THE STATE : Why Utility Deregulation Won’t Benefit L.A. Rate Payers

SAN DIEGO — Now that the California Public Utilities Commission has approved an electricity deregulation plan, starting in 1998, for investor-owned utilities, the question for Los Angeles residents and businesses is what does it mean for them? Are the oft-promised savings of the competitive marketplace soon to be theirs? Regrettably, no.

The reason is not Department of Water and Power inefficiencies but City Hall politics. To enhance its competitiveness, the DWP has done a commendable job of cutting costs. Its work force has been reduced by 1,500 employees--14% of its staff--to yield yearly savings of $86 million. Another $100 million has been saved in other areas.

Unfortunately, City Hall has other ideas about how DWP cost savings should be used. Mayor Richard Riordan has treated the DWP as a convenient cash cow to be milked to pay for more police. For the past three years, every penny of DWP net income and cost savings has been transferred to the city’s general fund, leaving nothing to pay off the department’s large debt.

The 1997 city elections pose another stumbling block to DWP competitiveness. Historically, the mayor and City Council have subsidized residential rates at the expense of industrial and commercial users. The reason: Residents vote, businesses don’t. But to be competitive with utilities like Southern California Edison, the DWP needs to raise residential and small-business rates now, and lower overall business rates by 1998. Since the mayor and half the City Council are up for reelection in 1997, don’t expect the needed residential-rate adjustments to be made in time for deregulation.

Unable to reduce its debt or adjust its rates, the DWP will remain at a competitive disadvantage to the state’s investor-owned utilities for years to come. While municipal utilities like the DWP do not directly fall under the commission’s jurisdiction, the city will have little choice but to shield the department from market forces well into the next century by preserving the DWP’s exclusive franchise to sell electricity in Los Angeles.

DWP customers will be the big losers. For the next five to 10 years, big businesses will be hurt the most, since industrial and commercial rates will remain high. In the long term, residential customers could be the hardest hit, however. If the city’s big businesses, in partnership with rival private utilities, are able to rewrite state legislation to impose competition on Los Angeles, large customers are likely to quit buying power from the DWP. Residential and small commercial customers would see their rates skyrocket to pay for the DWP’s debt service and loss of business revenues.

The DWP’s $8.1 billion debt is a major source of non-competitiveness. In relative terms, the department’s debt is several times the debt load of Edison and other private utilities. Debt payments now account for nearly one-third of DWP costs. By contrast, the state’s private utilities have dramatically paid down their debt by cutting costs, reducing shareholder dividends and holding rates high--all with the tacit encouragement of the PUC. Indeed, the commission’s deregulation plan allows these utilities to recover all their “stranded investments,” such as the San Onofre nuclear plant, through competitive transition charges between 1998-2003.

The DWP certainly wants to reduce its debt, but since Riordan took office in 1993, its power-system transfers to the city’s general fund have totaled $300 million, leaving nothing to pay it off. Since Riordan’s election, the DWP has been forced to increase its debt by $210 million, and borrowing is projected to grow by another $230 million over the next three years.

Over the years, California utilities have been burdened with large debts to build out-of-state generation and transmission facilities to meet load requirements, reduce reliance on imported fuel oil and reduce emissions. Until recently, utilities like the DWP built expensive coal and nuclear facilities because regulators banned the use of cheaper natural gas as a boiler fuel for new generation.

With deregulation, everything has changed. New entrants into the energy marketplace are free to choose cheaper and more efficient forms of generation, while existing utilities are saddled with large debts resulting from now-discarded state energy policies.

A politically driven rate system is the other major source of DWP non-competitiveness. While residential customers may think their electricity bills high, they would be 25%-30% higher were they on Edison’s lines. The same is true for small commercial customers. Were the artificially low rates of both groups raised to within 10% of Edison’s, the new revenue could be used to reduce debt and lower rates for large business users. Residential customers would naturally resist such rate increases, but they need to understand that rate adjustments would be beneficial in the long run.

The problem is that DWP rates for large industrial and commercial customers are already higher than what they would be if they were customers of private utilities. Under deregulation, if the DWP’s 100 largest customers started buying their electricity from lower-cost producers, they would take over one-fifth of the department’s revenues with them, leaving remaining customers to pick up the tab. If this happens, the rate increase for residential and small commercial customers would be far higher than the adjustment currently needed.

Despite the fanfare over the incentive package used to lure DreamWorks to build its studio in Los Angeles--which includes DWP hookup-charge concessions, the DWP, for its part, will be hard-pressed to lure new businesses or retain existing customers. Until the fundamental issues of DWP debt reduction and rate adjustments are resolved by the city’s elected officials, customers will be disadvantaged in the new deregulated energy marketplace. The DWP can be made competitive, if only the mayor and City Council would allow it.