As it operates under a new oversight board and is looking for a permanent new general manager, the Imperial Irrigation District (IID), a public-sector powerhouse dealing water and electricity in the southeast corner of California, is still trying to recover from the aftermath of Hurricane Katrina two years ago and subsequent hedging deals for natural gas supplies that went sour.

IID has some of its own generation, some of which are local natural gas-fired plants, for which it used to buy supplies in the short-term market. Katrina's impact left IID buying $10 and $11 gas supplies and it was "just killing them," according to a public-sector utility operator source familiar with the situation.

To overcome the wholesale gas market volatility, IID reportedly overreacted and signed a four-year hedging deal that gave the public-sector utility 100% of its gas in the $7 to $8 range, which now is not a very good price.

"It has cost them tons of money, so they had to adopt an energy adjustment clause for their retail customers that has so far turned into a permanent albatross," the source said.

Part of the fallout came last month when General Manager Charles Hosken was fired, 18 months into a three-year contract to run IID. The board vote in closed session was 4-1. Less than a week later the board voted to lower the energy cost adjustment (surcharge) from 5.03 cents/kWh to 4 cents/kWh, effective Aug. 1 and running at least through the end of this year.

"A more comprehensive study of the energy rate schedule -- including the energy cost adjustment and base rates -- will be incorporated into the 2008 budget process," the IID said on the board's move.

At that time, the board acknowledged that the energy surcharge was linked to what it called IID's "failed natural gas hedging program," but the district CFO disagreed with allegations that the hedging strategy had cost each customer about $75 monthly in higher charges.

For 2007, the cost of the hedging comes to roughly $6/MWh. "For a typical IID energy customer using 2,000 kWh (2 MWh), the current energy cost adjustment would comprise about $100 on his or her monthly bill, of which hedging would represent an estimated $12, the CFO said.

"The board started looking for scapegoats, and to some extent Charlie [Hosken] was a scapegoat," said the public-sector power official. "The hedging program was created before he ever got there, but the board's contention was he didn't keep close enough tabs on it, and it got out of hand."

The source sees IID in the midst of turmoil, and characterized it as a situation that developed almost "overnight." Historically the public-sector entity has had internal problems between its water and electricity operations. The former is by virtue of the voting districts established that produced a majority of the board members with water interests because of their agricultural ties. However, the latter, electricity, is the major revenue producer. IID was created primarily to deliver water.

IID serves about 140,000 customers, most in Imperial County and a few in portions of neighboring Riverside and San Diego counties. It has peak demand between 900 MW and 1,000 MW.

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