Water & Power Can Lead the Way to Change

The Department of Water and Power is in a fix. Everyone acknowledges that a lot of changes have to be made if the DWP is to compete for customers after 2002, but change is happening at a glacial pace. As General Manager David Freeman has pointed out, he has 31 bosses who can say no to a reform, but no one who can say yes.

Now, the private utilities don’t have any more experience at competing for customers than the DWP does, but they are moving fast to change their ways and have been for some time. By 2002, the DWP will be woefully behind.

Charter reform provides an opportunity for Los Angeles to avoid the unsatisfactory or downright ugly options other cities are considering for their municipal utilities. Many of them are looking at privatization or walling their citizens off from competition or expanding their utilities into other commercial ventures, such as cable television, appliance repair and energy consulting to make money to offset potential losses in a newly competitive energy market. There is a better option, one widely practiced by other nations with industries that are changing from monopoly to competition: corporatization.

Corporatization is a way of making major changes in the structure of an enterprise, preparing it for competition, without changing ownership. If the DWP were corporatized instead of being a government department, it would be legally converted into an incorporated, for-profit business with the city as its sole shareholder. The new corporation would have a board of directors, run by a strong chairman (usually from the private sector), and the board would select a chief executive officer (also recruited, in most cases, from the private sector). The corporation would be freed from all government personnel and procurement regulations and be subject instead to ordinary corporate law. It would pay the same taxes as any other business, including local property taxes to the municipalities where it has facilities. And to the extent that it makes a profit, it could pay dividends to its shareholder, the government that owns it.

Australia and New Zealand forged the path in corporatizing electric utilities, making the transition from state-owned monopolies to a competitive market so successfully that Germany and Italy are following suit. Through corporatization, these countries avoid the political pain and other problems experienced with outright privatization, while restructuring their utilities to function like businesses in a competitive marketplace.

By changing the structure of the DWP, corporatization changes the internal operating incentives and the way that the city oversees it. This offers advantages in a competitive marketplace by depoliticizing the management and operations of the agency; allowing it to attract and keep top-quality management; refocusing on the core business, with clarified objectives; strengthening incentives for performance, specifically to reduce costs and increase revenues; increasing management’s accountability for the DWP’s performance; and separating policy and regulatory functions from operations.

The charter reform process can and should include corporatization of the DWP. The city still would own and ultimately control it on behalf of the taxpayers, but Freeman would be able to get operations in shape in time for competition. Specifically, the reforms and corporatization process embodied in the charter provisions should include, at a minimum, the following: a corporatized DWP to pay normal business taxes; a formal contract or memorandum setting forth the government’s policy objectives; a requirement for normal accrual accounting; and financial penalties for nonperformance.

These changes would not only set up the DWP for success in the coming competitive marketplace, but also establish it, and Los Angeles, as the national leaders in managing the transition of public utilities to competition. Sixty-three percent of utilities in the U.S. are government-owned, although they serve only 15% of the population and possess only 13% of the revenue from sales to customers. Investor-owned utilities comprise 8% of all utilities but account for 79% of the revenue from sales to customers. All across the nation, competition will mean municipal utilities have to overcome those odds. Los Angeles and the DWP have a unique opportunity to light the way for them.