It was Jan. 17, and Californians were suffering through their first day of planned, widespread outages. The state’s two largest utilities were facing financial ruin and unable to buy the electricity they needed.
So the state Department of Water Resources suddenly was thrust into the energy-buying business, setting off a mad scramble to create a new state power broker from scratch.
As officials rushed to hire staff, comb the private sector for experienced employees and stave off more blackouts, they weren’t thinking about state laws that require public disclosure of potential conflicts of interest.
“The subject didn’t come up,” said S. David Freeman, an energy adviser to Gov. Gray Davis who helped negotiate the state’s long-term contracts. “We were just too busy engaged in the battle.”
It’s an oversight that has come back to haunt the Davis administration.
Davis and the DWR have come under fire for failing to complete the public-disclosure duties required for government agencies.
Once disclosure forms were filed – in July – they showed that several energy traders had purchased energy company stock.
Among them was Vikram Budhraja, a consultant in DWR’s power buying division who signed a multimillion-dollar contract with the state. He acquired stock in Dynegy on January 11 and Edison International on Jan. 17 and 22. He reported on his form that he began work with the state on Jan. 25. The start date on his state contract, however, was Jan. 17.
Last week, Davis dismissed five state power purchasers who owned stock in Calpine Corp. while they bought energy for the state. One also owned stock in Williams Energy Partners.
The questions expanded beyond the water department this week as Interim Communications Director Steve Maviglio acknowledged that in June he bought $12,000 of stock in Calpine Corp., an energy generator he had touted as Davis’ chief spokesman. Under criticism for mingling his private finances with his public role, Maviglio planned to sell the stock Thursday.
The revelations have fueled criticism of the administration for flouting legal safeguards intended to prevent conflicts of interest.
Consumer groups are calling on the state Public Utilities Commission to reconsider its proposal to let the DWR unilaterally order rate hikes, an action up for discussion later this month.
“The DWR is shrouded in a controversy of its own making, yet in less than a month the PUC will vote on an unprecedented handover of authority to this agency,” the Foundation for Taxpayer and Consumer Rights wrote this week in a letter to the PUC. The agreement, it said, would leave “California’s energy procurement in the hands of an unaccountable agency with a track record that grows more dubious with each new revelation.”
Secretary of State Bill Jones, a Republican who is running for governor, has asked the Securities and Exchange Commission to investigate.
Davis spokeswoman Hilary McLean characterized Jones’ attack as a “political witch hunt,” and others in the administration call the criticism misplaced.
“The questions of the kind being raised now just weren’t raised at that time and for good reason,” Freeman said. “Everyone was focused on the fact that the state was literally going broke buying power.”
Jim Knox, director of California Common Cause, disagrees. He believes many of the power traders brought on by the state should never have been hired in the first place.
“The governor’s office has shown a cavalier disregard for the state’s conflict of interest laws,” he said.
Public officials at every level of state and local government must disclose their personal financial interests. In general, they must file a “statement of economic interest” upon assuming their positions, annually and upon leaving their posts.
At DWR, the state power buyers who were hired months ago received a memo in mid-June instructing them to fill out their disclosure forms, and the bulk did not comply until July 12.
Once the forms were completed, it became clear that many of the traders owned stock in power companies, particularly Calpine, which has signed three long-term contracts with the state totaling $12.9 billion.
“If there are grounds for conflicts, and I think there clearly are, it’s possible that some will challenge the validity of the contracts,” Knox said.
But administration officials and Davis supporters say the DWR was dealing with a crisis when it was catapulted into its new role, and didn’t have the time or wherewithal to address public disclosure requirements.
Before mid-January, the department was a little-known bureaucracy that focused on California’s water needs.
Because water had to be pumped up and down the state, the department sometimes purchased up to 800 megawatts of electricity at any one time, roughly enough energy to power 800,000 homes.
When it became the state’s power buyer, however, the department’s buying capacity was severely taxed. At any one time, the department could be expected to purchase up to 14,000 megawatts of juice.
Though the department had amassed some experience buying power for its water-pumping needs, it lacked enough knowledgeable staff to handle the enormous task it had inherited.
As a result, the department scrambled to fill positions.
Often, it sought candidates in the private sector, where workers weren’t accustomed to the bureaucratic forms and requirements typical of government.
“We needed folks that had some trading experience,” said Pete Garris, chief of operations for the state’s power buying branch. “It was just hectic and a challenge.”
William Mead, one of the power buyers who was dismissed last week, was a refugee from the California Power Exchange, the now-defunct state-sponsored venue where the three major utilities bought and sold power. Shortly after the exchange folded in January, he was recruited from his Southern California home to buy energy for the water department.
“I got a call in early February, ‘Can you be up here Tuesday?’ It was chaotic, undefined – nobody knew for sure what was going on and what was expected,” Mead said.
Things were so haphazard, Mead didn’t sign a contract for five weeks after starting work. And no one told him that there might be a problem with his stock ownership.
“The discussion of stock holdings was never brought up,” he said. “Nothing was ever said, nothing was ever discussed.”
In early July, with no warning, he was told to file a statement of economic interest, he said. “They rushed it in, ‘Quick, quick, you’ve got to sign it,'” he said. Shortly after filing his statement, which disclosed he owned 6,400 shares of Calpine stock, he got a call from the governor’s office demanding “I sell off my stocks by noon the next day.”
Like fellow traders from out of town, he lived at the Extended Stay America motel in Rancho Cordova. As a spot-market purchaser, Mead worked right on the trading floor of the Independent System Operator, which manages the power grid, in Folsom. Traders worked in 12-hour shifts.
Because Calpine sold its power through long-term contracts, “I had absolutely no way to influence the price of that stock,” said Mead, who was to be paid a maximum of $128,000 from February to August. “There was no secret inside stuff that I was privy to.”
Administration spokeswoman McLean countered that Mead and four other energy buyers were dismissed because of concerns that they were “helping with a decision to purchase power or enter into a contract” with companies in which they owned shares.
Like Mead, Elaine Griffin said she wasn’t told to fill out a disclosure statement until July.
At that point, the former Power Exchange employee who joined the water department in February realized she owned Calpine stock in her IRA.
Though she left for another job two weeks ago, she said she’s frustrated by the criticism being heaped on DWR’s power traders.
“I thought I was going to help out, do a good deed,” she said. “Now they’re laying all this blame on us.”