Power failure: siphoned funds, lack of maintenance hurt DWP.

EVERY SO often, the power goes out at Hollywood Center Studios on Santa Monica Boulevard.

It's not from a faulty transformer or problems at a receiving station, which triggered L.A.'s recent blackout. The outages are caused by cars that careen off Santa Monica Boulevard and knock down the power lines.

"In the last few years, it's been more frequent here," said Tim Mahoney, the studio's president.

The power lines should have been moved underground years ago, but money constraints have delayed the project. It's a familiar refrain: with city budgets squeezed, an increasing amount of the DWP's revenues are being siphoned off to city coffers. This, combined with the DWP's accelerated debt paydowns, a lack of stable leadership and political resistance to raising rates, has delayed upgrades large and small.

"For years, the DWP was an agency on the ropes as it tried to get rid of its bloated debt and faced continuing raids on its coffers by the city." said Stephen Erie, professor of political science at the University of California San Diego. who's written extensively about L.A.'s infrastructure.

Now, he said, the department is in better shape financially, but it's still playing catch-up on maintenance. "The big water mains are on the verge of breaking and we've all seen the vulnerability of the power grid," he said.

The DWP is now building its first new receiving station in 20 years, even though the burden on the electrical grid has increased exponentially. The project was on the books for books for nine years before groundbreaking earlier this year, but was delayed due to lack of funds.

L.A. City Councilman Tony Cardenas, chairman of the Commerce, Energy and Natural Resources Committee that oversees the DWP, said a new receiving station could have limited the citywide blackout's impact. "With a newer facility, we also get modern and more efficient technology," Cardenas said.

If there are more power outages and bursting water mains, Cardenas said customers will begin to question the integrity of the system. "When the lights go out, people think twice about how safe they are," he said.

Draining DWP

The DWP is a municipal-owned agency that passes along some of its excess revenues to the city. Four years ago, the agency reached an agreement with then-Mayor James Hahn to increase that amount to 7 percent of power revenues, from 5 percent.

Over the past 10 budget cycles, the DWP has transferred nearly $1.7 billion to the city's general fund--money that could have sped up programs to bury wires and upgrade the receiving system. Ironically, DWP was working on such upgrades when one of its workers inadvertently severed a line and caused the Sept. 12 power grid disruption.

Cardenas and others argue that the amount of money taken out is low compared to the amounts collected by other cities with public-owned utilities. If the DWP were privately owned, Cardenas said, the city would likely reap more in taxes than it currently transfers from the utility.

More significant, he said, are the DWP managers who haven't focused on capital improvement projects, along with the lack of political will to raise rates to pay for such projects. This left DWP asking for a double-digit rate increase last year to pay for maintenance backlogs, after forgoing a rate hike for nearly a decade.

"We went through a period where we froze our electric rates and put some of our capital needs on hold to free up cash to pay down our power generation debt," said DWP Chief Administrative Officer Robert Rozanski.

Another big problem has been turnstile management.

After Bill McCarley left in 1997, then-Mayor Richard Riordan brought in S. David Freeman to turn around the agency's fiscal problems. But Freeman left in 2001 to become senior advisor to then-Gov. Gray Davis during the energy crisis. After a period of interim management, consultant David Wiggs was brought in, but he contracted throat cancer in 2003 and later resigned. The DWP was under interim management until the end of 2004 when Ron Deaton, the former chief legislative analyst, took over.

"The less continuity you have at the top, the greater the problems are for carrying out long-term plans and policies," Erie said.

Like other public agencies, the DWP has also faced a steep hike in contributions to its workers' health and pension plans - a burden made heavier last week when the City Council ratified a generous new union contract.

Councilman Greig Smith argued that the pact was unfair because it pays DWP workers more than their counterparts at Southern California Edison and gives DWP workers higher wages than comparable jobs in other city departments.

Union leaders deny that DWP workers are paid too much.

"We're only slightly above the average," said Brian D'Arcy, business manager of International Brotherhood of Electrical Workers Local 18, which covers most DWP workers. He noted that labor costs account for $500 million out of the agency's $4.3 billion budget, and he called the pay increase "marginal."

