Q & A: PLANNING FOR THE FUTURE : FREEMAN SEES STREAMLINING OF DWP'S OVERSIGHT AS THE MAJOR UNFINISHED TASK AHEAD OF HIM, ALONG WITH CONTINUING TO CUT INTO MOUNDS OF DEBT.

Byline: RICHARD NEMEC Local View

EIGHTEEN months ago, when he assumed the top job at the Los Angeles Department of Water and Power, S. David Freeman was prone to scream repeatedly that newly legislated electric industry competition was coming and even the nation's leading public sector power provider had best get ready with a series of belt-tightening and reorganization measures that would profoundly change the $2 billion-plus operation. Today, Freeman seems to be saying, yes, competition is still coming, but so what?

A longtime proponent of public-sector electricity operations who has spent almost five decades heading some of America's largest government-backed water and electricity suppliers, Freeman, 73, during a recent meeting over lunch in a conference room adjacent to his 15th-floor office in DWP's downtown Los Angeles headquarters, quoted one of his favorite public figures, the nation's only four-time elected president, Franklin Delano Roosevelt, who said that public power organizations need ``the flexibility of a private company, with the responsibility of a public entity.''

That summarizes what Freeman is trying to do with DWP as its latest general manager. Freeman thinks the streamlining of the giant proprietary department's oversight by the mayor and City Council is the major unfinished task ahead of him, along with continuing to cut into mounds of debt.

Freeman is pushing for a third-party assessment of the DWP's oversight that could lead to a DWP charter reform ballot measure in 2000, following whatever happens to the current efforts to gain voter approval of a completely new charter. (The latter offers no changes in DWP's status, treating it as just another of numerous city departments.)

Although customers of investor-owned electric utilities in California have for the past year had a choice of who they buy their power from, the bulk of the retail mass market customers (residential and small business) are sticking with their local utility. Freeman thinks DWP customers in the long term won't want to switch, so he is unsure the city needs to offer them a choice.

He continues to emphasize that DWP must offer more than what the private sector utilities do, and if the department can't do that, it should get out of the electricity business.

Question: What are the major differences in DWP today compared to 18 months ago when you came on the job?

David Freeman: We've made a considerable move toward becoming competitive. Eighteen months ago the place seemed adrift, or at least, at anchor. We pulled up the anchor and are moving ahead. We reduced the above-market generation debt by a billion dollars ($4 billion to $3 billion), reduced the work force by about 2,000 jobs, and cranked up a lot of public benefits programs, with tree-planting in the schools, low-income energy efficiency programs, etc.

The culture has begun to change. Most of the people who didn't want to get engaged in a more competitive utility environment took early retirement. In addition, we are showing we can be more competitive.

We made $63 million net so far in this fiscal year selling surplus electricity. When I got here everyone was moaning that we needed to get private sector help (Duke and Louis Dreyfus) to do that. God knows how much money we would have given away if we had turned it over to them. Certainly, not everything is upbeat, but today there is a different perspective of us and a different reality.

Q: What is the reality of what DWP faces in the future?

A: We still have to roll out the new programs and also work on this issue of governance (DWP's multilayered oversight) for the long term. I consider that issue (governance) my major obstacle to getting this organization competitive so we can make decisions with the speed of electricity.

Right now, I can't hire or fire anybody, get legal help or buy stuff without a lot of permissions. I don't think we can be successful in a competitive environment unless we have the flexibility of a private company under a public board of directors and policies that support the public interest. So I think we need a good deal more delegated authority.

Q: I assume you think other public power entities already have this flexibility?

A: Just about everybody has it but us. I've been the CEO of quite a few public power entities, and L.A. is a unique case all by itself. Take Sacramento Municipal Utility District. It has no mayor's office or City Council or CAO (chief administrative officer), or CLA (chief legislative analyst). There is a utility board, and it's organized as a muni utility district. You can hire and fire and negotiate with labor, have an independent merit system. There are none of the controls and constraints that we have here. I was able to spend almost all of my time as general manager of SMUD (1990-94) running the utility. I spend half my time here getting permission to manage the utility.

