DWP Plan Lists 2,000 Layoffs, No Rate Hikes

Bracing for the impact of energy deregulation and saddled with a staggering $4 billion in bad debt, the Los Angeles Department of Water and Power’s new chief has prepared a reorganization plan that would result in the largest municipal layoff in city history but would avoid rate hikes and seek to put the agency on sound financial footing.

S. David Freeman, the newly appointed general manager of the city agency, intends to introduce his plan, which includes 2,000 layoffs, at a series of meetings beginning this week. In interviews with The Times, he sketched out his proposal, which could face tough going before the City Council.

Still, some officials who have been briefed on the plan, including Mayor Richard Riordan, have expressed their support for Freeman as he attempts one of the most complicated and volatile governmental transformations ever undertaken in Los Angeles.

“I have total confidence that he will come up with the right plan,” Riordan, who appointed Freeman last summer, said Tuesday. “He will end up with the plan that wins.”

Top officials agree that the stakes are enormous. According to Freeman, success in the five-year effort could leave Los Angeles with a viable public energy agency that could attract businesses, fund environmental research and help manage the city’s growth. Failure, the DWP chief added, could bankrupt not only the DWP but also the city itself.

“If we fail, we enter what we call the death spiral,” said Freeman, an energy veteran who once headed the Tennessee Valley Authority and the New York state power system, among other high-profile posts. “This is L.A. falling apart. This is it.”

To avoid that calamity, Freeman has proposed a sweeping reorganization of the DWP, starting with firing 2,000 of its 7,000 electrical generation workers. Freeman wants those workers, most of them white-collar managers and engineers, gone by Feb. 1, and he wants them laid off without significant severance payments, which would dilute the cost savings of the layoffs.

As part of his “action plan,” Freeman said he hopes to sell virtually all of the DWP’s car fleet, to consolidate its helicopter operations with the Fire Department’s, and to possibly vacate and sell its San Fernando Valley office building. Collectively, that would represent the most significant overhaul in the agency’s history, not to mention the most dramatic downsizing of the city bureaucracy under the Riordan administration.

Riordan said he lamented the human toll of the possible layoffs, but added that restructuring was critical: “It’s absolutely necessary if you want to stay in business.”

Freeman agreed.

“It may seem like a dramatic cut,” said Freeman. “But we’ve got more layers than any layer cake that’s ever been baked.”

Freeman stressed that his proposal is being offered for public comment, and he encouraged residents and businesses, the utility’s customers, to weigh in with their opinions. He also stressed that he was discussing the matter with employee organizations, council members and the mayor, seeking to build a consensus on how to prepare the DWP for its coming competition.

According to aides of Councilwoman Ruth Galanter, Freeman is scheduled to appear tonight at a community meeting at Westwood Charter Elementary School on Selby Avenue. Although some of the details were still being worked out, Galanter’s office said the meeting is scheduled to begin at 6 p.m. and is supposed to include council members Cindy Miscikowski and Mike Feuer as well.

The politics of Freeman’s plan, particularly his proposed layoffs, are potentially intense. The City Council, which must approve the restructuring, is famously protective of city workers. Through most good times and bad--even through fiscal hardships such as the period after the passage of Proposition 13 in 1978--the city has kept its work force intact, preferring to let job freezes and attrition whittle the labor force rather than use layoffs.

“This is not a council that likes to fire people,” said one political observer with long experience in dealing with local labor issues. “You can be sure that they won’t welcome any proposal to fire people by the thousand.”

Still, Freeman’s plan comes with a couple of political plums.

For one thing, he proposes to hold residential rates stable, a recommendation that is sure to make City Council members more comfortable with his package than with any alternative that might fuel populist anger over rate hikes.

Moreover, Freeman already has been meeting with the main rank-and-file union, the International Brotherhood of Electrical Workers, and says those employees agree that action is necessary--even if associations representing managers and engineers may oppose it. “They recognize that the wolf’s not at the door,” he said. “It’s in the kitchen eating our supper.”

Brian D’Arcy, business manager of the local IBEW, said he applauded the proposal and added that consumers would not be likely to notice the cutbacks.

“About 75% or more of that number [the layoffs] is management, engineering and administration,” he said. “No one will notice. Those people don’t have anything to do with delivering service.”

Bob Duncan, executive director of the association of engineers and architects, said he was briefed in general terms about the proposal Tuesday. Duncan said he still was waiting for specifics on which employees might be affected and how; until then, he declined to comment in detail, beyond saying that he and other association officials expect to be at the negotiating table making their case to save jobs.

Freeman’s slashing challenge could not be posed to a more important agency in the life and history of Los Angeles.

It was the DWP under the forceful leadership of William Mulholland that aggressively secured the water supply that transformed Los Angeles from desert scrub grass into a booming metropolis and eventually into the nation’s second-largest city. To this day, a larger-than-life portrait of Mulholland greets visitors to the DWP’s downtown headquarters.

