The ratings game.

The Department of Water & Power has been telling the Los Angeles City Council that it needs an 18 percent hike in residential water rates to ensure its bond rating doesn't drop.

But bond analyst Patrick Murphy at Standard & Poor's said that the rate hike has nothing to do with current bond ratings, which he reaffirmed last week at 'AA.'

"The LADWP's rating is unaffected by the City Council's decision not to approve the proposed rate increases," he said.

Last week, a City Council committee demanded an independent financial review of the utility's proposed rate actions.

Stacy Bellew, a spokeswoman for City Councilman Tony Cardenas, said several lawmakers were shocked when utility officials were unable to explain the reasons behind the rate increase.

She said that after the sessions, City Council President Alex Padilla admonished DWP staffers for exaggerating the threat of a rating downgrade.

Robert Rozanski, DWP's assistant chief financial officer and treasurer, who testified last week before the Council's Commerce, Energy and Natural Resources Committee, said he could not pinpoint a time frame for a potential downgrade in the utility's bonds.

"If we don't get the proposed revenue increases, we won't be downgraded fight away, that's probably true," he admitted.

More relevant is that DWP has a six-year, $2.5 billion capital improvement program that calls for $700 million to be funded by customers with $1.7 billion raised through new bond issues, he said.

Most of the improvements are needed to bring the agency's water quality systems in line with state and federal regulations. The utility also must upgrade its distribution system of aging pipes, increase security to prevent terrorist attacks, and pay for the restoration of Owens Lake as part of a class-action settlement approved last year.

Though the DWP proposed a rate increase of 11 percent this year and seven percent in 2005--which roughly translates into a $50 increase to residential water bills--analysts expect the agency will need far bigger rate hikes to fund these projects in the future.

"On a long-term basis, they have plans for even greater rate increases," said Murphy.

Rozanski agreed that further rate hikes would be necessary. The utility has not raised rates since 1992.

The rate proposal had not been heard by the whole City Council and is pending a financial review, though a rate increase could be approved in the short-term.

"The increases in operations and maintenance costs and the capital investments--all of that contributes to a need for revenue increases," Rozanski said.