Q: So, you're going to push a special charter amendment for DWP in the year 2000 to provide more flexibility for managing the department?

A: I think we're going to put out a request for someone like the Rand Corp. to make a study of this issue, then, build up from that, work with labor unions and by the fall or early next year, get to the City Council with a charter reform amendment tailor-made for us and get it on the ballot in 2000.

The charter commissions don't have room for us in their proposals. They divide up their work generically by subject matter, and we are so different than the rest of the city, the kind of things they are debating really can't help us.

Frankly, what difference does it make if the mayor or City Council, or some combination, can fire the general manager (of DWP)? What we need is a board of directors that can hire a good general manager and work with that person, and there is a decision-making process that will allow us to compete.

Q: Have you considered selling off assets, such as some of the excess power-generation plants DWP maintains?

A: Why should I do that when I am making so much money on it (the generation)? I am not trying to liquidate the whole company (DWP). I am trying to make it stronger.

What we discovered in the past year is that our generation plants are worth more - not less. Private utilities that have sold generation have gotten more than expected. Just figure out how much money I would have to get in excess power to capitalize net earnings of $60 million in six months.

We're doing OK. My idea is to pay off the debt (at a rate of about $600 million to $700 million annually) and then the city will possess some valuable assets, and the city can use them as they wish. Frankly, it is looking more and more like it is to this city's advantage to have generating capacity. In the marketplace, the commodity price (for wholesale power) is sneaking up, not going down, and that means we can sell to our own customers under the (market-clearing California Power Exchange) price.

Q: How do you slash costs, increase service, become more competitive and still have the DWP provide socio-economic services as well?

A: There is not much reason for the city to be in the electric business unless it fulfills such a responsibility. That could be fulfilled by pouring money into the treasury (general fund), or by just having lower and lower rates that draw industry; or it could be fulfilled by environmental initiatives. We have to be adding some value to this community over and above what Edison would do.

I think our poison pill (protection) against being taken over (by a private sector utility) Fis the $120 million we put in the city general fund annually. We are the city's largest taxpayer, putting five percent of our revenue back in the city each year.

If you need a little money for something, it is easier to get a contribution from us than a private company. And we're sort of proud of that.

Valley cityhood and water rights

Q: You have caused quite a stir with your response to a question earlier this month after a Town Hall speech. You talked about charging higher rates for water to Valley residents if they secede from the city of Los Angeles. Can you clarify your response?

A: The Valley was not a part of the city when we (DWP) stole that water, so from an equity point of view, if you're sitting on the Los Angeles City Council with cheap water from Owens Valley and the Colorado River and expensive water from the Metropolitan Water District, you are going to sell the cheap water to the people who are still in L.A. and sell the Met water to the Valley.

Now the Valley can form its own water company and try to get cheaper rates. But as long as they want to rely on us (DWP) as the water utility, they would have to pay more.

I am not saying that will happen. I am just saying if you want to look at what might happen, that is a reasonable, plausible scenario. Even the existing charter says that the DWP can charge higher rates outside of the city.

Q: A newly formed city would have the option to form its own electric and water department or contract with DWP?

A: Yes, they would have those options. Electricity is a whole different subject, though. It really isn't relevant. With the restructuring of the industry, people are going to eventually have their choice of electricity suppliers. But for water, no one really knows what is going to happen.

We do know however, that the water and the pipes will be there in place. We aren't going to pull up the pipes if the Valley secedes. So the fact that water might cost a little more really shouldn't make For break the debate over secession. No one is telling people in the Valley that they have to get a new water supply or new pipes.

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Photo, Box

PHOTO S. DAVID FREEMAN

BOX: Valley cityhood and water rights (see text)