Deregulation

Shock Therapy

How the Energy Crisis Saved L.A. from Kilowatt Socialism

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There's been one big winner in California's much-reviled, phony electricity deregulation plan: Los Angeles' publicly owned Department of Water and Power. Since the state restructured its electricity markets in 1996, the DWP has raked in hundreds of millions of dollars by selling excess power to juice-thirsty private utilities. In fact, just since January, reports the Los Angeles Daily News, the DWP has earned $100 million through such sales.

The deal works like this: When California passed "deregulation," the public utilities retained their various perks, including the right to buy subsidized hydroelectric power from the feds at rates well below the going price at the state power exchange. So the publicly minded fellows at the DWP purchased a ton of cheap federally subsidized power, marked up the price—sometimes by 10 times the original cost—and then resold it to private utilities. The result? A profit-making scheme that would make the boys at the near-bankrupt, privately held Southern California Edison drool.

In fact, those massive profits tell only part of the story of the DWP's good fortune. Thanks to deregulation, the utility's reputation has gone from public laughingstock to public power exemplar. Five years ago, long before California was famous for regular rolling blackouts, the public utility was mired in debt that totaled about $8 billion, far higher than the national average for public or private utilities. According to its own press releases, the DWP had the largest workforce per kilowatt-hour in the industry. Translation: The city could have generated electricity about as efficiently if it had powered its grid with a hand crank and employees buzzed on a case of Red Bull.

When deregulation passed, it brought with it the dreaded threat of competition with private providers. That was enough to promote big change at the lackluster utility. In 1997, the city hired a new general manager, David Freeman, to turn the utility around. By April of last year, Freeman had paid off more than $2 billion of the utility's debt. How? By doing what private companies do to improve the bottom line: laying off workers, selling property, and cutting costs. And, of course, by selling high-priced power to the rest of the state. "Just two and one half years ago the very survival of this utility was uncertain," said Freeman at a May press conference held at the city's downtown headquarters.

The DWP continues to take advantage of benefits that the private utilities lack, including tax-exemption, the ability to issue tax-free bond issues, control over its own generators, and the ability to buy long-term power contracts. And that list is far from comprehensive.

What the public sees is a city-owned utility that's offering low rates and uninterrupted service. What they don't see is the DWP's tremendous regulatory advantage over private firms and its brazen transfer of a multi-billion dollar debt burden to the rest of California through electricity sales. (The DWP has now agreed to sell power to the state for "cost plus 15 percent," according to the Daily News. Nevertheless, agreeing on exactly what "cost" entails is many of hours of haggling away.)

A cheery Los Angeles Times op-ed in late April informed readers that "Kilowatt socialism saved L.A. from the energy crisis." Not exactly, comrade: It turns out the energy crisis saved a socialist utility.