Once-Maligned DWP a Font of New Energy Ideas

As the state’s largest utilities contemplate crippling losses and severe rate hikes for consumers and Gov. Gray Davis worries about the effect of an energy crisis on his political future, the Los Angeles Department of Water and Power calmly plans for rate reductions and energy reliability over the next 10 years.

DWP, the energy ugly duckling turned swan, even offers a vision of how California can solve some of its power shortage problems without massive expenditure and environmental disruption.

The city-owned utility for 1.5 million businesses and households in Los Angeles plans thousands of small generators, typically 75 kilowatts and $40,000 apiece, to cope with peak demands for electricity.

Such peak demands caused power outages in California this year and left major utilities--and their customers in San Diego and South Orange counties--with extraordinarily high electric bills.

“Small-scale gas turbine and diesel power plants represent the future, if the old order keeps sputtering,” says S. David Freeman, general manager of DWP since 1998 and a politically savvy veteran in electric power matters nationally.

DWP has just won City Council approval for a $1.7-billion plan to ensure electricity supplies over this decade by refurbishing a few old power plants and adding small generators from such companies as Capstone Turbine of Chatsworth and the Honeywell (formerly Allied Signal) small-turbine plant in Albuquerque.

DWP already has power to spare. The company, which suffered neither power outages nor high prices this year, was able to sell surplus power into the commercial market. It used the proceeds to pay down debt.

Other municipal utilities in Anaheim, Burbank, Glendale, Pasadena, Azusa, Riverside and other Southern California cities also are doing well.

Municipal companies have been spared the state’s troubles because none joined the 1998 deregulation of electricity, under which major utilities Edison International, Pacific Gas & Electric and San Diego Gas & Electric sold their power plants and agreed to buy electricity from the California Power Exchange, which is modeled on commodity futures ideas.

Deregulation was supposed to bring lower prices to industrial and residential customers. But it hasn’t worked out that way. The deregulation scheme was flawed, with too few electricity suppliers to the power exchange and with a lack of recognition that power demand would grow so fast in California’s high-tech economy.

Failure has been expensive. With the exception of San Diego and Orange counties, where bills skyrocketed, Edison and PG&E; have paid heavily for power this summer without being reimbursed by customers who are under a rate freeze. The utilities face $2.5 billion each in losses or costs to pass along to ratepayers if the Public Utilities Commission lets them do so.

Davis, who will be running for reelection in 2002--when rate freezes end--is worried. He is demanding that the federal government reimburse power customers and that the state take back control of electricity. But reversing course is not a simple matter. The major utilities received cash windfalls of $2 billion each in 1998 from bond sales meant to facilitate deregulation. Customers were given temporary 10% rate reductions, with compensating rate rises built in until 2018.

The irony is that Freeman, 74--a civil engineer and lawyer who advised Jimmy Carter and other presidents and the U.S. Senate on energy and headed the Tennessee Valley Authority and power authorities in New York state, Texas and Sacramento before coming to DWP in 1998--had a role in devising aspects of California’s deregulation.

“I make mistakes,” Freeman says today. He sees the state’s energy problems getting worse before they get better. Beyond deregulation, natural gas--the fuel of choice for California electricity generation--is in short supply and rising dramatically in price.

What should be done? Freeman’s ideas have particular reference to the state’s small and medium-size businesses. He would offer incentives for energy conservation and encourage purchase of small power plants, which could run an office or light manufacturing facility or a supermarket. “Such generators would save on infrastructure; we wouldn’t have to install huge transmission lines,” Freeman observes.

But in DWP’s master plan, the small turbines are scheduled to account for only 4% of the company’s 7.9 billion watts of energy capacity. How can such a small addition make a big difference?

Because the average business today is small, Freeman points out. “Companies in the ‘new economy’ don’t need the massive energy supplies that aluminum plants require. But they need much higher reliability because their electronics and computer networking are sensitive to energy fluctuations,” he explains.

“Freeman is on to a good idea,” says Steven Erie, professor at UC San Diego and an expert on public infrastructure. “With the capacity in its 10-year plan, DWP will be able to offer energy reliability as a lure to high-tech companies to locate in Los Angeles.”

Freeman also offers a model for public power as head of the nation’s biggest municipal utility, with $2.7 billion in annual sales of power and water.

Municipal utilities reflect an old idea that cities could supply an essential resource more cheaply than commercial utilities. Instead of paying taxes and dividends, municipal companies pay into city budgets.

DWP this year will pay $110 million into Los Angeles’ general fund and about $60 million more in subsidized power for the city’s police and fire departments.

Public power was an endangered relic two years ago, when debt-burdened DWP faced bankruptcy and Edison, PG&E; and San Diego Gas & Electric were thought to be on the brink of prosperity thanks to deregulation and the efficiencies of the marketplace.

Today, however, deregulation is a dirty word and the 26 companies of the California Municipal Utilities Assn. are attracting attention: In San Diego, concerned businesses and citizens are trying to organize a municipal utility.