Under California's Electric Deregulation, City of Los Angeles May Face Bankruptcy from Municipal Utility

The Los Angeles Department of Water and Power (LADWP) is $7.5 billion in debt, and may threaten the financial stability of the City of Los Angeles when California's electric industry is deregulated beginning March 1 (the original Jan 1 date was rescheduled).

City Councilwoman Ruth Galanter, who heads the council's ad. hoc. committee on LADWP restructuring, said "In the newly competitive environment, if we are not competitive, the utility will fold. Those left holding the bag are the owners - the people of Los Angeles," pointing out that the city would have to declare bankruptcy.

Proponents of the State's deregulation law, AB1890, claimed that municipally-owned power companies were protected, and promised that public power agencies not wishing to enter the market would have their service territories protected. But critics observe that this promise has failed as the largest customers in public power service territories have threatened to relocate unless they are allowed to leave the public system, forcing communities such as Los Angeles and Sacramento to accept exposure to the new market. "What deregulation advocates ignored is the fact that many communities rely on their power companies for much more than just electricity. Even systems that had progressive rates, like Los Angeles, now face bankruptcy. Others, with progressive environmental programs, are now being forced to scale back or face similar disasters. Deregulation here is proving to be a fundamental assault on public power and local control in general," said energy economist Eugene Coyle.

In January, just five months after California's legislature deregulated the state's electricity industry, General manager Bill McCarley stunned the press when he speculated whether his city will be the "first municipal utility to face a hostile takeover" by Edison International or other deregulated utilities in the deregulated market. At stake is the city's longstanding dependence on the municipal utility for $109 million in revenues to the city's already depleted budget and $60 million in subsidized rates for the police and fire departments. The city's revenues have shrunk 43% in real dollar value since the passage of Proposition 13 in 1978.

Critics observe that deregulation will further impoverish local governments already hit by Proposition 13 and Proposition 218, whose passage in 1996 further restricted the ability of local governments to fund themselves. "Proponents of deregulation have focused so narrowly on 'lowering prices' that they missed the big picture, namely that they were deregulating the largest industrial sector and biggest polluter," said Coyle. "This is just the beginning of the fallout to come," said Coyle.

Copyright (c) 1998 by the American Local Power Project