City Council Mustn’t Waffle on Overhauling the DWP

The Los Angeles Department of Water and Power has no choice but to emerge from its cocoon as a protected utility and into the newly competitive and deregulated business of electricity. This transformation will not be easy. Already the City Council is subject to intense political pressure to reject a major reorganization plan put on the table by S. David Freeman, the DWP’s new general manager. DWP employees are lobbying hard against a proposed cut of 2,000 jobs.

But the downsizing is a necessary evil, though the employees deserve fair severance packages if they don’t get other city jobs. This is the new world of deregulation. Should the City Council fail to approve the reorganization plan, Los Angeles residents could face big rate hikes or even threats to the financial stability of the city.

The big challenge for the DWP--and the 30 other municipal utilities in California--is to adapt to a market-driven world while carrying old, uneconomical assets. The DWP is saddled with a total of $7.5 billion in debt accumulated for its various projects. Of that total, $3.3 billion is for the Intermountain Power Project, a Delta, Utah, subsidiary of the DWP. The mammoth coal-fired facility was conceived in response to the 1973 energy crisis, when oil prices soared and utilities everywhere scrambled to ensure energy resources at predictable prices. The deal also illustrates how the DWP could indulge in inefficiency and shortsightedness because it was a protected monopoly.

The project, located in Utah because of environmental objections to a site in California, was a cooperative venture with Utah Power and Light Co., 29 Utah cities and five other California cities--Burbank, Glendale, Anaheim, Pasadena and Riverside. The $5-billion plant finally came on line in 1984, and since then the DWP has been contractually bound to buy most of the plant’s electricity until 2027 whether the power is needed or not. The DWP also locked in long-term coal purchases at $36 a ton from suppliers, now including L.A.-based Arco. That is a killing premium above the spot market price of $22 to $26. Such foolish spending continued as recently as 1990, when the utility paid $15,000 for a two-day charter flight tour of the Utah plant for two DWP commissioners and three executives.

The cost of electricity from Utah, five cents per kilowatt hour, is twice the average regional cost. Of that five cents, 3.1 to 3.2 cents is directly related to financing the plant’s debt. The expensive coal adds another penny to the cost. It is unclear if the coal contracts can be renegotiated, but Freeman says he’ll try hard.

A major part of the new boss’ reorganization plan involves freeing DWP’s generating business of $4 billion of debt by 2003. To do this, he plans to cut costs and jobs and sell the DWP’s automobile fleet and other assets to come up with $2 billion; $1 billion more is already budgeted for debt payoff, and the remaining $1 billion would be raised by mortgaging DWP’s distribution and transmission facilities--a shrewd move to unburden the power generating side of the utility so it can compete, while shifting debt to sectors that do not face competition. By paying the Utah debt, the DWP would be able to freeze and eventually lower electric rates, now up to 30% less than Edison’s.

Freeman also is seeking from the City Council authority to enter into long-term energy contracts and create a “competition transition charge” on customers who select another supplier when the electricity market is fully opened. The charge, allowed under state law, would compensate the DWP for losses on power plants that are no longer competitive. The City Council ought to view the DWP proposal with a sharp eye to its effect on businesses, but it must not back down from an overhaul.

National debt rating agencies have expressed concern that the City Council, which allowed all of the DWP actions that are such problems now, will not approve a thorough reorganization. But today, the realities of the marketplace--not politics--must rule.

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Pricey Power

The L.A. Department of Water and Power has a costly long-term deal with the Utah Intermountain Power Project that brings power to Los Angeles from the huge coal plant.

Amount of DWP power supplied by Utah plant: 33%

Amount of total DWP debt accounted for by Utah plant: 44%

* The Utah plant’s power is much more expensive per kilowatt hour than power from other sources.

UTAH PLANT: 5

Other coal: 1.5-2

Hydroelectric: 1.5

Oil and gas plants: 2-3

Source: DWP