Duke / Louis Dreyfus Is DWP’s Alliance Pick
The Los Angeles Department of Water and Power will unveil plans today to form a strategic alliance with giant power broker Duke/Louis Dreyfus to position the staid, debt-laden municipal utility for the free-market energy world coming to California next January.
The alliance would pair the largest U.S. municipal utility with the nation’s second-largest electric power broker. Duke/Louis Dreyfus of Wilton, Conn., is a joint venture of Duke Power of Charlotte, N.C., the nation’s sixth-largest utility, and Louis Dreyfus, a global commodities trading company with offices in Paris and New York.
By linking with Duke/Louis Dreyfus’ nationwide market network, DWP would win access to vast new markets for its excess energy, while Duke/Louis Dreyfus would gain entree into one of the nation’s most coveted energy markets.
The proposal is to be presented today to the DWP board of commissioners. It must be approved by the commission and by City Council. The council’s vote is an open question because of opposition by Southern California Edison to such an alliance. Edison wants to be DWP’s partner.
Louis Dreyfus, founded in Paris in 1857, did $22 billion in commodities trades in 1995, the last year for which figures are available. The firm ranks as the world’s second-largest trader of cotton and third-largest frozen orange juice trader.
The commodities firm and Duke Power established a joint venture in late 1994 to combine Duke’s power production and generating-plant expertise with Louis Dreyfus’ marketing and trading acumen and contacts.
Operating in 48 states last year, Duke/Louis Dreyfus bought and sold enough energy--28.3 million megawatt hours--to light up two cities the size of Los Angeles. But DWP would be by far its biggest such partner.
The alliance is only one of several measures that DWP must take if it is to survive the deregulation of electric power, observers say. DWP must also cut up to 1,000 jobs, drastically reduce its $7.9 billion in debt and cut in half the $100 million in operating revenues that it turns over to the city’s general fund each year.
Alan Spen, executive managing director of Fitch Investors Service, called Duke/Louis Dreyfus “a high quality provider of power marketing services, one of the leaders of this developing industry, and they should bring a positive element to DWP.”
DWP General Manager William McCarley said Monday that terms of the three-year deal with Duke/Louis Dreyfus call for no money to change hands. But Duke/Louis Dreyfus would install sophisticated, computerized trading equipment and modeling systems at DWP facilities and train DWP employees in their use.
If the alliance is approved by DWP commissioners and City Council, DWP would be guaranteed its current $6 million in wholesale trading revenues plus half of whatever Duke/Louis Dreyfus helps it generate above that by selling electricity to other areas. The utility would also be shielded from all potential trading losses.
In addition to a conduit for selling its more than 1,000 megawatts of excess power capacity, DWP sees Duke/Louis Dreyfus as a way to tap into sophisticated energy trading techniques that have come to dominate the wholesale energy business since a 1992 federal law allowed the nationwide brokering of energy, like a commodity, over interstate transmission lines.
The DWP announced in April that it would solicit proposals from potential allies, and 13 companies responded, a field that was later whittled to Duke/Louis Dreyfus, Enron Corp. of Houston and Pacificorp of Portland.
Duke/Louis Dreyfus was selected because of its “vast expertise in all facets of the global energy market--major fuel markets, management of price and financial risk, delivery of energy to customers, construction and operation of energy systems and the delivery of retail products and services to customers,” McCarley said in a letter to the commission.
The alliance would be only the latest pairing of major utilities with an energy broker. Most have been accomplished through mergers, such as the purchase announced last week of Valero Energy gas pipeline company by San Francisco-based Pacific Gas & Electric for $723 million.
But municipally owned utilities, such as DWP, also have been aligning with energy marketers as well. Last month, the 12-city Northern California Power Agency paired with Enron to explore joint marketing and product opportunities. Duke/Louis Dreyfus has done similar deals with several small city-owned power companies, most notably that of Dover, Del.
