Free Market Threatens Some Low Power Rates

As the state-mandated deregulation of the power industry approaches, a big question for residents in Glendale, Burbank and Pasadena is whether they will continue to enjoy electricity costs 15-25% below that paid by many of their neighbors.

Residents in each city now get electricity through their municipal utilities, the three largest government power companies in Los Angeles County behind the Los Angeles Department of Water and Power.

But the state legislature voted last year to deregulate the power industry, putting pressure on all utilities to streamline operations in preparation for the new, tougher marketplace.

Whether costs can be contained and rates maintained as deregulation kicks in over the next five years is uncertain.

Already, the DWP announced last week that it will lay off 2,000 workers by February because of deregulation, the largest mass government layoff in Southern California history.

The three smaller utilities have focused on tightening operations for some time, each with slightly different approaches.

Glendale, for instance, has had a hiring freeze in place for three years, imposed a modest rate hike and has focused on lowering its debt. Pasadena too has hiked rates temporarily to help give it better footing in the market when competition finally hits in January, beginning a transition period that will last until 2003.

If local utilities don’t reduce debt, the fear is their rates are sure to rise above market levels, said Ron Stassi, general manager of Burbank’s Public Service Department, which serves some 50,000 electric customers.

Stassi would like to eliminate $200 million in debts that could hinder it from competing in an open market.

The Burbank utility has also trimmed staff by 30 workers, he said, mostly through attrition.

Pasadena, which is aggressively trimming its debt load by planning cuts of 30% of its utility work force and raising rates some 11%, will put its plan into effect in the next month, said Paul Little, a Pasadena councilman.

For Glendale’s municipal utility, which serves roughly 85,000 residential and commercial users, $167 million worth of debt is forcing the utility to consider a wide range of cost-saving options so that its electric rates do not skyrocket when it is forced to compete on the open market.

These options include slight rate increases, cutting back on the amount of surplus revenues generated by the utility that go to the city’s general fund and cutting back on capital outlays.

The utilities’ outstanding debt is primarily the result of long-term contracts that are forcing the utilities to continue paying for power at inflated rates so that power plants can recoup their construction costs.

State lawmakers, when they voted for deregulation last year, created competition transition charges, that will allow the municipal utilities to tack on fees to consumers’ bills to recoup some of the costs involved with unburdening themselves of their huge debts.

If a customer switches from a municipal utility to a privately-owned utility, they’ll still have to pay their share of the debt service in the form of these charges during the transition period, said Bernard Polk, director of Glendale’s Public Service Department.

“In 2002 we’ll be competitive,” said Little, of the Pasadena city council. “That’s when we have to be.”

For all three utilities, residential consumers are paying slightly less than larger commercial or industrial users of power, which, in effect, have been subsidizing the residential users.

“Deregulation generally translates into residential users paying a little more and commercial users paying less,” said Bill Hall, Glendale’s electrical services administrator. “This will primarily help the business community.”

And larger customers, he said, generate more revenue to the utility, making them very important to the success of the utility. But whether or not deregulation will change anything for certain, is anyone’s guess, Hall said.

To remain viable in an open market, said Stassi, of Burbank, the utilities will have to eliminate their debts far faster than earlier anticipated. “In the short run, it will mean higher rates,” he said.

“It’s like having a 30-year mortgage on your house and paying it in 15 years,” said Hall, of the municipal utilities’ debt and the coming deregulation deadline.

While all three utilities claim they will be ready to compete when the time comes, there is a nervousness among the utility managers and administrators about the uncertainty of the coming free market and their own roles in it.

While all three are reinventing themselves to compete in the coming deregulated market, what this new market means to consumers remains the subject of considerable speculation.

“I don’t think anyone knows for sure what deregulation will look like,” said Dan Waters, executive director of the Southern California Public Power Authority, a financing organization for 11 consumer-owned power districts representing some seven million customers. “A lot of people are making predictions about what competition will look like in five years, but no one knows.”