DWP Chief Freeman Talks About Future of the Agency.

IN the two years since S. David Freeman took the helm of the L.A. Department of Water & Power, he has reduced staff by 2,000 positions, cut the agency's $4.1 billion debt by 37 percent, and reached an historic accord with Owens Valley farmers over damage caused by the decades-long diversion of water to Los Angeles.

Now, with the prospect of full power deregulation in two years, Freeman says there remains much to do, including restructuring the governing system of the nation's largest municipal utility and getting the City Council to sign off on building new power plants.

Yet the folksy, 73-year-old utility executive, who headed the Tennessee Valley Authority and the Sacramento Municipal Utility District before coming to L.A., is setting out on a new challenge - becoming an elected official. Earlier this year, Freeman, a Democrat, announced his intention to run for the seat now held by Assemblywoman Sheila Kuehl, D-Encino, who is termed out next year. Freeman is one of three announced Democratic candidates for Kuehl's seat, which is usually Democrat turf.

Question: How prepared is the DWP for electric power deregulation?

Answer: We're plunging right ahead in an old-fashioned way. Our game plan has not been complicated: to freeze the electric rates, to continually and steadily cut costs, and to create larger profits and use those profits to pay down the debt. All of this brings our outfit up to a competitive standard.

Now every item in my plan has not worked out, but we've done better than expected in enough items to offset those areas where we didn't do as well as we thought we could.

But the big thing that's happened is that, because power prices have gone up across the state - and not down as was expected when it was announced that deregulation was beginning - we've been able to sell surplus power into the market at a considerable profit. I'm talking about $75 million a year's worth of power.

Q: How did that come about?

A: You can call it luck. Edison immediately sold off its power plants for next to nothing two years ago. But we held on to ours, even though the plants would bring in about $3 billion if we were to sell them today.

Q: But weren't prices supposed to come down? Wasn't that the whole point of deregulation?

A: This is a transition period. Real competition hasn't broken out yet. There's this "transition charge" that all the utilities are now levying to recoup their bad investments from earlier decades. It means that (consumers) have to pay Edison 3 cents a kilowatt-hour regardless of whether or not you buy power from them. So there's little incentive to change until that transition charge comes off in a little more than two years.

Q: Since the DWP now has a choice as to whether to enter the competitive marketplace, do you think it will?

A: That's the question that the City Council will have to grapple with, especially if we have electricity that costs less than the market price. Do you want to join an open market... or do you want to price your power below market levels and use that low price as a magnet to draw more people here?

The facts are that we have moved down our debt from $4.1 billion to $2.6 billion. We're retiring the debt at a rate of $680 million a year, it will be gone by 2003. We've renegotiated our coal contracts and are in the process of getting rid of our above-market deals.

Q: You may have surplus power now but will that remain the case as L.A.'s population continues to grow?

A: There's no question that our surplus is dwindling and will continue to do so. That's why we need to look at building new, more efficient power generating plants. I'm not a fool. The fact that these old, inefficient coal-fired plants can make money for us right now in a tight market should not lull us into complacency. The fact is that a lot of other utilities are building new power plants. And then we're not going to be competitive with these 1970-something plants. So yes, we'll need new plants.

Q: So do you think you can convince the City Council to go along with your plans for new power plants?

A: Well that's an astute question. Because what's happening is that as we pay down the debt under the existing governance, the fear factor is diminishing. My governance challenge is becoming tougher as a result of our success. We now have the Rand Corp. documenting for us how the existing governance structure is hindering us, and how, once we get into real competition, it would cripple us. I mean, in most public utilities, there is a board of directors and a managing director. Here, you've got a board, you've got the City Council and its staff, you've got the mayor and his staff, and even organized labor.

Q: But wasn't one of the aims of charter reform to make it easier for agencies like the DWP to make decisions unencumbered by a huge bureaucracy?

A: Well, charter reform really didn't do much positive or negative for us. We need a round of charter reforms for the DWP. The civil service system is at the heart of the problem. You don't have merit pay here. It's inherently unfair for a person who works their tail off to earn the same amount as someone who goofs off all day. But that's how it is here.

Q: Why are you running for the state Assembly?

A: I view myself as the positive side of term limits. There ought to be some people with experience out in the world who go into public service for a spell and then retire or return to the private sector. That's what the drafters of our Constitution envisioned. I've gathered quite a bit of experience, especially in the energy and the infrastructure areas.

Q: What was the reaction when you first announced you were running?

A: The general reaction was, "David, you've lost it." And that reflects the cynical view of government that we have to overcome. I've never admired the businesspeople who have not ever dirtied their hands with local or state politics and curse the performance of others.