Q&A : REGIONAL POWER PLAYER; DAN WATERS, PUBLIC UTILITIES VETERAN OF 35 YEARS, DISCUSSES DEREGULATED FUTURE OF ELECTRICITY IN STATE.

Byline: Richard Nemec

DAN Waters has spent virtually his entire professional career in the government-run utility sector, spanning 35 years. He has seen the electric industry move from a highly regulated, tightly controlled and capital-intensive business into a newly transformed, market-based environment in which California is among the first states in the nation to provide all customers a choice of their power supplier beginning next year under a new state law, AB1890, passed last year.

As such, Waters is in a good position to observe what the public sector utilities need to do to survive - assuming they can - in this new profit-driven world where the low-cost provider is king.

For the past three years, Waters has headed the Southern California Public Power Authority, a joint powers authority established in 1980 by 10 Southern California government-run utilities and one irrigation district to provide tax-exempt debt financing for the member utilities' interests in power plants and transmission lines developed in the southwestern United States. SCPPA has funded more than $4 billion in six different projects, including the Palo Verde Nuclear Generating Station west of Phoenix, Ariz.

Prior to his tenure with the SCPPA, Waters worked at the power authority's largest member, the Los Angeles Department of Water and Power, for 32 years - the last four of which he was the general manager and chief engineer, the highest ranking position in the $2.5 billion municipal utility, the nation's largest government-run utility. As the head of the DWP and at SCPPA, Waters has been an active advocate for public sector utility interests in both Sacramento and Washington, D.C.

Question: Given the relatively large debt they are saddled with, what are the prospects for the California municipal utilities, and particularly the SCPPA members, in the new electric environment?

Waters: Over the past three or four years we have done a pretty good job of taking advantage of refinancing the cost downward of our largest project, Palo Verde, using outstanding bonds. Our bankers now have come up with a plan to also sell taxable bonds. So, we are now in the process of entirely restructuring the more than a billion dollars of Palo Verde debt.

This is part of our goal of getting the Palo Verde cost of power down to three cents/kilowatt-hour. We decided that we could get to the three cents by the year 2004. The actual operations and maintenance and fuel costs on Palo Verde are really quite reasonable. Most people say competition will end nuclear, but it probably will have the opposite effect because once we get the debt paid off or the investor-owned utilities (Southern California Edison Co. or San Diego Gas and Electric Co.) get them written off, nuclear plants will probably be pretty cost-effective.

DWP has the largest chunk of SCPPA's 5.91 percent interest in Palo Verde (about 60 percent of it), so the restructuring of the debt will affect the department dramatically. DWP has been the prime mover in getting this restructuring of the debt under way. They have been the prime author pushing the hardest to get this one.

Q: Is privatization a viable alternative for the DWP in the new electric industry in the future?

Waters: If you are talking about privatization from the standpoint of outsourcing, I'd say yes. Customer services you want to keep your hands on, but some of other stuff can go outside - customer information, data control systems, especially functions not unique to the electric business.

I think it is one of those things where you look at one piece of the business at a time and then make economic decisions. As far as privatization of any utility, I think when it gets to the point where it makes sense if it isn't something that can be sold to the voters, then it won't go. Any privatization proposals would have to include: a) lowering of rates, and b) a plan to deal with debt.

The debt is the problem. If you can take care of the debt, any of these municipal utilities can operate just as profitably and efficiently as any private sector utility or any other corporation. The municipal utilities' general fund transfers to help run local government services are much smaller than the profits being taken out of any profit-making (investor-owned) company.

Q: In California, how is the development coming along to create independent, third-party organizations to operate the state's electric grid and a wholesale power spot market, or ``power exchange''?

Waters: A lot of questions have been answered, but a lot of questions still remain (in the development of these new, independent not-for-profit entities). There is cost and reimbursement of transmission owners (such as the DWP, which owns a big portion of the state's major transmission lines). Ultimately that will be up to the Federal Energy Regulatory Commission.

In general, I think the state legislation establishing the ISO and power exchange really worked to the advantage of the municipal utilities and others. When the original (Western Electric Power Exchange, or WEPEX) filing was made to FERC by the three major private-sector electric utilities, it was pretty much a unilateral document by those three. The most recent filing (March 31) since the legislation has had pretty broad support. There are none of the major objections the municipal utilities had a year ago.

The state law sort of gave the municipals and other stakeholders a formal part in the process and made us players. It gave us a formal seat at the table. The March 31 document basically has the support of most of the players. It is not a consensus document, but it covers most of the key issues and has the support of all of the key players.

And I think most of the credit should go to Dave Freeman (Mayor Richard Riordan's choice as the new general manager of DWP, who has been operating as a state-appointed trustee to establish the ISO). He did a pretty good job of leading the charge on this thing.

Q: What should the municipal utilities, such as the DWP, do in the face of the 10 percent rate cut for the private sector utilities' residential and small-business customers under the state law?

Waters: They have to educate their customers about the fact that they are still relatively better off.

DWP rates by and large are about 20 percent lower for the average residential customers than are Edison's, so even with the mandated rate decrease, the muni customers should be better off, but you have to explain that to people. In addition, the way the law works, the 10 percent reduction is totally on the backs of future customers who will pay for it by paying off in future electric rates the special state-backed bonds that will allow the utilities to offer the decrease now.

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Photo: no caption (Dan Walters)