DWP Chief Says Deregulation Could Spell Ruin

With California plunging toward a free market revolution in energy, the general manager of the Los Angeles Department of Water and Power has spent months warning that his historic and vital agency faces ruin without a major overhaul. His anxieties, however, largely have gone unheeded by the two commissions charged with revamping the City Charter, and have attracted almost no reaction from other city leaders.

The result is a strange standoff whose outcome could dramatically affect the livelihood of millions of city residents.

The general manager, S. David Freeman, bases his contention that radical changes are needed on the impending deregulation of energy generation in California, a move that proponents say will drive down electric bills by opening up the market to competition. But once private companies can compete for customers who today are the sole province of the DWP, Freeman argues, the public agency will be easy pickings.

That’s because its rates are well known, so private companies will be able to pitch offers just below the DWP rate and steal customers. Faced with a declining customer base, the DWP would then be forced to raise the rates on those who remained, in turn making itself more vulnerable to competition.

The result, said Freeman: a deepening death spiral that eventually would bankrupt the DWP, strip the city of millions of dollars in annual revenue and fragment service to a region that has jealously guarded its supply of electricity and water. Moreover, as some observers agree, a DWP bankruptcy ultimately would threaten the solvency of Los Angeles itself because the city is the guarantor of the agency’s most onerous debts.

Freeman Calls for More Flexibility

In order to head off what he sees as a looming catastrophe, Freeman has proposed an overhaul of the DWP’s management, essentially turning it into a private company overseen by a publicly appointed board and obligated to turn over a share of its revenue to the city. That, Freeman says, would give the agency the flexibility it needs to compete while ensuring that the city continues to benefit from its utility.

Not everyone shares Freeman’s sense of gloom and doom. Some city officials believe that the DWP will fare well in a deregulated energy market because it enjoys some advantages over private utilities.

In addition, some of those who believe that Freeman has sounded an important alarm blame him for not speaking up earlier, saying that if he had, his concerns might have found their way into the city’s ongoing debate over how to rewrite the City Charter.

As it is, Freeman’s concerns not only have received little public attention, they have essentially been dismissed from that charter discussion.

The issue surfaced last summer, when Freeman heard there was a move afoot to revamp the way the city government is run and figured that he had a perfect project for the reformers: retooling an agency faced with a whole new set of rules imposed by the state’s decision to deregulate the business of selling electrical power.

Since then, Freeman has been politely put off by the city’s elected charter reform commission and brusquely told to go pound sand by an appointed group of charter reformers. The mayor’s office has listened to his ideas but offered little response. And a key City Council member advised him to back off, even though she likes his proposal.

Today, the colorful Tennessean has withdrawn to his office and kicked up his cowboy boots, chastened by his brush with Los Angeles politics and unsure about where to head next.

“I have to admit, I’ve never been quite so surprised at a reaction,” Freeman said in a recent interview. “They told me at the charter commission that I was catching the wrong train. Well, they’ve got the wrong sign on that train.”

Freeman’s experience over the past few months could have profound implications for his agency, the nation’s largest municipal power company, as well as for city and county residents who foot the agency’s bills and who benefit by the government services that it helps subsidize. If the DWP cannot compete, residents and customers could be saddled with billions of dollars in bad debt.

Freeman’s proposal is hugely ambitious. He wants the city government essentially to turn over one of its most important, cash-generating agencies, the DWP, to a publicly appointed board of directors.

Those directors--whom Freeman would like to see named by the mayor, City Council, city attorney and auditor-controller--would then cut the DWP management loose, allowing it to run as a private business, making deals, hiring and firing employees and consultants and competing elbow-to-elbow with a host of competitors in the soon-to-be-deregulated California energy market. In return, the DWP would pledge to continue supplying the city treasury with a percentage of its revenue, and the City Council and mayor would remain the last word on rates.

With that kind of latitude, Freeman believes, the DWP could hold its own against the private sector; without it, he fears the agency will be hamstrung by its competition and will quickly succumb to it.

“We’ve got to have flexibility,” he said. “The whole pace and temper of decision-making in this place is three-quarter time. That’s not going to be true of our competitors.”

Freeman, however, has failed to galvanize much support for his plan.

