DWP explains electric shock

The Los Angeles Department of Water and Power is proposing a series of steep rate hikes over the next few years. The utility, which provides water and electricity to 3.8 million residences and businesses, wants three electrical rate hikes — 2.9% on Jan. 1, 2.9% on July 1 and 2.7% on July 1, 2009 — and two consecutive water rate hikes of 3.1%. The agency would also restructure rates to charge a higher rate to households that use significantly more power. As City Council members and L.A. residents digest the proposal, and an argument brews over special rate structures in the Valley, officials have been making their case. Recently, DWP acting General Manager Robert Rozanski and spokesman Joe Ramallo stopped by the editorial board to discuss the utility’s plans.

Old pipes

Robert Rozanski: So what we’d like to do I guess at this point is kind of walk you through our rate proposals, and our three proposals that we have. One relates to the rate increase proposal for the electric side of our business; one is a rate increase for the water side of our business; and the third uh, piece is an electric restructuring of the rates to encourage conservation. And so those are the three pieces, and if I may, uh, I would like to start — let’s see what we have here — why don’t we start with off with, we’ll start off with water. Why don’t we start out with that one.

And so, we look at our water system, uh, we have a lot of uh, pipe, that in the very near term will be about 100 or so years old. We have a lot of pipe, maybe over half right now, that’s about 90 years old. And so when you look at the city as a whole, somewhere between 1936 and 1971 there was a big boom. So I believe we have about [4 million people] in our service area today. And about half of that population, in our estimate, came to Los Angeles say in that period from 1936 to 1971. And so when you look at our system, a lot of our distribution system for the water as well as the electric, was built in that time period, really to uh, address the issue of growth. So when you look at these pipes, this is really an indication, uh, of how old the system is becoming... What we must do is begin to address that aging infrastructure now, so we don’t get to a point where we’re not able to, uh, properly maintain the system, which would lead to, uh, additional rates, water main breaks, and the like.

The cost of a nice view

Robert Rozanski: As you know there were a couple of regulations that were passed: the surface water treatment rule and disinfection by-product... Probably the largest component (of water-quality costs) we have is the open reservoirs we have, under those regulations we can’t allow surface water to run into them and then have that water put into the distribution system for potable. And so, and L.A. is very unique compared to other utilities, water utilities across the nation in that we have many more, many more open reservoirs. So that regulation affects us in an adverse way. So what we’ve had to do is take those reservoirs out of service except in an emergency such as an earthquake. You’d have to boil it. Or in a fire situation you could use it for that, obviously. And in some instances what we’re doing is we’re taking those reservoirs out of service and putting in large underground tanks. Because many of those reservoirs look like small lakes, and there are a lot of beautiful homes that are above those small lakes if you will, and the people in those communities want to maintain the ambience of that.

Jim Newton: That would be Silver Lake and Hollywood Reservoir?

Robert Rozanski: Yes, Silver Lake is. There are a lot of them. So it’s a real difficult process. We have to work with the neighborhood and make sure everybody’s happy and yet still make some sort of compromise where the costs aren’t way out or exorbitant, so we do take into account community input where it’s possible... That’s the lion’s share of the cost you see for increasing water quality.

How to turn 18% into 8%

Robert Rozanski: People said to us: “Gee, why are you coming to us and asking us to approve an 18% rate increase and pass touting the fact that you haven’t had an increase in 15 years? Why didn’t you ask sooner and have smaller increases so people could rather than all of a sudden hit people with an 18% rate increase.” So we went back to the drawing board, and made some adjustments. As a result of that the City Council said: Here and after, anytime, any proposed rate increase you have, DWP, we want you to subject that to an independent third-party review. And so as a result of that they did a review of the proposed rate increase. At the end of that we ended up with 2.75% revenue increase instead of the 18% increase. And our board went through and cut our budgets even more, and got down to 2.75% (annually) because it was closer to 3.9% that we were asking for each of them.

Robert Greene: How do you account for the disparity? I mean, that’s close to an 8% increase.

Robert Rozanski: A lot of what we did was we just started going through and cutting out a bunch of stuff that we thought we could live without. And the board went through line item by line item, and looking at sponsorships, whether they be um, the memberships and the like. And we started going through those. We started hacking those. We made sure that any membership or sponsorship is put into a database so we know...

Jim Newton: What do you mean membership or sponsorship?

Robert Rozanski: A membership could be, you know, you’re a professional, you’re a member of some society, that we pay dues. There might be conferences that you go to and other such things. For many of our employees — many of them are professionals from craft people who have licenses and the like. And it could also be Chamber of Commerce events. And what we found was there were different parts of our organization that were members of the chamber and there were also other parts of our organization that were members of the chamber. So it wasn’t well coordinated. So what we did was we consolidated all of that, all the memberships, and we cut all those out. And sponsorships really relate to anything from we’re having a lineman’s rodeo, and they want us to buy a table — you know, ten people — or they want us to purchase advertising. So we went through and dramatically reduced that as well. What were the other ones?

Joe Ramallo: Our depreciation study...

Robert Rozanski: We went through a depreciation study, oh, that helped us a lot. Part of the motive for the rate increase isn’t cash per se, and this is where it gets complicated. We have to meet our bond rating, our AA bond rating. We have double-A bond ratings for both our water and our electric. And that’s critical because we’re planning to borrow upwards of, in excess of for water it’s probably 77% of our capital over the next five years. So the interest rates will go up if we get downgraded. So to keep those ratings up we need to have certain coverages. It’s no different from where you have a home mortgage, part of the general underwriting requirements that your mortgage has to be 35%, no more than 35% of your gross income. There are rules like that for the debt side. In our case it’s called two-times coverage.