L.A.'S $100 MILLION BLUNDER DWP FAILS TO NEGOTIATE LOW-COST DEAL FOR PRICE OF NATURAL GAS TO CITY.

Byline: Harrison Sheppard Staff Writer

The Los Angeles Department of Water and Power received authority nine months ago to lock in natural gas at low prices but failed to cut a single deal - a blunder that officials said Friday could cost the city $100 million.

DWP officials said they expect to pay at least $111 million more for natural gas next year and that much of the increase could have been avoided, had they hedged against the kind of price spikes that contributed to the energy crisis two years ago.

In September, the City Council gave the DWP authority to lock in natural gas prices to protect against price spikes - but no contracts were signed. Since then, gas prices have increased and are expected to continue going up enough so that the DWP expects to pay at least $305 million for gas next year - a 57 percent increase from the current year.

At least $60 million and possibly up to $100 million of the cost could have been avoided if the department had locked in lower prices soon after receiving council authority.

``It's disappointing,'' said Council President Alex Padilla. ``We tried to give them a tool to control costs and they didn't take advantage of it.''

The department will dip into reserves to pay the added cost so no immediate rate hikes will be sought, officials said.

But the consequences will hit residents in an indirect way: by denying L.A. some of the money transferred to the city's general fund that pays for basic services like cops on the street and sidewalk repair.

The department normally transfers 7 percent of its revenue to the city general fund. By reducing the department's bottom line by $60 million to $100 million, the transfer is reduced by $4 million to $7 million at a time when the city is strapped for cash.

DWP officials said the contracts and financial instruments involved are extremely complicated and, if not approached correctly, could lead to financial disaster, such as befell Orange County in the 1990s or private companies like Enron. They said they tried to be as deliberate and careful as possible rather than rush in and make a mistake that could cost the city down the line.

``It's just the nature of the process,'' said Robert Rozanski, the DWP's assistant chief financial officer and treasurer.

``We have to be prudent. We have to go slow,'' he said. ``Yes, we would have loved to get everything executed on Day One. We would've loved to lock in to low gas. That was our goal. That's why we were pushing this from the very beginning.''

The DWP also depended on outside firms it was dealing with, he said, and these sometimes had their own reasons to delay as they carefully reviewed the contracts.

Rozanski said it was just as likely that the DWP could have locked in prices early only to see them fall even lower. They would then be subject to criticism and second-guessing for the opposite reason.

Industry experts have told the department it can take six months to a year to negotiate the contracts, he said. The first contracts are to go to the DWP board next month.

Councilwoman Ruth Galanter, who chairs the council committee that reviews the DWP, noted that the department began working on the issue a year before getting council approval and should have done more preliminary work leading up to the council vote, allowing the agency to get the contracts in place quickly once approved.

``They cost us a lot of money - the ratepayers and customers, who also own the company,'' Galanter said.

``I'm all for being thoughtful and deliberate,'' she said, ``but I think they could have started being thoughtful and deliberate longer back so they could be ready to start the process after the council approval.''

Natural gas is one of several sources used to fuel the DWP's power plants, but it is the most volatile in cost. The department also uses coal, nuclear power and buys power on the open market. Its overall budget for fuel and purchased power next year is $1.1 billion, or $151 million more than in the current year.

The contracts take the form of several financial instruments known generically as derivatives. Tactics include fixing a specific price, setting a maximum or coming up with a range.

The department had to ask the council for delegated authority to enter such contracts on the spot because of the fast-moving nature of the market. To prevent the kind of risky trading that has sunk private companies, the department was limited to just buying the contracts and could only apply them to 75 percent of its total expected needs for the coming year.

Overall, the department's power revenue has fallen and expenses have risen in the current year, leading to $105 million less net income in 2002-03 than expected, prior to the city general fund transfer. Next year, the amount will be another $24 million less. The department has a roughly $2 billion budget on the power side of operations.

The water system is going through problems as well, and officials expect $20 million less net income this year than budgeted and a $10 million drop next year, out of a $600 million budget.

The DWP is facing a number of long-term problems and Galanter thinks a rate increase will soon be necessary.

``We can't run this system indefinitely without increasing its revenue,'' Galanter said.