Opinion; Opinion Desk 

THE STATE The Unexpected Hero in a Deregulated Electricity Market 
Steven P. Erie; Robert V. Phillips 
Steven P. Erie is director of UC San Diego's urban studies and planning 
program and a senior consultant to the L.A. County Economic Development 
Corporation. Robert V. Phillips is a former general manager of the Department 
of Water and Power 
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09/10/2000 
Los Angeles Times 

Home Edition 
M-6 
Copyright 2000 / The Times Mirror Company 
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SAN DIEGO -- What a difference four years make for Department of Water and 
Power customers. With passage of electricity deregulation in 1996, an 
uncompetitive DWP clung to life. Unable to pay down its $4-billion-plus 
power-generation debt and saddled with high rates for large business 
customers, it faced the prospect of a death spiral if it entered a 
deregulated marketplace. Commercial customers threatened to flee to 
lower-cost energy suppliers, while residential customers could be forced to 
pay large fixed costs. As a result, the DWP shunned deregulation. 
Yet, by this summer, as San Diego Gas & Electric's ratepayers, the first to 
be exposed to market forces, faced a doubling, even tripling of their 
electric bills, the DWP's 3.8 million customers basked in low rates and a 
large power surplus. More remarkable, the DWP is even being touted today as a 
model for proposed municipal utilities in cities hard-hit by escalating 
electricity-rate increases. 
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What accounts for this startling turnaround? While current management 
deserves credit, the DWP's position also is a product of longer-term policy 
and investment decisions. Since its creation nearly 100 years ago, the 
department has made low-cost water-and-power reliability its policy 
cornerstone. Ezra F. Scattergood, founder of the DWP's power system, 
relentlessly pursued cheap hydroelectric power--nearly all from Hoover 
Dam--and by 1940, L.A. boasted the nation's lowest power rates. Yet, with 
postwar population and industrial growth, new and more expensive ways had to 
be found to meet burgeoning demand. 
Starting in the 1970s, stringent state air-quality regulations, which 
eliminated fossil-fuel-fired plants in California, created the need for 
large, expensive power stations in Utah and Arizona. The DWP's new power came 
from four large, steam-generating plants in the L.A. Basin, partnerships in 
out-of-state coal-fired and nuclear plants, an Intertie connection to the 
energy-rich Pacific Northwest and the peak-load Castaic pump storage 
facility. As a result, the DWP accumulated nearly 7,000 dependable megawatts 
of generation, well above this summer's peak demand of 5,300 megawatts. 
For the DWP to have entered the deregulated marketplace early on, it needed 
to pay off the large debt created by its investments in distant energy 
sources and offer competitive rates for large business customers. Under 
deregulation, debt relief came at the cost of reduced reliability. 
Investor-owned utilities such as Southern California Edison could pay off 
debts like the San Onofre nuclear power plant with a transitional surcharge 
added to ratepayers' bills. But participating utilities were forced to sell 
their power plants so that transmission and generation lay in separate hands. 
The DWP's decision to pass on deregulation's guarantee of debt relief was 
risky. While municipal utilities were given the option of fully entering the 
marketplace in 2002, there was little evidence that the DWP could 
unilaterally pay off its huge debt since its revenue in part was used to fund 
other projects, like Mayor Richard Riordan's police buildup. While the city's 
elected officials approved residential rates 20% below private-utility 
charges, they balked at lowering rates for large businesses that were higher 
than for rival utilities. Because big businesses would be the first to enter 
the deregulated marketplace, many believed the DWP would have to be 
privatized to be competitive. 
Yet, since 1996, the debt of the "uncompetitive" DWP has been halved, and the 
agency plans to be debt-free within two years. It now sells surplus power to 
other utilities, accelerating debt payoff. Adding 960 megawatts of capacity 
over the past several years by restarting mothballed plants, the DWP, in its 
just-approved 10-year, $1.7-billion capital program, will provide 2,900 
megawatts of new generating power. As the state's investor-owned utilities 
and their ratepayers face a doubling or more of energy prices until new 
plants come on line, the department plans to offer a 5% rate reduction by 
2002. Armed with low rates and a large surplus, it is vigorously promoting 
alternative-energy sources. 
The department's current management deserves some credit for the turnaround. 
DWP general manager David Freeman has adroitly used that deregulated market 
for surplus sales and debt relief. Forging an alliance with the department's 
largest labor union, Freeman has wrung concessions from a labor-friendly City 
Council. Freeman also engineered the sale of the DWP's share of a poorly 
performing plant--the Mohave facility--while planning upgrades of cleaner 
plants in the L.A. Basin that will significantly add to the department's 
energy reserves. 
By continuing to say "no" to deregulation, the DWP can ensure Los Angeles' 
future economic competitiveness. It and other public utilities are the 
state's lowest-cost providers of electricity. They possess the reserves 
needed to provide ultrahigh reliability to an electricity-dependent economy. 
Although they do not return profits to shareholders, public utilities can be 
operated as efficiently as their private counterparts if freed from political 
interference. Until the state's energy crisis is fixed, the high cost of 
electricity, and the associated uncertainty, in deregulated regions will 
result in business and job losses to oases of low-cost, reliable public power 
such as Los Angeles, Pasadena, Glendale, Burbank, Anaheim, Azusa, Vernon, 
Riverside, Colton and Sacramento. 
The DWP's stunning success in a deregulated market has caught the attention 
of San Diego, where ratepayers have suffered the most, and San Francisco. In 
San Diego, suburban San Marcos decided to create a municipal utility two 
weeks ago, and Chula Vista is considering one. A local congressman has urged 
voters to create a countywide municipal-utility district using the 
initiative. Another, more conservative congressman has suggested that local 
governments build and operate gas-turbine power plants at the Miramar Marine 
Corps Air Station to lower electricity prices and meet demand. A similar 
grass-roots movements for energy independence via municipal ownership is 
afoot in the Bay Area, which faces the deregulated marketplace in 2002. 
California's ill-conceived experiment with deregulation has turned the 
once-staid utility world upside down, in the process severely blurring the 
lines between private and public. Under the 1996 law, investor-owned 
utilities received massive state and ratepayer subsidies to pay off past 
debts. Today, these same utilities are petitioning state officials for 
subsidized rate relief. Yet, L.A.'s Department of Water and Power and other 
municipal utilities have not received one cent of state assistance for debt 
relief or rate stabilization. By staying the course of reliability and 
forsaking deregulation, the DWP furnishes a valuable lesson in the tangible 
benefits of public ownership. * 

GRAPHIC-DRAWING: (no caption), WES BAUSMITH / Los Angeles Times;