By Luck or Skill, DWP Gets the Last Laugh Energy: Utility's decision to eschew deregulation plan pays off as the rest of the state faces power shortages.

By DOUGLAS P. SHUIT, JOE MOZINGO, Times Staff Writers

With much of California facing the threat of blackouts and in some cases having to deal with soaring electricity rates, the oft-criticized Los Angeles Department of Water and Power is sitting pretty, with enough power to meet the city's needs and to rake in huge profits by selling it elsewhere in the state. Things are going so well these days that the DWP says a once-staggering $4-billion debt has been bought down to $1.7 billion, with the utility expecting to be debt-free within two years. The millions of dollars the agency takes in by selling electricity on the open market--especially during peak summer months--is helping reduce the debt. And, even as electricity bills in San Diego have doubled in recent months, the DWP hopes to implement a 5% rate reduction in 2002. DWP General Manager David Freeman could hardly mask his glee Wednesday. "If you're fed up with electric rates, if you are worried about reliability, come to Los Angeles," he said. By standing pat during a time of massive change in the electricity industry--a move that could easily have backfired--the DWP has emerged as one of the state's strongest players. Indeed, the utility's maverick course was so successful that some have suggested there was an element of luck in the turnaround. "It doesn't matter," Freeman said in interviews with The Times. "Luck is more important than skill." Things can still occasionally go wrong--an equipment failure at a converter station knocked out about 160 traffic signals Wednesday in the San Fernando Valley--but in general, that DWP luck is holding. The wild price swings in some areas and threats of blackouts in many parts of the state stem in large part from a sweeping utility industry deregulation bill approved by the Legislature in 1996, officials agree. The law made California a leader in utility deregulation and a testing ground for much of the nation. Under deregulation, investor-owned utilities, in exchange for massive financial concessions granted by the state, agreed to buy electricity from a statewide power exchange, a type of cooperative, that would be supplied at market rates by private suppliers. Historically, rates had been set by the California Public Utilities Commission, the regulatory agency that the utilities had to answer to for most of the last century. In theory, competitive pressures were supposed to drive down California's traditionally high power rates. The market price of electricity was kept down for a while, but utilities are now paying dramatically more for the electricity they buy. San Diego Gas & Electric, which deregulated faster than the state's two other major utilities, Southern California Edison and Pacific Gas & Electric, passed higher market prices directly on to consumers, whose bills have more than doubled in recent months. By contrast, the DWP watched from the sidelines as investor-owned utilities charged into the deregulated utility marketplace. Some were predicting that the public utility would become road kill in the new era. The DWP at the time was struggling with its massive debt and anticipating major job reductions as the result of business decisions that in some cases were made decades before. But in a series of strategic decisions, DWP managers carved out an independent course. For one thing, the city chose not to participate in the deregulation plan mapped out by the Legislature. In another move now paying dividends, the agency increased its capacity in the late 1990s at a time when investor-owned utilities, like San Diego Gas & Electric, were selling their own power-generating plants. Beginning in 1998, the DWP revamped three shut-down power plants that are now producing an extra 960 megawatts. "With that surplus, we've been able to make these sales," Freeman said. Today, the department can produce more than 7,000 megawatts, while demand for power in the city, even during the recent heat wave, has not topped 5,100, Freeman said. And with such fierce demand throughout the state during peak hours, the DWP can make an extra $250 per megawatt-hour. In the last year, the department made $140 million from sales of its excess electricity. Last month alone, it pulled in $35 million, an increase from July of last year, officials said. With profits coming in and debt dwindling, Freeman said the department could afford a 5% rate cut. Despite the favorable conditions, the question of possible deregulation, or privatization, hovers over the department, although Freeman strongly suggests that the DWP's current robust financial health is a good argument against it. Ultimately, utilities hope that private power firms will build more power-generating capacity and that prices will drop. If the prices ultimately fall below the level at which the DWP can supply the electricity, the city and its ratepayers will be at a disadvantage. But Freeman, a onetime head of the Tennessee Valley Authority and a strong advocate of public power, believes that public utilities will always be at a competitive advantage because they don't have the built-in pressure for higher profits that investor-owned utilities have. "This deregulation is a path that we deliberately chose not to travel," Freeman said. "We have no intention of subjecting the people of Los Angeles to those kinds of risks." He added: "We intend to have electricity costs that are below the market price indefinitely." Freeman said a new $1.7-billion, 10-year capital investment plan he recently introduced will ensure that the DWP continues to have a relatively low-cost supply of electricity. The plan would be paid for with cash, part of which would come from selling the city's share of a massive coal-burning power plant in the Nevada desert. Additionally, the DWP expects to have cash to spend once it pays off its bond debt. The department is paying down the debt at a rate of $60 million to $70 million a month, Freeman said. The money raised under the plan, now under consideration by the City Council, would overhaul three aged power plants, weaning the city off older, more costly and higher-polluting plants. Freeman said the city would have plenty of electricity for the years between the sale of the Mohave Generating Plant in the desert and the completion of the three other plants. He said the council must act quickly for the DWP to sell its share of the Mohave plant by September, when a deal struck by two other power companies and the buyer expires. He said the department would make $190 million in profit by selling its share of the controversial plant, while also avoiding $75 million in expenditures to upgrade the facility to new environmental standards by 2001. Although much of that is in the future, Freeman was able to play Santa Claus on Tuesday by feeding badly needed electricity into the state's power grid, which helped put off the threat of rolling blackouts. He said the added power came from coal-fired plants that required air quality waivers. That means the DWP will have to take corrective action at some point. But Freeman said it was worth it. "We decided that we would keep the lights on in the state," he said. The power the DWP has been selling is expensive. Edison and PG&E, whose rates are still frozen by the PUC under the complex deregulation law, have not been able to pass the price hikes on to customers. But consumer advocates expect the two utilities to appeal to the PUC for the right to do so. "We are going to fight them if they try to pass on the extra costs," said Nettie Hogue, executive director of the Utility Reform Network, who is calling deregulation a failure. "We are not going to underwrite the entire cost of this failed experiment. The most innocent people in all this are the customers." Clarence Brown, a spokesman for Edison, said utilities believe that deregulation will ultimately work. Brown said he thinks the deregulated competitive market eventually "is going to be good for everyone involved." But he said "there are also glitches" that private utilities hope the state will correct.

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DWP Debt Note: As of Aug. 2, the department's debt was $1.74 billion.

* * * Source: Los Angeles Dept. of Water and Power

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