L.A. Mayor-elect James Hahn is already facing his first major crisis.

A showdown between Hahn, who doesn't even get sworn in until July 1, and Gov. Gray Davis over L.A.'s municipal power is emerging. And it threatens to poison relations between the incoming mayor and the embattled governor for months to come.

At the center of the dispute: charges by Davis that the Los Angeles Department of Water & Power and other public-sector utilities are gouging the state with their sales of excess power. Davis singled out the DWP, which earned more than $200 million in profits last year from the sale of power to the now-defunct California Power Exchange.

Lately, Davis has said he is prepared to seize the power-generating assets of the DWP and other municipal utilities if they don't lower their prices.

"We're going to get that power one way or another," Davis said in a recent interview.

The DWP vehemently denies the charges of price gouging, saying that it now sells much of its excess power to the state at 15 percent above cost and wants to be a "good neighbor."

The issue even soured what ordinarily should have been a high point between the two leading Democrats: a congratulatory phone call from Davis to Hahn the morning after Hahn won the election.

"He told the mayor-elect that, if he needs to, he will use his emergency powers to seize the assets of the DWP," Davis spokesman Steve Maviglio confirmed.

Hahn campaign spokesman Kam Kuwata said that Hahn responded by telling Davis that his first duty as mayor is to protect the rights of DWP ratepayers.

"He took a firm line with the governor," Kuwata said.

Hahn and DWP officials are warning Davis that, if he attempts to seize the DWP's power, they will take him to court.

"I've got my attorneys working on this right now, and if Governor Davis so much as tries to seize the power that Los Angeles DWP ratepayers have paid for, we'll see him in court," Hahn said during his final mayoral debate on May 31.

Back in 1996, the DWP and other municipal utilities were given the choice to opt out of the new deregulation law. The original intent was to protect these utilities from the rough-and-tumble of market competition. The L.A. DWP, for example, had accumulated more than $4 billion in debt and was widely considered unable to compete in the open marketplace.

Of course, over the past year, it's been the privately owned utilities that have suffered from the deregulation plan that has gone so awry. Now, it's the municipal utilities particularly the L.A. DWP that have stable prices and ample supplies, making them the envy of the rest of the state.

For much of the past year, the out-of-state private power producers bore the brunt of criticism from Davis and other state officials, who alleged they were gouging the state. But in the last couple months, the state released figures showing that some of the biggest profits were being reaped by publicly owned utilities, particularly the Bonneville Power Administration in Washington state, BC Hydro in British Columbia and the L.A. DWP.

Since then, the Davis administration has stepped up its attacks on these public-sector utilities.

Late last month, Davis said in an interview with the San Francisco Chronicle that he is prepared to seize the power-generating assets of the L.A. DWP and some 30 other municipal electric utilities if they don't reduce the prices at which they sell excess power to the state.

"Gov. Davis consciously chose to issue this threat in the (San Francisco) Chronicle to inflame Northern California passions against Los Angeles," said Stephen Erie, professor of political science at UC San Diego, who has long tracked regional water and power issues. "It plays into this whole (Northern California) mantra of, 'They stole our water, now they're gouging us on power.'"

Within hours of Davis' threat being published in the Chronicle, L.A. City Attorney and now Mayor-elect Hahn fired back, declaring in his final mayoral debate that his office was already working on a court challenge to Davis should the governor follow through on his threat to seize the DWP's power.

Two days later, on June 2, Hahn fired off a letter to Davis stating that his threat to seize the DWP's power was unconstitutional and warning him that the city would sue to stop the state from seizing its power.

"Instead of making threats, your office should work with the municipalities and other generators to change the practices of the state, which give no incentive to generate excess electricity," the letter stated. "Should the State attempt to seize any of the power of the City of Los Angeles, the City will be forced to commence litigation."

Then came the "congratulatory" phone call to Hahn.

Maviglio said that Davis hopes not to use his emergency power. "We much prefer the Los Angeles Department of Water and Power enter into long-term contracts with the state Department of Water Resources," he said.

The L.A. DWP is currently in negotiations with the state DWR over the terms of such long-term power contracts.

Currently, according to the Hahn letter, the DWP sells its power at market rates, except when a declared power stage emergency is in effect. Then the DWP charges the state 15 percent over the cost to produce the electricity.

Former DWP general manager S. David Freeman put the 15-percent-over-cost policy in place last winter. In April, Davis appointed Freeman as his energy czar, putting him on the other side of the fence from the DWP in the current negotiations.

Freeman could not be reached for comment last week.

In the mayoral campaign, both Hahn and his opponent Antonio Villaraigosa said the primary duty of the DWP is to sell power at reasonable rates to its own customers. "We should not be in the business of subsidizing the rest of California," both candidates declared repeatedly during the campaign.

The question at the crux of the current negotiations, of course, is just what constitutes a fair return on the DWP's excess power. To Davis and state officials, anything more than the cost of producing power plus a slight profit margin is "gouging." But to L.A. officials, anything less than the full market value is a subsidy to the rest of the state.

And industry observer Erie points out that DWP is using its profits responsibly.

"The DWP wants to charge the market rate for power so it can pay down the remaining $1.1. billion in debt faster," Erie said. "The lower the price, the longer it takes to pay down the debt."

Ironically, reports emerged last week that wholesale power prices are dropping in California because of mild weather and additional power supplies coming on line. If these trends continue, the spread between market rates and power production costs could lessen dramatically, making these negotiations easier.

Of course, if temperatures return to seasonal norms, the spread would widen again. And if there's a prolonged heat wave, the crisis could quickly become very acute, putting more pressure on Davis to secure low-priced power from the municipal utilities.

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