Now, DWP Has Put On the Gloves : New Alliance Will Help Utility Compete Regionally
“In the new world of deregulation, you have to be a factor outside of your area because that’s a way of surviving in your area,” says William Louis-Dreyfus, the head of Duke/Louis Dreyfus, the joint venture firm that Tuesday became a partner of Los Angeles Department of Water & Power.
Louis-Dreyfus, 64, the fourth generation to head a French American family firm dating to 1850, is saying that DWP--the municipal utility that experts thought would be road kill in the deregulation derby--will be reaching out to attract big customers outside its home area. In Orange County, it will target the territory of Southern California Edison, and in San Diego the markets of Enova. And it will even reach into the Northern California preserves of Pacific Gas & Electric.
Of course, those utilities in turn will be trying to poach business from DWP’s 1.3 million household and commercial customers when competition begins next year.
But the prospect of DWP as an aggressive competitor is new. Until now, DWP’s best hope was thought to be a holding action, trying to retain customers and merely survive against competition from neighboring utilities.
However, on Tuesday, DWP’s Board of Commissioners voted 3 to 0 to approve General Manager William McCarley’s recommendation that the utility enter into a strategic alliance with Duke/Louis Dreyfus, the Wilton, Conn.-based trading company allied with a North Carolina utility.
Terms of the alliance call for the trading company to guarantee DWP the lowest market cost of wholesale energy, a guarantee that would have saved the utility between $15 million and $30 million in 1995, Duke/Louis Dreyfus Chief Operating Officer Simon Rich said.
Initially, large DWP customers, such as UCLA, USC and the Port of Los Angeles, will feel the effect of lower electric rates because those big electricity users will be immediately wooed with competitive offers from other utilities.
Residential and small-business customers will benefit indirectly from such deals because without them--that is, if DWP’s big accounts were lost--greater cost burdens would fall on the remaining customers.
And all residents of Los Angeles as owners of DWP are ultimately liable for the utility’s nearly $4 billion in bonded indebtedness.
So all of Southern California has a competitive interest in the alliance with the sophisticated Louis Dreyfus firm, which has traded wheat, corn, oil, natural gas, even orange juice in a long history that spans continents, world wars and persecution.
About the time grain markets emerged in Chicago, Leopold Louis-Dreyfus was buying Russian wheat in the Black Sea and selling wheat forward in London to avoid the risks of price fluctuation. Ironing out risks is what trading and futures markets have been about ever since. (The family, for obscure historical reasons, hyphenates its name but not that of its company.)
And now trading, the process that William Louis-Dreyfus, who has a law degree from Duke University, calls commercialization, comes to electric power. Electricity prices traditionally have been set by state regulation, which was thought essential to provide and allocate a scarce resource.
But with conservation in energy usage and increases in production, regulation left the nation with too many power plants and prices too high for a commodity in surplus.
“In a fully deregulated world, the marriage of the physical commodity with its commercialization is not only desired but is essential,” explains Louis-Dreyfus, until now better known in Los Angeles as the father of actress Julia Louis-Dreyfus on “Seinfeld.”
“It is essential because the commercial will not reach its full potential nor the physical its full competence unless they marry,” he goes on in his scholarly manner. In other words, if you don’t know the right price, how do you know how much to produce and sell?
That said, the DWP-Duke/Louis Dreyfus alliance proposes to do more than trade wholesale. It will sell the electricity of DWP’s eight power plants to other areas, earning more than DWP does now.
And it will customize electricity, tailoring pricing to conditions and hours of the day. A film company that works at night with tremendous needs for lighting will get special rates once competitive pricing is allowed next year.
Electricity’s price can vary 100% over the course of a day, Rich explains, which is why sophisticated trading operations are on the rise. Duke/Louis Dreyfus competitors for the DWP alliance, Enron of Houston and PacificCorp of Portland, Ore., have both become proficient at trading power.
The competitive future of electricity promises a handful of national power-trading companies delivering electricity to be distributed by skilled marketing firms, says the head of another Southern California utility who hopes to be among the successful marketers.
As deregulation proceeds in the next five years, the Southern California market promises to become a competitive free-for-all. Already, power resellers, who will be able to buy surplus electricity from utilities and resell it at bargain rates, are signing up group customers for next year. New Energy Ventures, a Los Angeles firm headed by a former president of Edison, has signed up the California Retailers Assn. and the Plastics Assn.
Alliances will be mandatory if municipal power companies such as those in Anaheim, Burbank, Glendale, Pasadena, Riverside and elsewhere want to survive.
Ultimately, the promise is efficiency and lower prices for electricity, but there will be a lot of competitive casualties as market discipline comes to electricity. Louis-Dreyfus is philosophical but optimistic. The free-market system may merely be “the lesser of two evils,” he says, but alternative systems “don’t work at all.”
And to the widely held belief that DWP, with 8,900 largely union and civil service employees, will have trouble making it in the new environment, Louis-Dreyfus says, “I do not think that DWP has weaknesses that are not inherent in large institutions of any kind.”
That may be damning with faint praise, but the International Brotherhood of Electrical Workers, Local 18, which represents more than 6,000 of DWP’s employees, nonetheless supported the alliance Tuesday. The challenge of survival makes new friends, or strange bedfellows, depending on your viewpoint.
Times staff writer Chris Kraul contributed to this report.
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Getting Charged
Energy trader Duke/Louis Dreyfus is teaming up with the DWP to bring lower-priced electricity to the lucrative California market, where rates average 50% more than in the national average of 8.80 cents per kilowatt-hour and residents use more than in any state except Texas.
HIGHEST ELECTRICITY RATES
Average residential cost per kilowatt-hour* for investor-owned utilities, July 1995 to June 1996, in cents:
New York: 14.42
Connecticut: 13.87
New Hampshire: 13.61
Hawaii: 13.36
Maine: 12.64
California: 12.16
New Jersey: 12.03
Rhode Island: 11.68
Massachusetts: 11.60
Vermont: 10.89
National average: 8.80
* A kilowatt-hour would power a color TV for five hours.
Note: California’s rate is an average of revenue per kilowatt-hour for Pacific Gas & Electric Co., PacifiCorp, San Diego Gas & Electric Co., Sierra Pacific Power Co. and Southern California Edison Co.
HIGHEST TOTAL CONSUMPTION
Total electricity consumption per capita in 1994 (the latest year for which data are available), in trillions of BTUs**:
Texas: 880.9
California: 729.1
Florida: 544.4
Ohio: 526.7
New York: 447.6
Pennsylvania: 419.8
Illinois: 414.5
North Carolina: 340.5
Michigan: 311.0
Georgia: 306.8
** A BTU (British thermal unit) is a standard measure of heat energy. It takes about one BTU to raise the temperature of a pound of water by one degree.
ENERGY TRADING
Unlike a traditional electric company that provides generation, transmission and distribution of energy services to customers in a designated area, an energy trader buys and sells electricity as a commodity, purchasing quantities of power from utilities in one part of the country and selling to utilities in another.
Sources: Edison Electric Institute, Energy Information Administration
Researched by JENNIFER OLDHAM / Los Angeles Times
