speculation and one part politics.

It began in the early 1980s, when the DWP offered $6.4 million in a sealed-bid auction for the leasehold rights on 6,824 acres of land managed by the U.S. Bureau of Land Management.

The DWP won the lease, and with it the rights to explore the rolling, volcanic hills inside the China Lake Naval Weapons Center.

After successful exploratory drilling, DWP officials spent the next few years nailing down permits, completing feasibility studies and waiting out an environmental lawsuit over federal lands.

DWP believed it was worth the wait. During the 1980s, natural gas production was unreliable, and experts feared $40-a-barrel oil prices. Alternative energy sources such as solar power, geothermal and biomass production, still seemed promising.

``The big push was for fuel diversity,'' Briffett said.

By spring 1990, the DWP was sending out requests for proposals to companies interested in turning Coso steam into electricity and then selling up to 150 megawatts to the DWP. Among the seven bidders was industry giant California Energy Co. Inc. and a smaller rival, San Jose-based Calpine Corp.

DWP picked Calpine in Jan. 1992, and the vapor-to-power idea marched ahead.

The science worked like this: Drilling rigs similar to those used in oil and natural gas exploration would burrow deep into the earth, from 1,000 to 10,000 feet. The drills then would suck out a mineral-rich fluid, which would be brought up to the surface and then channeled through a separator that would extract water and other impurities.

The steam would emerge at extremely high pressure at temperatures reaching 450 degrees, DWP engineers say. Experts say that's plenty to drive an electric turbine generator the size of a Winnebago to produce electricity.

By November 1993 Calpine still had no signed contract. It was then, Calpine general counsel Joe Ronan recalled, that company officials got a call from DWP managers.

``They said there were reconsidering . . . so we had a meeting and said, `What are you doing?' '' Ronan recalled. ``We had gone through millions of dollars.''

DWP, now answering to the newly installed Riordan Administration, said there was ample reason for reconsidering the project.

Among other things, consumer demand for electricity had dropped for the first time in years, driven in part by the recession and the Los Angeles riots.

Changes in air quality regulations eliminated cost savings that had been anticipated in the form of smog-emission credits for using alternative energy sources.

Talk of deregulation in the electric power industry also was beginning. DWP officials worried they would be stuck with huge amounts of steam-produced electricity more costly than they could obtain from conventional sources.

``It wasn't in the best interest of our ratepayers and the Department to develop the project,'' said Kellie Peterson Kendall, who managed Coso for DWP during much of its life.

Sean Hagerty, who oversees California geothermal programs for the federal government, said steam power is costly despite the potential to generate vast amounts of electricity from the ground. Statewide, he said, geothermal energy produces enough juice to power the entire San Francisco Bay Area.

But, ``It's a tremendous gamble,'' said Hagerty. ``Just exploration alone to drill to a well costs $2 million. It's capital-intensive.''

By virtue of geologic happenstance, nonetheless, California is home to the nation's biggest geothermal operations, which produce 7 percent of all electricity in the state, analysts say. Besides the Coso area, there are steam-energy plants in Imperial County and in Northern California.

The ``Geysers'' field north of San Francisco is the world's largest steam-energy producer. The Philippines, Japan, Mexico and New Zealand have invested extensively in the geothermal business.

Analysts say the cost of power generated by alternative energy sources - like geothermal, wind and solar plants - is much higher than for electricity produced by traditional means.

``Basically, geothermal energy is a declining asset,'' said Gary Hovis at Argus Research in New York. It doesn't ``make sense for the city fathers of Los Angeles to be dabbling around in geothermal energy. It's a red herring and a fad.''

Analyst Douglas A. Christopher at Crowell, Weedon in Los Angeles says some of the highest priced energy purchased by Edison International is produced by geothermal plants.

The big Rosemead-based electric company paid 13.3 cents a kilowatt hour for geothermal power last year, whereas the cost from natural gas fired plants was 2.2 cents per kilowatt hour, he said.

Asked Christopher: ``Are you willing to pay (more) . . . for your energy if the air is cleaner?''

Scrambling for a compromise that would salvage DWP's multi-million dollar investment, officials with the utility negotiated with Calpine executives for about a year and came up with what they figured was a workable plan.

Under the deal, DWP would not be obligated to buy a single watt of geothermal energy from Calpine, while the company would be free to sell the energy to third-party buyers.

In return for that, the city would receive royalties estimated between $8 million and $30 million over three decades.

Speed was of the essence in coming to an agreement, since two of the DWP's three leases were due to expire in December 1997, and there was no guarantee the federal government would quickly renew them.

If energy production hadn't started by then, the land in theory would revert to the U.S. government, according to documents obtained from the City Attorney's Office.

To date, the Department has poured roughly $20 million into Coso - money spent on the federal bid, test drilling, lease payments and other costs. Delays in producing energy have cost the city millions more in royalties.

Originally, the plants were supposed to be running by 1996. Today, Calpine officials say 1999 is a more realistic target date.

If DWP and Calpine were satisfied, the Mayor's Office was not and went to war against the powerful bureaucracy of the DWP despite a City Administrative Office report concluding that the compromise made sense.

Riordan and his aides in late 1994 urged that ``the asset be sold,'' according to City Attorney's documents.

At the same time, California Energy, the firm that Calpine beat out for the project, was pressing its case with Riordan's office and the City Council, arguing that the Calpine deal should be scrapped.

Since 1994, records show, California Energy and its lawyers at Morrison & Foerster lobbied aggressively to convince lawmakers, particularly Riordan, that the reshaped energy plan was really a whole new agreement that should be competitively bid.

``The public interest requires no less,'' company president Thomas R. Mason wrote to Keeley on Aug. 16, three weeks before Keeley leaked the City Attorney's legal analysis - the leak that Hahn made public April 19. ``The new contract, and its economic value to the taxpayers, have never been tested through a competitive bidding process as required by the City Charter.''

California Energy had earlier written Riordan, saying DWP had paid $945 per acre, compared with the company's deal to lease a federal field near DWP's proposed steam plant for $18 an acre. Their plant, which is on Navy land, fired up in summer 1987.

Keeley, in an Aug. 8 letter to Councilwoman Ruth Galanter, said he still had reservations about the compromise, suggesting that DWP sell the steam to California Energy on a short-term basis.

``Though it is possible that, at some future date, a new power plant at Coso leasehold would be economically viable, it is clear that such as project is not viable at the present time,'' he wrote.

Despite those reservations and the questions he raised about the City Attorney's legal strategy, Keeley faxed to California Energy's lawyers the now infamous document on Sept. 8, purportedly with the aim of convincing the company to back off its legal threats.

The Council and Riordan signed off on the compromise geothermal deal with Calpine in October, and California Energy filed suit against the DWP in January.

In the course of obtaining California Energy documents through the legal process of discovery, City Attorney Hahn found the company in possession of his legal strategy memo, along with a cover sheet from Keeley asking company officials not to reveal he had given it to them.

The political controversy exploded April 19, and the fate of the Coso project hangs in the balance as the mayor battles to keep his trusted deputy on board.

But Briffett still believes Coso will happen.

``It's frustrating, but it's not a failure,'' he said. ``There is a future.''

At the very least, the Navy - which developed the Sidewinder missile and other classified weapons at China Lake - hasn't been jarred by the flap at City Hall. It has a deal to tap into the steam supply if its normal power lines go down, Hagerty said with a chuckle.

CAPTION(S):

Map: Coso Geothermal Reserve