Fearing "Hostile Takeover," Los Angeles Faces Major Revenue Losses, Higher Electric Rates for Residents

The Los Angeles Department of Water and Power (LADWP) chose a partnership of investor-owned utility Duke Power and power marketer Louis Dreyfus early in February as a three year "strategic alliance" to save the municipal utility, whose existence is threatened by California's 1996 deregulation law, to be implemented in 1998.

In January, LADWP General Manager Bill McCarley stunned the press when he speculated whether his city will be the "first municipal electric utility to face a hostile takeover" by Edison International or other neighboring utility holding companies under the deregulated market.

The municipal utility, and the city that owns it, face major disruptions under California's new deregulation law going into effect in 1998. At stake is the city's longstanding dependence on the municipal utility for $109 million in revenues to the city's already depleted budget (real dollar value revenues have declined by 43% since local taxation powers were restricted by California law in 1978) and an additional $60 million in subsidized rates for the police and fire departments. Critics observe that deregulation will further impoverish local governments already hit by Proposition 13 in 1978 and Prop 218 in 1996. "Municipal power companies help keep property taxes down," observed investment analyst Edward Tirello of NatWest Securities in the Los Angeles Times. "But now they're threatened."

Also threatened are small commercial and residential customers, whose rates are currently lower than those of Edison and Pacific Gas and Electric (PG&E), by pressure of industrial customers with rates slightly higher than Edison's or PG&E's and who will flee the publicly owned system unless their rates are reduced before 1998.

LADWP General McCarley is recommending austerity measures to keep the system afloat, raising residential rates to cut industrial rates, and reducing payments to the city budget to $60 million/year to reduce debt. "But then the city will have to raise taxes, said James Flanagan in the Los Angeles Times. "The day may come when LADWP defaults on its bonds or raises rates. Then Edison or other cash rich utilities will buy the system." Edison and PG&E will receive cash windfalls of $2 billion each from stranded investment provisions in the state's deregulation law.

Arthur O'Donnell, of California Energy Markets, said strategic alliances such as LADWP's "are publicly touted as a way to get in line for the opportunities that restructuring is supposed to bring - and privately recognized as insurance against being involuntarily swallowed by the massive market shakeout that analysts are already predicting."

The LADWP deal with Duke and Louis Dreyfus (D/LD) allows the municipal utility to operate its 5000MW of power plants, but gives D/LD decision-making power over when and how they operate, as well as over all wholesale energy transactions. D/LD will pay LADWP $6 million per year - what it currently nets in energy sales - but will keep half of all additional sales up to $30 million, and 40% of all profits above $30million. D/LD and LADWP will jointly market energy efficiency programs and rate stability packages to large customers likely to leave the public system when deregulation starts in 1998. D/LD agrees not to compete with LADWP for one year only after the the deal terminates.

The partnership with D/LD met open resistance from Edison, whose service territory surrounds the municipal utiltiy. Representatives of the holding company promised a political fight for an opportunity to be "sole partner" to the city, according to Calfornia Energy Markets. Under pressure from Edison, Los Angeles Mayor Richard Riordan initiated negotiations betwen LADWP, Edison International and Southern California Gas on January 6, saying the city's utiltiy faces "an immediate and absolute need for outside assistance." Riordan said his office would facilitate discussions between LADWP and the investor-owned utilties with the possibility of a second bidding process for alliance opportunities for Edison to take over some of LADWPs' distribution services, leading Mayoral candidate Tom Hayden to accuse Riordan of attempting to "sell off the department to the IOUs." Observed O'Donnell, "My view is that Mayor Riordan's response emanates from a position of fear, rather than one of strength....For the people of Los Angeles, it could amount to the worst of both worlds - waking up to find that their supposed access to choices in the competitive market has already been supplanted. It clearly threatens the ability of the nation's foremost public power agency to control its own destiny and to serve the public."

Copyright (c) 1997 by the American Local Power Project