Dow Jones on DWR contracts

LOS ANGELES (Dow Jones)--California Secretary of State Bill Jones has bolstered calls by top Republican legislators for an independent audit of the state's long-term energy contracts and purchases in the spot market.

Such an audit could eventually lead to renegotiating some of the $44 billion in contracts signed by the California Department of Water Resources, Jones said at a press conference Monday. He was joined at the event by former California governor George Deukmejian.

"Certainly it would be of benefit to the state based on the prices it paid to have some of those contracts renegotiated, though we have to follow the law like any other party," Jones said.

In recent weeks, Jones has called on California Attorney General Bill Lockyer to investigate possible conflicts of interest posed by consultants hired to negotiate contracts who also owned stock in energy companies. The state Fair Political Practices Commission is investigating the matter, and the federal Securities and Exchange Commission is also investigating whether any stocks were traded by state employees using insider knowledge. The attorney general hasn't officially said if he is investigating. Under state law, energy contracts could be void if a conflict of interest was found to exist during their negotiation.

"Some will say there are already many investigations underway, but a comprehensive audit conducted by an independent accounting firm is an entirely different matter," Jones said. "The attorney general's office isn't trained and equipped, nor is it their responsibility to perform such a comprehensive business audit."

The CDWR, which started buying power in January in lieu of the state's three cash-strapped utilities, has come under fire in recent weeks for buying too much power under long-term contracts and for locking in market-peak prices for up to 20 years. The CDWR has signed $44 billion in long-term deals and spent about $9 billion on spot purchases.

Senate, Assembly Republican Leaders Request Audit

Jones, who hopes to run against Gov. Gray Davis next year, said he supports a letter sent by Republican leaders to State Controller Kathleen Connell in mid-July requesting that she arrange an audit of the state's energy spending.

The letter, sent by Senate Minority Leader James Brulte, R-Rancho Cucamonga, and Assembly Minority Leader Dave Cox, R-Sacramento, asks that Connell consider arranging and paying for an outside consulting firm to determine if power contracts and purchases were prudent and if they will necessitate electricity rate hikes.

Connell's office verified that she received the letter and said she was preparing a response.

"We're responding to all the questions in the letter; we are definitely answering the questions. Check in later this week," said Lisa Casalegno, Connell's press secretary.

The letter, a copy of which has been obtained by Dow Jones Newswires, singles out two topics in addition to prudence and rate hikes. Those topics include how the price of energy was calculated and whether or not energy consultants pose a conflict of interest.

According to the letter: "How does the Administration arrive at the price of energy purchased through the long-term contracts? Are these figures inclusive of variable factors that can impact the potential price of energy? What is the true cost for the consultants with whom the Administration has contracted for electricity purchases? What oversight and accountability precautions have been taken to ensure that there is no conflict of interest?."

Connell has said in recent months that she fears the state's energy purchases will jeopardize its general fund as well as prospects for a $12.5 billion revenue bond sale in October to fund long-term power contracts. Last week, Assemblyman John Campbell, R-Irvine, asked the Assembly to hold immediate oversight hearings to investigate the state's energy-related activities, saying he had "serious concerns regarding several of the administration's actions."

Governor's Office, CDWR Say Audit Unnecessary

A CDWR spokesman dismissed calls for an audit as being politically motivated, noting that spot-market power prices have declined markedly since the contracts were signed.

"We're in a good position: we've avoided blackouts this summer and we have a reliable injection of energy, and that was our goal," Oscar Hidalgo said. "Everyone's trying to turn over a rock, but the bottom line is, we're seeing a market that's been well in control since June."

Davis' spokesman Steve Maviglio agreed that an audit wasn't needed.

"These have been the most scrutinized contracts the state has ever entered into," Maviglio said. "Besides, as a matter of course there will already be an audit for all CDWR spending by the State Auditor's office."

-By Jessica Berthold, Dow Jones Newswires; 323-658-3872; jessica.berthold@dowjones.com