DWP IN FOR POWER STRUGGLE; INACTION PUTS L.A. UTILITY FAR BEHIND IN ENERGY INDUSTRY; IT'S TIME TO LET PRIVATE SECTOR TAKE CHARGE.

Byline: Richard Nemec

IT has been more than two years since the Los Angeles Department of Water and Power, the nation's largest government-run utility, embarked on an aggressive course to ``reinvent'' itself so it would not be left behind in the coming competitive electricity industry.

Alas, as we move past midyear, the giant, multibillion-dollar proprietary agency that is self-sufficient and supplements taxpayer dollars in the city's general fund, is still lagging way behind with the outset of power competition beginning in five months in California. Most of the blame can go to politicians, most notably the splintered City Council.

Despite some vision by the DWP's professional management and outside consultants who have been paid handsome fees, most, if not all, of their major proposals to radically transform the City Charter-driven water and power utility are lingering in various stages of neglect. Mayor Richard Riordan and the City Council seem satisfied to carry on politics as usual instead of recognizing that the worldwide economic momentum transforming the production, transmission and distribution of energy is bigger and longer lasting than their political games.

As a result, the wisest course of action eventually - probably when the city adopts a new charter - will be for Los Angeles to get out of major parts, if not all, of the electricity business and turn them over to the private sector.

A look at the past 12 months shows that political inertia has replaced any sort of sense of urgency that consultants and the DWP's revived management have tried to instill.

Early in a two-year consulting assignment in 1995, some international energy experts articulated the need to eliminate the DWP's badly uncompetitive rates to its largest, most potentially independent customers. Proposals eventually were made last year, and approved by the DWP board, to provide rate decreases of up to 5 percent for the DWP's largest customers. Those proposals have sat for months before the City Council with no action. The new cry is for further deep cost cutting.

A year ago an aggressive proposal for seeking an alliance with a private sector partner was launched, including a detailed bidding process that resulted in the selection of Duke/Louis Dreyfus (now Duke Energy), an internationally recognized wholesale power trader and retail energy services provider. The DWP governing board approved the alliance last February.

Although the department itself has made subsequent modifications in the deal, the City Council has delayed any final resolution on the proposal, appearing to respond to intense political pressure from Southern California Edison Co., the neighboring investor-owned power provider that sees itself as having the most to lose from a DWP deal with a major international/national firm.

The reality is that the alliance and the rate discrepancies between large and small customers have been presented to Councilwoman Ruth Galanter and four of her council colleagues who make up a special ad hoc committee on electric industry restructuring. Action, however, has been the last things on their minds. Another sticking point was partially removed last month (July 1) with the nomination by the mayor of a new, full-time general manager for the sprawling department. The City Council was expected to approve this move soon. The previous GM, a Riordan selection, announced his departure last fall and left at the end of February, claiming the city was unwilling to pay enough for the increasingly high-powered demands of the position.

Freeman to the rescue

The mayor addressed that problem by naming longtime public power guru, 71-year-old S. David Freeman, to head the $2.5 billion municipal utility. Thus, the hope for someone from the private sector power industry was crushed by the weight of economic and political expediency. A longer-term replacement will have to await the fate of what the new competitive environment does for the DWP as a public power entity. Galanter, after several months chairing the special ad hoc committee, seems to have seized on this vacuum to do nothing - although there is an interim general manager, Harry Sizemore, who was moved over from his regular city position as general manager of the sanitation department. (The mayor subsequently has placed Sizemore in a newly created ``chief operating officer's'' job to run the day-to-day DWP operations while Freeman tries to slash costs and avoid rate increases.)

Earlier in the year, Galanter kept quietly pointing the finger at Riordan for not naming a new GM quick enough and to the DWP bureaucracy for being too anxious to sign an alliance with a private sector firm.

Waiting in the wings to be addressed are other major issues, such as reducing the DWP's huge, multibillion-dollar debt and uneconomic contracts for power plants and electricity they produce out of state in Utah and Arizona. And there is the decision of when and how to provide DWP customers with the choice of their power suppliers. Customers of investor-owned utilities, including Edison, will have this choice Jan. 1.

Changes worth try

The DWP's public sector counterpart up north, the Sacramento Municipal Utility District, began a limited customer choice program earlier this summer on a pilot basis. Along with the customer choice question, the city also must formally decide when and how it will join the state's new wholesale power spot market (``power exchange'') and whether it is willing to turn over some of its major transmission facilities to the operation of a third-party, not-for-profit ``independent system operator'' that is now being formed to begin operations Jan. 1.

And what about the mandated 10 percent rate reduction for the private sector utilities' electric customers? How is the DWP going to respond to this competitive challenge and the payment (in future rates) of its so-called stranded costs for huge debt-financed power facilities that are uneconomic, for the most part, in the brave new electricity world?

While these issues begin to burn - and not just smolder - the City Council's ad hoc committee has done little more than study the issue and push some issues back at the mayor's doorstep. And for his part, Riordan has failed to try to bring political pressure on the City Council by publicly challenging their do-nothing style of governance.

It is fair to say that the DWP is facing some very complex issues that depend on other governmental bodies, such as federal energy regulators, the IRS, the state Legislature and state PUC, over which the L.A. city fathers have little leverage. It also must be emphasized that these decisions carry billion-dollar impacts - with a capital B. But with the crush of time, and with too much lost ground to make up, perhaps the most prudent approach would be to begin serious assessments of what parts, if not all, of the giant department should be turned over to the private sector, along with a realistic assessment of what the city should receive as a fair market value for its assets, which are among some of the most extensive electricity facilities in the nation.

Ultimately, the city may be better off simply owning and operating the power lines and related facilities that bring electricity to residents and businesses, along with managing its part of the state's and region's grid system. It could leave making power and its retail sales of it to competing private sector interests.