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DWP Hopes Voters See the Light on Measures

Deregulation: Passage of Props. G, I and J called crucial to utility's long-term survival.


The Los Angeles Department of Water and Power is trying to transform itself from plow horse to thoroughbred to compete in the deregulated power industry starting in 1998, and is asking voters for help on Tuesday.

Like most of the nation's 2,000 municipally owned utilities, DWP is struggling to prepare for the brave new world of competition in an energy market it has monopolized for 90 years. The largest such utility in the nation with 1.3 million customers, DWP faces enormous competitive disadvantages against leaner, more nimble investor-owned utilities.

DWP's dire straits lead city officials, utility managers and Wall Street analysts to describe passage of three ballot initiatives--Propositions G, I and J--by Los Angeles voters on Tuesday as essential to the utility's long-term survival.

If passed, Props I and J would expand DWP's investment and hiring options. Proposition G would allow it to sell its vast excess energy capacity outside Los Angeles, something it is now prohibited from doing. That would in turn set the stage for a strategic alliance with a national power marketer.

Mayor Richard Riordan thinks it's so important that, although there seems to be no organized opposition to the ballot measures, last week he scrambled to raise $200,000 from business supporters to finance a last-minute radio and television advertising blitz to run this weekend.

"With deregulation coming, DWP has to get leaner and meaner," Riordan said.

With Wall Street looking on, Riordan and other city officials have a recurring nightmare: that DWP will lose its large industrial power customers to lower-cost competitors, an exodus that would shift the onus of paying DWP's huge debt and high costs onto residential customers.

That would not only cause residential rates to skyrocket but also possibly set off a chain of events that could put the city's finances at risk by increasing its borrowing costs and lowering the share of DWP revenue on which Los Angeles can rely to balance its budget. Those cash and in-kind "transfers" from DWP account for about 7% of the city's general fund.

"These ballot initiatives will be another step in the right direction, assuming they do pass, in terms of the signal it sends to Wall Street that the public and political establishments are willing to do the necessary things to run DWP on a businesslike basis," said Frank Ingrassia, partner in Goldman Sachs' municipal finance department.

Even if the measures pass, DWP still faces huge challenges. Over the next six years, the power industry will change from a safe, regulated business to one as freewheeling as any.

Many on Wall Street wonder whether the utility can change from an engineer-dominated bureaucracy to a market-driven culture in time to prevail--an obstacle faced by all utilities but one deemed especially steep for those municipally owned and answerable to political leaders.

DWP General Manager William McCarley--who is leaving in January over what he calls a salary dispute--has instituted a number of changes over the last two years that have earned Wall Street plaudits. But the obstacles, such as high fixed costs that include $600 million in annual debt payments, are daunting.

Although DWP has reduced its costs by $100 million over the last two years by eliminating 2,000 jobs, or 20% of its payroll, Standard & Poor's utility bond analyst William Cox says the utility must still trim $460 million more by 2002. Doubts about that were a factor in S&P's decision to lower its ratings of DWP debt last month.

DWP is also saddled with an albatross of a power project, the Intermountain Power Agency, from which it is contractually obligated to buy 30% of its power at twice current market rates. Intermountain is a Utah-based generator of coal-fired electricity that sells all of its power to DWP and five other Southern California municipalities.

DWP committed to the project in the mid-1970s, partly to meet environmental goals of lessening Los Angeles Basin air pollution and its reliance on petroleum. But it over-borrowed for its contribution for the plant's construction, and those bonds are under increasing scrutiny on Wall Street.

Then there are the labyrinthine and slow-moving politics of the City Council--the utility's board of directors--whose social objectives are often at cross purposes with sound business practice. A request made in May by DWP management to cut rates by $25 million for large users--an important gesture in keeping large customers on board, McCarley said--is still languishing on the council docket.

The political atmosphere would become even more touch-and-go for DWP over the next year once it, as expected, proposes raising residential rates, which are now 22% less than those charged by Southern California Edison. A rate increase would put DWP at rough parity after Edison lowers its rates by 10% by January 1998, as mandated by the state's power deregulation law.

As one example of the unique problems facing managers at DWP, McCarley cited civil service restrictions that can preclude hiring the best people. Those restrictions would be relaxed under Proposition J.

"I am a chief executive of what amounts to a $2.5-billion company and I can only appoint seven people in an 8,900-employee company, and of those seven, five of them must have 15 years' experience in the DWP," McCarley said.

With the management picture unclear, can DWP transform itself to a stakes runner? Other municipal utilities have done it successfully, said Alan Spen, a specialist on municipal utilities at Fitch Investors Service.

"The key is to not dillydally, to move aggressively as you can, thinking through a strategic plan. There is time here," Spen said.

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