DWP chief plans to hike water rates in near future.

Los Angeles Department of Water and Power chief S. David Freeman says the agency must look at raising water rates - possibly as soon as fiscal 1999-2000 - to pay for higher maintenance costs to the water system.

While there is no specific proposal on the table to raise rates, Freeman told the Business Journal that a water rate increase "is almost inevitable." He stressed that any increase would be "less than double-digit."

"We've gone five years since our last increase and I think we've done a good job in holding the line," Freeman said. "But we need to make heavy investments in our pipes. Much of our water system is 85 to 90 years old and is in desperate need of repair. We've already had some property damage because of pipes breaking and we don't want to have any more."

Because the DWP already has run up $7 billion in debts mostly on the power side - Freeman said that financing these improvements entirely through bonds is probably not feasible.

"We have an ongoing program to use borrowed money, but sooner or later, we will come up against debt limits," he said.

Freeman said he is "sounding the alarm now" about the need to raise water rates, well in advance of any specific proposals, to educate the public about the need to maintain the water system.

While an increase in water rates would impact businesses throughout the city, talk of such an increase has not stirred much opposition from business interests. Officials with the Los Angeles Area Chamber of Commerce say they plan to evaluate specific water rate-hike proposals as they come forward.

Ezunial Burts, the chamber's president and chief executive, said he expects Freeman to follow through on his promise to lower electricity rates as deregulation moves into full swing after 2002.

"We look at both sides, water and power. So, the real question is, does this talk of increased water rates offset this projected electricity rate decrease?" he said.

Larry Kosmont, an L.A.-based business and real estate consultant who is also a commissioner of the Metropolitan Water District, the region's wholesale water agency, does not expect any water rate increase to have a big impact on area businesses.

"Most businesses in the city have the ability to absorb this. It's not going to be something that forces businesses out of the area," said.

Los Angeles has no water tax, which gives it more leeway to raise basic rates when compared to cities like Glendale or Pasadena, which each have water tax rates of 7 percent on top of the actual cost of the water, Kosmont said.

The MWD, which indirectly serves all residents and businesses in the Los Angeles region through its sales to local water districts, raised its rates a total of about 50 percent in the early 1990s. That increase went to cover increased capital outlays for construction of the Eastside Reservoir near Hemet and for maintenance of its pipes. The agency has no plans to increase rates for the next two years and any increases after that would be less than 1 percent per year, according to MWD Chief Financial Officer Bert Becker.

The DWP has nearly 7,000 miles of water mains and thousands more miles of smaller pipes, many of which were laid down in the early years of the century, shortly after the opening of the aqueduct from the Owens Valley in 1913.

Former DWP General Manager Bob Phillips said the pipes and surrounding tunnels have not been adequately maintained in the last 15 years or so.

"That's too long to let these things go and the bill is now coming due," Phillips said. "They've got over 7,000 miles of water mains. If you assume the life of a distribution main is about 70 years, that means they should be replacing about 100 miles of main a year. I believe they are only replacing about 30 miles a year."

Phillips said some of the money needed to fix the pipes was diverted to the city's general fund to help Mayor Richard Riordan set aside more funds for the buildup of the Police Department.

Another factor behind the increase in maintenance costs is the need to upgrade the agency's filtration systems to meet with new federal drinking-water standards, Freeman said, although the amount of money that would likely cost would be far less than the money needed to replace old pipes.

Meanwhile, Freeman said the DWP's employee buyout program has drawn so many takers that the agency now faces a shortage of personnel in critical positions.

Shortly after he came on board as DWP chief last September, Freeman announced plans to cut about 2,000 positions from DWP's payroll in a bid to make the agency more competitive in the newly deregulated electric power market. Last winter, the DWP negotiated a deal with union representatives on a buyout package aimed at avoiding layoffs. The buyouts range from $25,000 to $50,000 per employee, depending on seniority status.

As of the July 15 deadline to accept the buyout packages, a total of 2,100 DWP employees had signed up to receive the buyouts, slightly more than the goal of 2,000, Freeman said. That takes the total DWP workforce down from about 9,000 to about 6,900, assuming everyone who signed up ultimately leaves the agency.

"The dust hasn't fully settled yet, but it appears that not everyone who is leaving is among those we wanted to leave," he said. "More people have left in the engineering and management categories than we had targeted, which means we are probably going to have to backfill some critical positions."