DWP Shaping New Free Market Survival Skills
For the moment, an adroit exercise in bargaining-table brinkmanship has spared the Los Angeles Department of Water and Power from massive layoffs, but the real question confronting America’s largest municipal utility remains unanswered:
Can the city’s public power system survive competition? Can an infamously bureaucratic utility nurtured in the sheltered workshop of monopoly transform itself into an agile competitor in California’s emerging free market for power?
Part of the answer will be determined by what sort of DWP emerges from the painful downsizing that is about to shake the utility to its core.
If the buyout-and-severance package negotiated over the past five months of torturous talks, bitter litigation and political maneuvering works as planned, thousands of employees--young and old--soon will decide whether they have a future with DWP.
By fall, one in five of the utility’s employees will be gone. Those who leave will take generations of experience with them.
Reshaping those who remain into a nimble, competitive team instead of a work force accustomed to protection from the rigors of the marketplace looms as a major problem.
So too does the overarching issue of paying off the $4 billion in debt on DWP’s power plants, most of it associated with the huge coal-fired Intermountain Power Project in Utah that supplies a third of the city’s electricity.
Slashing his work force is just one element in DWP General Manager S. David Freeman’s plan to pay off much of that debt by the end of 2002, when the state’s power market is fully deregulated. But to do that, he will need to take maximum advantage of this week’s City Council vote, granting him unprecedented power to negotiate long-term contracts and discounts with the major DWP customers already being courted by competing power providers.
Though the DWP is not expected to open its territory to competing power suppliers for almost four years, two of DWP’s biggest consumers--the University of California and the state university system--already have signed with Enron Corp., a hard-charging Texas competitor.
And an offshoot of the state’s biggest utility, the Pacific Gas and Electric Co., has just landed a major contract to manage the nationwide energy needs of oil company Ultramar, which operates a large refinery in Wilmington.
The competitive frenzy will only intensify with the opening of most of California to deregulation at the end of this month. At that point, electric customers served by Southern California Edison, PG&E;, and San Diego Gas & Electric, will be free to buy their power elsewhere.
Because the state law mandating deregulation did not set a deadline for California’s municipal utilities to join in, DWP can hold on to its customers until the city agrees to open its doors to competition. That will buy Freeman some time to confront the challenge of preparing the DWP to do battle in the free market for power.
Absolutely critical to DWP’s chances of survival in this new world is the complex question of what to do about the utility’s muddled relationship with the city’s government. Now, the utility’s general manager has 21 bosses--15 City Council members, the mayor and his five appointees to the Water and Power Commission--who have been known to pull in different directions at the same time.
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“We have the most complicated system of governance devised by mankind to run the Department of Water and Power,” Freeman told the city’s Charter Reform Commission last week. “It is virtually ungovernable. There is no utility organization in America even under the monopoly situation of the past that has anywhere near the layers and bifurcation that we have here,” he said.
Freeman urged the charter reformers to put the DWP under the control of a seven-member board of directors, two appointed by the mayor, two by the president of the City Council, and three public members elected citywide.
David Lefkowith, president of the Canyon Group, a Los Angeles-based management consulting firm for the utility industry, said the DWP is “a difficult, if not impossible, organization to manage. The hidden weakness is the intrusion of politics in all decision-making.”
Lefkowith, who has done training programs at the DWP, said the utility has “a culture of politics, not a culture of achievement.” He observed that DWP employees do not receive performance reviews.
The ultimate outcome of the emerging discussion about DWP’s future has major consequences for the city and its residents because the utility contributes annually to the general fund that finances such critical services as police and fire protection, parks and libraries.
“Is the DWP more a business or more just another branch of city government? You’ve got to make that fundamental decision,” Freeman told the charter commission. “Right now, it’s another branch of city government, and the governance is designed to contain and restrain and inhibit and require the people who are trying to run the department to get permission from all sorts of people all over town before you do anything.”
From Freeman’s standpoint, there is only one choice. “It is a business,” he said. “It does have to be competitive.”
And the City Council this week gave him some of the tools to achieve that goal.
After a tentative agreement on a buyout and severance package was reached with the last of the DWP’s labor unions, the council on Wednesday gave its blessing to downsizing the utility. Council members Mark Ridley-Thomas and Nate Holden opposed the move, concerned that the impact would fall disproportionately on women and minority employees.
The council also voted to freeze electric rates for four years. And it gave Freeman the authority to negotiate long-term power contracts with DWP’s existing customers.
As an incentive to stay with the utility, Freeman will be able to offer a 5% discount to any customer signing a 10-year contract.
“These ordinances are designed to make sure that we don’t lose customers the minute we open the doors to competition,” said Councilwoman Ruth Galanter, who chairs a special committee on energy deregulation.
“It is within our power as the governing body of this city to say ‘yes’ or ‘no’ to opening our doors to competition,” she said. “But the real world is going to require that we do that. We want to be in a position to make sure we have a department that is not only surviving, but can beat the pants off the competition.”
The council’s action and the hard-won agreement with the unions won praise on Wall Street.
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Dan Aschenbach, a utility analyst with Moody’s Investors Service in New York, said the labor settlement was “a positive development” for Los Angeles’ debt-laden public utility. “It needs to have these . . . reductions to bring its costs down for competition,” he said.
Beyond the major issues, it was apparent this week that the DWP also must pay attention to basic nuts-and-bolts problems.
Consider this: the DWP has been supplying power--lots of it--to an unknown number of customers who never are billed.
For example, the city’s Board of Water and Power Commissioners agreed Tuesday to accept $1.7 million to settle a lawsuit against the former general contractor on the Metro Rail subway project in Hollywood.
Shea-Kiewit-Kenny dug twin subway tunnels from Wilshire Boulevard to Hollywood Boulevard for 18 months, beginning in February, 1993, without any use of power being recorded on a specially installed electric meter. It took another four months after the problem was discovered to have the meter repaired.
During the entire 22-month period, DWP billed the subway contractor just $16.74 per month for the power needed to build the subway. The contractor “faithfully paid” the bill even though corporate officers and managers knew it was far too low, according to attorneys for the city.
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The DWP sued the contractor after SKK refused to pay a revised bill for $1.88 million. The contractor, which was fired by the Metropolitan Transportation Authority after a huge sinkhole developed on Hollywood Boulevard, ultimately agreed to pay the $1.7 million.
In the course of their investigation, utility crews found the problem could only have been caused by someone shunting the power around the meter.
Utility workers also recently tracked down an electric meter at a commercial operation in the city that had logged 2.5-million kilowatt hours over the last 10 years without the customer being charged.
It was discovered only after a veteran employee, Ellen S. Schneider, suggested that the DWP might want to cross-check its billing records with separate computer files of the locations where meters have been installed.
For that recommendation, which promises to net the utility millions of dollars, she received a check for $25,000.
