Katrina-inspired buy backfires on utility and its customers

From his office in a strip mall in the Southern California desert, energy trader Bill Rapp bet heavily that Hurricane Katrina would cause natural gas prices to go up and up and up.

He got it wrong – spectacularly wrong.

The gamble has led to tens of millions of dollars in losses at the utility he worked for, the Imperial Irrigation District, and resulted in higher electric bills for its 140,000 customers in this region of triple-digit temperatures and double-digit unemployment.

As for Rapp, he lost his job and went from potential hero to goat.

“We're having to pay for someone's bad decisions, for someone's mistakes,” said Donna Freeman, 60, who pays $300 a month to cool her small home.

Rapp vehemently rejects his employer's portrayal of him as a rogue operator and insists he acted at the direction of the utility board and with the knowledge of his colleagues.

Rapp, 42, was responsible for buying natural gas for the utility's electrical generating plants under a new strategy to hedge against price swings.

After Hurricanes Katrina and Rita struck the Gulf Coast in August and September 2005 and knocked out natural gas plants, Rapp bought $155 million worth of gas in just four months, or enough fuel for about a year and a half, according to a consultant's report on the mess and interviews with utility officials.

Electric utilities routinely buy gas and coal well in advance. The idea is to lock in a favorable price now, in case prices go up later. But Rapp's buying of so big a supply of gas in so short a period was highly unorthodox.

Moreover, according to utility officials and the consultant's report, Rapp worked with little supervision and even made trades on his cell phone instead of on a recorded office line – a violation of company policy and a departure from industry practices.

Natural gas prices did shoot up in the first few months after Katrina, but then slid after a mild winter, and Imperial Irrigation found itself overpaying. It lost $51 million by one estimate in the consultant's report.

The higher prices were passed along to Imperial Irrigation's customers in this struggling agricultural area of around 15 percent unemployment, and their monthly electric bills climbed about $10 on average, said John Pierre Menvielle, president of the utility's elected board. The board also had to make $20 million in budget cuts this year that included putting off the replacement of utility poles.

State and local authorities investigated and decided to bring no charges. The utility's consultant, Baker Street Group of San Diego, found no evidence anyone tried to profit personally or harm the utility.

In retrospect, there were warning signs before Katrina struck. In June 2005, accounting and consulting giant KPMG cited a litany of safeguards that were missing from the utility's hedging program.

In January 2007, Rapp was suspended with pay and escorted out of his office. He was fired this spring.

He is now suing the utility, accusing it of defamation.

Now unemployed, he spends his days shuttling his children around the Imperial Valley, a spinach-, alfalfa- and lettuce-growing area near the Mexican border about 100 miles east of San Diego.