UTILITY LEARNS PRICE OF EXPERT ADVICE : WAS LADWP'S $27 MILLION SPENT FOR ENERGY CONSULTANT WORTHWHILE?

Byline: Richard Nemec

IT is indisputable that the City of Los Angeles Department of Water and Power, the nation's largest government-run utility, if it were an emergency room patient, may have been pronounced DOA a few short years ago. It had been bleeding profusely at times, and the pulse was weak.

LADWP's recently departed general manager, Bill McCarley, used to use the medical metaphor that when you need major open heart surgery, you can't rely on medics and Band-Aids. You need a team of cardiac surgeons and all the trappings of a major medical center.

For the gravely ill government utility, McCarley, with concurrence from Mayor Riordan and the City Council, chose Ross Perot's European-based consulting firm, PSC Energy Corp., to help stop the bleeding and get the department at least jogging again, if not running marathons.

PSC Energy's bill ultimately was $27 million over two years (1995-97). The surgery was finished this past February.

Despite all of the sophisticated attention, however, the prognosis for LADWP is still uncertain. Even with a team that numbered up to 40 full-time professionals working alongside LADWP's managers at some times during the two-year gig, PSC Energy's work has at best provided only a partial recovery. A relapse for the department lurks in many different places.

Before picking up its final paycheck, PSC Energy filed a final report with LADWP and its five-member governing board, the Mayor's Office and City Council. That document makes it clear from the first paragraph of the executive summary that the consulting firm's two-year assignment was to initiate a comprehensive business transformation, with the operative word being initiate (or start), not necessarily finish the job.

And not surprisingly, despite its multimillion-dollar bill, PSC did not finish implementing much of anything. The consultants, however, did a pretty good job of describing the major flaws at the sprawling, $3 billion government utility, which is operated as a self-sustaining, ``proprietary agency,'' along with outlining in broad terms what needs to be done to correct the situation.

Had the high-price consultants merely declared that the patient was sick, we all would be right in demanding our money back. But it is never that simple in the consulting sphere.

PSC Energy appropriately identified ongoing revenue losses along the magnitude of $200 million annually, which even in big government is real money.

They warned of potential additional losses in the range of $150 million to $350 million annually. Again, that tends to get people's attention.

While facing large revenue losses unless long-term deals can be made with major industrial users of electricity, LADWP also faces ever-increasing needs to slash operating expenses beyond the $100-plus million saved through massive work force downsizing that was started even before PSC Energy came on board.

The consultants identified another $200 million in annual cost reductions that would be needed, at the same time the department faces large capital expenditures in the range of $300 million to upgrade its antiquated computer systems.

In the so-called hard assets of power generation and transmission facilities, in which LADWP has billions of dollars of debt-financed investments, the consultants recommended selling or retiring or mothballing some assets and getting out of high-cost, long-term contracts for out-of-state power.

Remedy?

While the diagnosis is clear, PSC's remedy is not. And in any event, PSC Energy was not able to address the main inhibitor - the cumbersome, multilayered political approval process LADWP must go through on any major change, involving three masters: its board, the mayor and ultimately the City Council.

It appears that reorganizing LADWP's basic management structure and ongoing attempts to update and streamline its customer service operations are where the biggest impacts were provided by the consultants, who were headed by several senior members with extensive experience helping Great Britain transform its decades-old nationalized utilities into regional private companies, most of which have now been bought up by major U.S.-based energy companies.

Organization

As a result, the department now is organized in about a half-dozen business units; it has a combined marketing/customer services operation to more aggressively reach out to customers, and it has greatly improved its relationship with its unions, only a few short years after more than 90 percent of the work force went on strike in a crippling blow to the electricity and water supplier for the city's 3.5 million residents and several hundred thousand businesses of all sizes.

Improved customer services? Maybe. PSC Energy and the department point to ways in which the consultants made a tangible difference. For example, before they came on board, the average customer's telephone wait for a service representative was three minutes; and the end of last year it was cut to 1 minute, 45 seconds. Uncollectibles from deadbeat customers totaled about $27 million annually in 1994; by the end of last year that total had been reduced to $23 million.

Does the average customer recognize the differences? I doubt it. Overall, some high-ranking department leaders, when asked, gave the consultants failing marks for being incomplete in too many areas.

For example, PSC Energy ignored the water side of the business despite the fact that it faces some of the same tough restructuring challenges that electricity is currently going through. Similarly, water systems in California are among the largest power users so they have a huge stake in the electric industry shakeout.

Even more fundamental, the consultants never examined the basic strategic question of should the city continue to keep water and electricity services combined? The crucial area of technology upgrades was left unresolved.

Finally, there is the matter of whether some of the so-called ``credit'' that PSC Energy takes in its wrap-up report is legitimately the consultants' doing.

The good and the bad

Anyone who has worked in a major organization that has been thoroughly analyzed and scrutinized by the dark-suit-and-white-shirt crowd knows that the art of consulting is knowing how to attach yourself to the good and distance yourself from the bad.

If the question is whether LADWP got some value out of this two-year odyssey, the answer is an unqualified yes. But if the question is whether it got its full, $27 million worth of value, the answer for now is probably no.

There is a chance that the assessment could change for the better if the city could act with uncharacteristically lightning speed on some of the most pressing joint department/PSC recommendations. Sadly, that is not likely to happen, and LADWP's ``investment'' in fancy consultants may be less valuable as a result.