“A serious, thoughtful discussion is necessary,” Freeman complained. “This is the most important long-term issue that I need to discuss, so I’m laying some options on the table. But no one seems to want to talk about it.”

That was certainly the case last month, when Freeman made his pitch to the city’s appointed charter commission. He had barely laid his ideas before the commissioners than they turned sharply on him.

Commissioners Robert Wilkinson and Ed Edelman were particularly brusque, suggesting that Freeman’s proposal was far too sweeping for the commission to take up at such a late date. Freeman caustically responded that if the commission would stop immersing itself in the minutia of government, it might have more time for analyzing real issues.

George Kieffer, the panel’s chairman, said later that he thought the reaction to Freeman’s suggestion owed more to its timing than its substance.

“It’s a very big idea, it’s very late in the process, and it’s not completely developed,” he said. “We weren’t opposed to the notion that we ought to be looking at it, but it should be studied as a separate matter.”

Freeman admits that he could have floated the idea earlier, but the DWP has had plenty of problems in recent months, as he and its top managers have struggled to slash the work force and whittle down the agency’s massive debt. Only when that issue was in hand, Freeman said, did he turn to the questions of the DWP’s governance.

Freeman’s appearance before the elected charter reform commission was less confrontational but not much more productive. After waiting out three consecutive meetings of the panel, Freeman finally got his chance to present his proposal.

The commission listened, a few commissioners expressed interest and a few raised questions. Commission Chairman Erwin Chemerinsky worried about some of the potential implications of effectively privatizing the city’s utility. Then the matter was referred to a task force. It has never been heard from again.

Chemerinsky said last week that his concerns about Freeman’s proposal stem from one aspect of it: The DWP chief asked that the new city charter, if adopted by voters, allow the City Council and mayor to perform the revamping of the agency. That would save the need to return to voters another time specifically to authorize the reorganization, but Chemerinsky said he worried that Freeman’s approach effectively allow the city government to divest itself of a huge public asset without public approval.

Freeman tested the waters in the mayor’s office, too, expecting to find support there among Mayor Richard Riordan’s business-minded staff. Again, he came up empty.

“There wasn’t room on their plate for this right now,” he said, an observation echoed by a top member of the Riordan team. Freeman is viewed in the mayor’s office as a charming and effective leader with a strong base of support in the City Council, but he also is regarded with some suspicion for the same reasons.

The result: The mayor’s office heard Freeman’s ideas but lent no obvious support to them when he pushed forward.

Other Agencies Run by Independent Boards

Beneath the surface, however, are strong feelings about a measure whose implications are far-reaching. Freeman points out that more than a majority of public utilities across the country already operate under independent boards. In Texas, for example, a 15-member board appointed by the governor meets once a month to set policy and give general direction to the utility, whose general manager it also hires and fires. In Los Angeles, Freeman reports to a five-member board that meets twice a month and has no direct authority to select or fire its general manager, much less to select a lawyer or otherwise manage many aspects of its business.

Some observers believe Freeman is exaggerating deregulation’s threat to his agency. City Administrative Officer Keith Comrie has decades of tenure in Los Angeles government, and he said he thinks the DWP will do just fine under its current structure, even after energy deregulation.

“I think government can be just as competitive and just as efficient as the private sector,” Comrie said. Public utilities, he noted, pay no taxes, often are able to borrow money at lower rates than private companies and pay no dividends to shareholders, though the DWP does turn over a percentage of its revenue to the city government.

“There is no reason the DWP cannot continue to supply power more cheaply” than private companies, Comrie insisted. And strong public oversight over the utility will insure that the DWP is fair to its customers and true to its responsibility to the city, Comrie added.

“There are no services more essential than water and electricity,” he said. “Decisions on those products ought to be made out in the sunlight, after good public debate.”

Freeman’s plan, Comrie said, “is not going to sell.”

Freeman shakes his head and says he is baffled by comments like that. After a lifetime in public power, Freeman said he firmly believes that the leaders of Los Angeles have no idea how seriously the revolution that is headed their way will shake their world. And he cannot understand why no one is listening.

“The world has changed,” he said. “You can ignore that fact and continue to act as if it hasn’t changed. The only problem with that is that if you do it, you almost surely die.”