July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
About a year ago I stuck my neck out to predict that electric utilities might end up with stranded investment in transmission lines. I suggested that financial commodities trading-longs, shorts, and hedges-might supplant physical product movements. It's happened in natural gas, where the interstate pipelines have suffered from "decontracting" and capacity "turnback"-a phenomenon that has tended to move from West to East.
Here's another view, from attorney George Galloway (Stoel, Rives, Boley, Jones and Grey, Portland, OR), counsel for PacifiCorp:
"An interesting thing is starting to happen in the West. Transmission may turn out to be last year's battle. Most of the power that is bought and sold doesn't go anywhere. It's the normal trading function."
Galloway continues: "Transmission constraints don't seem to be that important anymore. We may err if we put too much emphasis on transmission bottlenecks going forward in deregulation."
William McCarley, the current general manager of the Los Angeles Department of Water and Power (LADWP), has a problem, and darned if I know the answer.
McCarley sounds as if he wants to play the merger game. He harbors doubts over how well the LADWP can compete against Southern California Edison and San Diego Gas & Electric (SDG&E). In fact, SDG&E recently announced a merger with Pacific Enterprises, the holding company that owns Southern California Gas, the nation's largest investor-owned natural gas local distribution company (LDC).
But how do you merge with an municipal utility?
On the good side, LADWP has been gearing up to play hard ball. According to McCarley, LADWP has trimmed its staff by 20 percent (2,000 employees) over the last two years, and has a proposal pending before the city council to cut rates for more than two out of every three customers. LADWP has even prepared a media marketing blitz complete with glossy, four-color magazine ads. But there's bad news, too. LADWP carries a lot of tax-exempt debt-"A staggering debt load," says McCarley. He adds that LADWP's exemption from the state's stranded-cost charge will not kick in under the new California restructuring law (see this issue, p. 32) unless LADWP grants direct-access rights to city residents, plus reciprocity rights to utilities outside the city.
To achieve a sort of "virtual merger," LADWP has issued a request for proposals for a strategic partner and has narrowed the list down to three. When I asked McCarley for details, he said he envisioned a venture-type arrangement to trade expertise with another company. Meanwhile, a ballot initiative was set for November 5 to allow the voters of Los Angeles to decide whether LADWP should operate outside city limits.
Can McCarley succeed in diversifying a muni? Deborah Kimberly, manager of finance and administration at Salt River Project, warns that nonproprietary activities can jeopardize tax-exempt financing for public power. Speaking at a workshop on income-tax issues at the recent Electricity Forum held in Santa Fe by the Department of Energy and the National Association of Regulatory Utility Commissioners (NARUC), Kimberly noted that the Treasury Department issued proposed regulations a while back on private activity bond constraints and has