So profound has the DWP’s influence been on Los Angeles that some residents of the parched Owens Valley, whose water supply was acquired by the agency in a series of stealthy moves, still view the DWP as the source of their miseries.

“This agency, I’m proud of its history,” Freeman said this week from his 15th-floor downtown office. “We helped build this city in a very real way. The real question is our ability to contribute to the 21st century of this city in the way that we contributed to the 20th century.”

The agency’s place at the center of Los Angeles’ development makes the current state of the department all the more troubling to city leaders, who have struggled for years to settle on a plan to address energy deregulation. Freeman, who refers to himself as a “utility repairman,” was confirmed by an enthusiastic and unanimous City Council in August. He took office the following month vowing to make the DWP competitive in the energy business when deregulation takes effect beginning in January and continuing to 2003.

For the DWP, the peril in deregulation is that it will force the local agency to compete with private industry. That means that if DWP power costs more than private companies’ such as Southern California Edison, industrial customers can simply opt out of the DWP and get their energy somewhere else.

What’s more, even slight variations in the cost of energy might result in large shifts of customers.

“If you come in a very, very close second, it sucks,” Freeman said. “This is head-to-head competition. Either we’re going to get whipped, or we’re going to do some whupping.”

For the DWP, the particular problem in that struggle is that the agency enters the period of competition with huge debts. Overall, Freeman said the DWP is carrying about $7 billion in debt. Of that, about $3 billion is in the department’s transmission and distribution operations, where it will continue to enjoy monopoly power even after deregulation, and where, according to Freeman and others, the agency’s many assets cover those debts.

As a result, those areas are not of immediate concern.

Where Freeman and other analysts are nervous, however, is the $4 billion in debt that the department is carrying in its power generation operations. That is debt rung up through over-investing in inefficient power-generating facilities--coal plants, nuclear power plants and the like. Although those facilities produce power, they do it at a higher rate than the competitive cost on the market. Once deregulation hits, there will be no point in industrial customers paying more than market prices, since competitors will be there to offer lower prices for the same commodity.

“This department never met a consultant it didn’t hire,” Freeman said. “It never met a natural gas pipeline it didn’t buy into. We have too much of everything.”

The result: Although the debt is slowly decreasing, the investments continue to be huge drains on the department.

“It’s bad deals,” Freeman said. “It’s screw-ups. . . . We have gone out and bought more power plants than we need.”

The DWP is not alone in that. Other utility companies over-invested in costly sources of energy such as nuclear power, and now they too are paying the price for it. One difference, though, is that many of those other utilities have moved more quickly to prepare for deregulation. The DWP has dawdled, Freeman says, and is only now preparing to pay the price for its delays.

Top city officials are well aware of the problems confronting the agency. Councilwoman Galanter, whose committee oversees the DWP, has backed Freeman so far, and is expected to play a key role in reviewing any proposal to overhaul the department.

Likewise, Riordan is a pivotal figure in the coming debate, in part because he has pledged repeatedly to make city agencies competitive. Even as Freeman is working to modernize the DWP, another Riordan appointee, Julian Burke, is trying to streamline the Metropolitan Transportation Authority.

In fact, Burke and Freeman--as well as Riordan--in some respects resemble one another in their business strategies.

“These are two nonbureaucratic people running these departments, which is a huge change,” the mayor said. “I’m a strong believer in putting power and accountability together, and to do that, you need strong people to delegate power to. These are people I feel totally confident to give that authority.”

Riordan made his name in business in part through his role in restructuring the toy company Mattel, which was ailing in 1984 when Riordan joined its board as part of a financial bailout group. During Riordan’s time on the board, Mattel cut its international work force by about 2,500 employees; 800 of the lost jobs were in Southern California.

Mattel emerged from restructuring in far better financial shape. Today, Riordan’s choices for the MTA and the DWP are embarked on similarly difficult overhauls.

At the MTA, Burke, a corporate turnaround specialist and longtime associate of the mayor, already has announced that 85 transit workers will be laid off and an equal number of vacant positions eliminated. Those moves are expected to be only the first wave of cutbacks at the troubled agency. Burke has said that on Nov. 13, he will present a plan at a special board meeting called to address the agency’s deficit.

The DWP’s problems are different but in some ways even more acute than those of the MTA. The looming onset of competition utterly changes the working environment for the DWP, and Freeman’s proposed changes are intended to brace the agency for that radical transformation.

“This is not my idea of a good time,” Freeman said this week. “But I do not see a way around this.”

Times staff writer Rich Simon contributed to this story.

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Change at the DWP

Los Angeles’ Department of Water and Power is confronting a huge debt in its electric power generating operations, roughly $4 billion that is not backed by assets. To cut the debt, DWP chief S. David Freeman proposes:

* Laying off 2,000 employees, most of them managers and engineers.

* Eliminating the automobile fleet, roughly 600 cars.

* Merging the helicopter fleet with Fire Department’s.

* Total estimated savings: $2.1 billion

Source: Los Angeles Department of Water and Power