'On the ropes'

The DWP's backlog of infrastructure upgrades grew in the mid-1990s as the utility--then bloated with debt--had to slim down to prepare for deregulation.

Debt was incurred as the utility invested in new and refurbished power generating plants. That proved a wise investment; during the electricity crisis, the DWP was the only major California utility that had excess power on hand.

Even after municipal utilities were exempted from the state's deregulation law, there were fears that Southern California Edison would undercut DWP prices and lure major customers to move into Edison territory.

To make the utility more competitive, city officials sought a "strategic alliance" with an energy company. They entered into talks with a subsidiary of Charlotte, N.C.-based Duke Power Co., but Freeman and the City Council put the deal on hold to focus on cutting the $7.9 billion debt load in half.

Freeman reached an agreement with DWP unions to slash 2,000 jobs and moved to accelerate debt payments.

D'Arcy said the focus on debt reduction led Freeman to fund capital projects with cash from current-year budgets, instead of using proceeds from sales of long-term bonds. "Freeman had a slogan--'Debt Free in 2003,'" D'Arcy said. "While it did reduce the debt, that's not the way you should be paying for capital projects."

The staff cuts also impacted the ability to plan and implement capital projects. "We lost a tremendous amount of experience in those staff cuts," Rozanski said.

Even when the DWP devoted resources to retrofit old power plants to add capacity and reduce emissions, it came at the expense of maintaining the grid.

It wasn't until the state's deregulation program imploded in 2001 that the DWP stopped accelerating debt payments and began to focus on infrastructure needs. Overall, the DWP is spending about $600 million a year in capital upgrades to its power system, more than half of that earmarked toward re-powering and maintenance of old power generating plants.

Water system

At the Century Park Place condominium tower in Century City, residents are faced with a wholly different DWP problem.

Since last year, building manager Cassie Turner said water pressure has been steadily declining. Last week one of the tower's pumps burned out. "It just shows how fragile the water grid is in our area," Turner said. "It really underscores that there are risks."

It's generally acknowledged that DWP's water system is most vulnerable and needs the most attention. Many of the water mains, which were designed to last 50 years, are already 70 or 80 years old, sparking fears of water main breaks like the one that occurred in February in the San Fernando Valley.

That break in a 70-year-old trunk line flooded several streets in the Northridge area and lowered water pressure for thousands of customers. "We are going to be looking at water main replacement more than we have seen in the last 20 years," said Cardenas. "The focus will be much more intense and more frequent and there will be much more money spent because we put it off for so long."

Rozanski said the DWP is inserting new cement linings in other water mains throughout the city as a way to extend the life of the mains. But department officials concede that they don't have enough revenues from water service to pay for all these repairs. Power funds are off-limits because of a provision in the 1925 city charter that forbids the commingling of water and power revenues.

The capital program for water is $328 million for the fiscal year that ends June 30, 2006. Of that, $95 million is set aside for water-quality improvements mandated by the federal government and only $100 million is going toward repairing aging water distribution system.

That's one of the reasons the DWP proposed an 18 percent hike in water rates last year. After an outcry from ratepayers and neighborhood councils, the City Council and the utility agreed to scale back the increase to 11 percent.

The DWP wants to ask for an additional 4 percent rate increase this year, but the council has ordered independent auditors to determine if the rate increase is warranted.

Turner hopes it passes. At a recent meeting, DWP officials told her that to return to normal water pressure, the utility needs to build a new Century City pumping station.

"But they said that's going to take several years and millions of dollars," she said. "With so many new buildings going up around here, you have to wonder if there's going to be enough to go around."

Diversionary Tactic

Revenue transfers from the DWP to L.A.'s general fund. *

1997     $118.4
1998     $105.9
1999     $129.4
2000     $134.2
2001     $145.3
2002     $181.4
2003     $212.9
2004     $202.9
2005     $250
2006     $189.8 **

* Fiscal years ended June 30

** Budgeted

Source: Los Angeles City Administrative Office

Note: Table made from bar graph.