The state Independent System Operator said it would investigate the Santa Ana Democrat's charges, and a spokesman for the state's power buying agency said it was concerned that the ISO had behaved improperly.

State Department of Water Resources spokesman Oscar Hidalgo said the ISO asked for its help and then suggested a solution that would have saved the state money but involved making false statements.

"We didn't feel it was proper. Yeah, we would have saved money, but it's not a proper way to do business," Hidalgo said. "It's against the market rules."

The department did not comply with the request, he said.

Dunn and Hidalgo say the incident unfolded Nov. 14, 2001, when the ISO asked the state to buy more power. This is their account:

Even though the state had enough power, the ISO was anticipating repairs on a transmission line would make it essential to draw electricity from two plants -- one run by Duke Energy Corp. and one by Reliant Energy Inc.

Those plants were not prepared to make themselves available, the ISO reportedly told the Department of Water Resources, and it needed the state to promise to buy their power.

When the state objected to the expense, the ISO offered a variation. If the state would submit a "fictitious load" -- falsely inflate future power needs -- then the department wouldn't have to sell power at a loss.

The department refused to submit a false estimate, but it did help the ISO, buying more than $900,000 of extra electricity and selling other, surplus power at a loss.

ISO Chairman Michael Kahn said the allegation would be investigated but that "there is no evidence at this time to indicate any wrongful conduct or manipulation of the ISO's markets."

The ISO says the incident saved consumers money and kept the grid stable.

Reliant officials had no comment on the incident, which Dunn said was triggered partly because generators had been disregarding ISO orders to run when needed. Duke officials could not be reached for comment.

"The ISO, in our view, was engaging in the manipulation of the market itself in response to the manipulation engaged in by the generators," said Dunn, who chairs the Senate committee investigating price manipulation.