DWP Still Not Ready to Compete, Chief Warns

After more than two years of aggressive cost-cutting and forced attrition, Los Angeles’ Department of Water and Power is back on sound financial footing, but still faces such severe governance problems that it may never be able to compete in a free market, according to the agency’s general manager.

“We’re getting ready for competition,” said S. David Freeman, who has run the nation’s largest municipal utility since 1997. “But competition and radical government restructuring are a package. We can’t be competitive if we’re organized the way we are. . . . If we opened up this market, we’d lose our customers over time.”

Those problems are severe enough that Freeman said he now believes the city would be wiser not to open its electrical market to private competitors, when that becomes possible in three years. Those are profoundly cautionary words from Freeman, a lifetime advocate of public power, but one whose mission in Los Angeles has been to prepare his agency for the competitive marketplace that will hit the state’s energy market with full force in 2003.

Although that’s an esoteric debate in some respects, it is one with tangible implications for the life of Los Angeles. Not only is the DWP the source of Los Angeles’ power and most of its water, but it is also a major contributor to the city budget, so its operations help pay for police, fire and other municipal services. As a result, any breakdown in the DWP would have far-reaching effects on the city’s health.

City leaders are mindful of that important connection, and some responded warily to Freeman’s notion that it may prove unwise to open up Los Angeles to competition in the energy market.

“It’s a tricky thing,” said Councilwoman Ruth Galanter, who chairs the committee that oversees the DWP. “I’m a little surprised that David’s floating that at this time.”

Galanter did, however, express satisfaction at the progress the DWP is making toward eliminating its debt. “We’re paying that off without compromising our service to our customers,” she said.

Bond agencies have registered their approval as well, giving the DWP high ratings for its debt reduction. In January, for instance, Standard and Poor’s gave the DWP an “A-plus”--a high rating makes it easier for the agency to raise money through bonds--and remarked that the DWP “is expected to enhance competitiveness without compromising the utility’s financial or operational strengths.”

Not long ago, that seemed impossible. The DWP was so battered and saddled with bad debt--investments in nuclear, coal and other power plants that were polluters and that produced expensive energy--that many city officials were prepared essentially to sell it to a private company.

Some of the agency’s top brass had investigated--and abandoned--a proposal to have it declare bankruptcy, and some City Council members openly questioned whether the DWP could survive much longer.

Instead, the department, which helped lay the foundations for Los Angeles, was retained as a municipal agency but forced to embark on a painful period of belt-tightening.

Freeman pushed for the first layoffs in modern Los Angeles city government history in 1997, and though he did not get all he wanted, the DWP’s work force has dropped from 8,900 in 1997 to 7,400 today. Those cutbacks, along with an improving economy and some shrewd financial moves, have allowed the DWP to make better-than-anticipated headway at reducing its mammoth pile of bad debt.

Today, the DWP is carrying $1.9 billion in bad debt, less than half the amount that it had in 1997 and ahead of its schedule to erase its red ink by 2003.

Moreover, the agency is benefiting further from the difficulties that the private sector has had gearing up for deregulation of California’s energy market.

“They killed the old system before the new one got its britches on,” Freeman chortled in an interview. “What that means is that we’re still making money on some of our power. If it’s a real hot summer, we’re going to--I hate to put it like this--but we’re going to make out like bandits.”

Still, at the DWP, there’s always a new crisis. And despite the firmer financial footing, Freeman said he is convinced that the agency cannot survive if the City Council votes to open up Los Angeles to free competition for residential customers’ electrical business.

The reason: The DWP remains burdened by the limitations of the public sector generally and Los Angeles’ byzantine government in particular.

Civil service rules limit hiring and firing, cumbersome legal arrangements slow down contracts and a five-member citizens commission sets policy for the department that in turn often requires City Council input or approval. All of that slows down decision-making, Freeman said, adding that those limitations would badly weaken the DWP’s competitive position if it were forced to compete in the open market.

“We don’t even have our own lawyer,” Freeman said. “How are we supposed to compete like that?”

As a result, he said he would recommend to the City Council and the next mayor that they refuse to open up the Los Angeles market to outside competition. He concedes that would be controversial under any circumstances and politically untenable--if the DWP is charging higher prices than competitors would offer. The only way to sell the notion, he said, would be to have the DWP offer competitive rates but then operate as a public monopoly.

That way, he said, “competition will be like the atomic bomb--always out there but never used.”

For Freeman, the progress at the DWP is a source of pride, but it did not prove enough to launch the 74-year-old administrator on a second career. Freeman--a colorful manager whose cowboy boots, Tennessee twang and memorable aphorisms set him apart from most of the city’s bureaucracy--attempted to parlay his success at the DWP into a state Assembly seat earlier this year. His advertising included words of praise from figures as diverse as Jimmy Carter, Ralph Nader, Ronald Reagan and Mayor Richard Riordan.

He lost anyway.

Fran Pavley, a former Agoura Hills mayor, got more votes than any of the other Democrats, including Freeman, in the field. She will face Jayne Murphy Shapiro, the leading Republican vote-getter, in a November runoff.

“They showed me that all politics is local,” Freeman said.

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DWP Debt

in billions

*’96-’97: $4.1

*’97-’98: $3.4

*’98-’99: $2.6

*’99-2000: $2.0

**2000-’01: $1.2

**’01-’02: $0.4

**’02-’03: $0.0

*Actual

**Estimated

Note: As of March 31, the department’s debt was $1.97 billion.

*

Source: Dept. of Water and Power