BWG's Independent Financial Review Supports DWP's Proposed Water and Power Revenue Increases.

LOS ANGELES -- In response to an independent financial review of the Los Angeles Department of Water and Power's proposed water and power revenue increases, DWP officials announced today that they are in general agreement with the findings and recommendations. The Los Angeles City Council required an independent review to substantiate the need for DWP proposed revenue increases. The reviews were overseen by the Office of the Chief Legislative Analyst and the Office of the City Administrative Officer.

The report, prepared by the Barrington-Wellesley Group (BWG), was submitted today. It recommends implementation of:

1) a natural gas surcharge to offset high natural gas costs that are
needed to fuel the natural gas power plants located in the Los Angeles
basin;
2) a renewable portfolio surcharge to offset marginally higher costs
of clean, renewable energy and transmission expansion;
3) water revenue increases of 3.9% and 3.5 %, effective on July 1,
2006 and July 1, 2007, respectively.

The report also provides other recommendations to increase productivity and efficiency, while minimizing expenses.

"Overall, the Department of Water and Power concurs with the findings contained in the report," said DWP General Manager Ronald F. Deaton. "We support the recommendations with respect to the need for water and power revenue increases. We also agree that we must work rigorously to minimize our costs."

According to Deaton, the BWG report will be presented to the Board of Water and Power Commissioners at its April 4 meeting. Water and power rate presentations to the Board will begin a 90-day period that will allow Neighborhood Councils and other stakeholders to review and provide input.

DWP concurs with the BWG report's recommendation that its Energy Cost Adjustment Factor needs to be unfrozen due to the substantial increases in the cost of natural gas. "DWP has saved customers nearly $90 million over the past two years due to successful implementation of a natural gas financial hedging program, and timely acquisition of natural gas fields. However, a natural gas surcharge is still needed to maintain the power system's financial integrity. We estimate that this year's cost of natural gas will exceed the current budget by nearly $100 million," said Deaton.

Deaton added that the surcharge for the Renewable Portfolio Standard is necessary to provide funding for clean, renewable energy to meet Mayor Antonio Villaraigosa and DWP Commissioners' aggressive goal of providing 20% of the city's energy from renewable resources by 2010.

Similarly, the report identifies the need for water revenue increases over each of the next two fiscal years to fund water quality improvements brought about by increasingly stringent federal and state water quality regulations, and to fund environmental commitments in the Owens Valley.

In response to BWG's recommendations regarding cost containment, Deaton said the DWP management has already embarked upon intensive budget reviews to identify opportunities to further reduce expenses. The Board also has initiated actions to reduce costs, and will conduct a comprehensive, "zero-based" review of all DWP expenditures prior to adopting the proposed fiscal year 2006-2007 budget.

Other recommendations in the report call on the DWP to make long-term investments in new information systems, update its Integrated Resource Plan to include the Renewable Portfolio Standard and aggressive energy efficiency programs, and install effective workforce management practices.

"We are currently developing a comprehensive Information Technology strategy that will reduce costs and improve operational efficiencies, and we have initiated the process to update the Integrated Resource Plan. These major initiatives will be presented to the Board in conjunction with the upcoming budget reviews," said Deaton.

The report cites three power system measures of reliability. Although DWP rates well compared to other California utilities, there is a downward trend. At the direction of the Mayor, DWP retained Electric Power Research Institute to review the power system's reliability. Within the next month, DWP will receive recommended actions to improve reliability. In addition, Deaton indicates that DWP's proposed budget for fiscal year 2006-2007 will include investments to enhance the power system's reliability.