Free Market Threatens Some Low Power Rates

As the 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 that are 15% to 25% below those paid by many of their neighbors.

Residents in those cities get electricity through their municipal utilities, the 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 utilities to streamline operations for the new, tougher marketplace. Whether costs can be contained and rates maintained as deregulation kicks in over five years is uncertain.

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

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

Glendale 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 that their rates are sure to rise above market levels, said Ron Stassi, general manager of Burbank’s Public Service Department, which serves about 50,000 electric customers.

Stassi would like to eliminate $200 million in debt that could hinder the agency 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 by planning cuts of 30% in its utility work force and raising rates about 11%, will put its plan into effect in weeks, said Paul Little, a Pasadena councilman.

For Glendale’s municipal utility, which serves approximately 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 going to the city’s general fund and cutting back on capital outlays.

The utilities’ debt is primarily the result of long-term contracts that allow power plants to recoup their construction costs.

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State lawmakers, when they voted for deregulation last year, created competition transition charges, which will allow the municipal utilities to tack on fees to consumers’ bills to recoup some of the costs of reducing their debt.

If customers switch 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.

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.”

Larger customers, he said, generate more revenue to the utility. But whether deregulation will change anything for certain is anyone’s guess, Hall said.

To remain viable in an open market, Burbank’s Stassi said, the utilities will have to eliminate their debt 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,” Hall said.