Tough Issues Await New DWP Chief

S. David Freeman, whom Mayor Richard Riordan appointed general manager of the embattled Los Angeles Department of Water and Power on Tuesday, will have to wrestle a host of tough issues if he is to whip the bloated department into shape to compete in California’s soon-to-be-deregulated energy market.

Come January, the DWP will have to duke it out with dozens of other energy companies in the deregulated power market, one in which out-of-state power companies such as PacifiCorp of Oregon, Enron of Texas and neighboring giant Southern California Edison, will be trying to snatch away the municipal utility’s biggest customers.

And, with time quickly running out, it is clear that the DWP isn’t ready to compete. Its payroll is bloated, the rates it charges big businesses are too high, and it is suffocating under a mountain of debt connected to a Utah power plant that is as much an albatross as nuclear plants have been to Edison and Pacific Gas & Electric.

The DWP is also mulling a politically explosive rate increase of 10% or more on residential and small business customers, while cutting rates to industry, a move that its advisors insist is necessary to be competitive against the Enrons of the world.

Freeman’s job, then, is to make the DWP, the nation’s largest municipal utility, more like a business, and quickly. His experience in accomplishing that goal at other public utilities was a big reason that he was chosen for the DWP job over Matthew Cordaro, president of Nashville Electric Service, a municipal utility in Tennessee.

In a public power career spanning several decades, Freeman, 71, previously headed the Tennessee Valley Authority, the Sacramento Municipal Utility District, the New York Power Authority and the Lower Colorado River Authority. He was an energy advisor to President Jimmy Carter and director of the Ford Foundation’s Energy Policy Project.

Since last summer, Freeman has been interim trustee of the state’s Power Exchange and Independent System Operator, two Sacramento-based agencies central to the upcoming deregulated energy market. He would replace William McCarley, who retired as DWP general manager in March.

But assuming that he is approved by the City Council this month and on the job in early September as planned, Freeman would have little time to rest on his laurels. He will have to quickly lead the department through some painful changes, including the probable elimination of 1,500 jobs over the next year. The payroll now totals 8,900 workers.

The jobs reduction, described by the DWP’s outside consultants as essential, was approved last month by the utility’s five-member commission, which does not envision layoffs. The commission also set aside $39 million for buyouts to entice employees to leave voluntarily.

At a Tuesday news conference hosted by Riordan, Freeman said he would increase rates only as a “last resort,” preferring to “cut costs . . . and then we’re going to cut costs again. . . . It’s hard to become competitive by raising rates.”

There also is the small matter of how to whittle down the DWP’s $7.9-billion debt, more than half of it connected to the Utah coal-burning power plant from which the department contracted to buy power at twice the going rate. Those debt payments are the main reason that the department’s annual overhead is $400 million too much, consultants say.

Freeman called the debt the single biggest impediment to the DWP’s competitiveness, and said he will be looking for ways to renegotiate it.

Meanwhile, Freeman must deal with the delicate political sensitivities as head of the DWP, the largest municipal power utility in the nation. That’s because his ultimate bosses are the mayor and the Los Angeles City Council, whose bottom line often has more to do with votes than bond ratings and net income.

At the Tennessee Valley Authority, Freeman made a reputation as a gruff, no-nonsense administrator unafraid of making the tough calls. As chairman from 1978 to 1981, he halted construction on eight nuclear power plants and instituted tough environmental practices that brought the seven-state agency in compliance with the federal Clean Air Act.

One of those plants was in Mississippi, home state of the late U.S. Sen. John Stennis, then head of the powerful Senate Appropriations Committee. Freeman said he was able to persuade a wary Stennis of the necessity of halting construction.

“Freeman has a tremendous amount of experience dealing with all sorts of politicians, from the federal government to officials of the seven states that the TVA covers. He’s probably one of the most qualified guys they could find,” said Edward J. Tirello, a utility analyst at NatWest Markets in New York.

After the TVA, Freeman moved on to the Sacramento Municipal Utility District, where he oversaw the aftermath of the closure of the utility’s Rancho Seco nuclear plant, making up for the loss of half of that agency’s power-generating capacity without raising rates. Then it was on to the Lower Colorado River Authority, where he scrapped a highly visible coal mining project.

And lest anyone think Freeman is anti-nuclear, he points out that he saved the Indian Point nuclear reactor from closure while head of the New York Power Authority from 1994 to 1996 “although I have a healthy scepticism about the economics of nuclear power.”

In an interview, Freeman said he was not taking the DWP job for the money. In fact, his base salary of $200,000 is much less than the $300,000 he is being paid now by the state and less than what he could earn as a consultant.

Freeman said he likes the challenge of making the DWP not just economically competitive but environmentally positive. He wants to invest in technology that will help preserve “this thin layer of atmosphere around the Earth.”

“Public power is at a point of either making a contribution to the 21st century or dying, and if all public power is going to do is just be competitive with private power, then who needs it,” Freeman said.

Staff writer Ted Rohrlich contributed to this story.