Interim GM Sheds Light On Firewall Between L.A. DWP's Power & Water Departments

Enrique, the Mayor recently appointed you interim GM of DWP, and within weeks of doing so choose L.A. CLA Ron Deaton to be the permanent department manager, So, you truly are the city's interim municipal utility director. Share your short-term priorities and the immediate challenges that you were asked to assume.

Well, when I took over the functions of the department, it was basically to focus my attention on operations of the day-to-day activities that the department has to perform. Of course, I still deal with some of the aspects of dealing with the media and some of the events in line with the department. But the message given to me basically by the Mayor's office was to keep it simple and straight down the middle. No fancy issues, nothing major, just keep up operations going. And that's been the focus of my objective here for the last few months.

And you rose out of the power side of DWP?

Yes, that's correct. I spent most of my career at DWP on the power side, and much of the time I worked back in Washington as well as Sacramento. But most of my experience and responsibilities have been with the power system.

As noted, while we do this interview in the context of Ron Deaton having been named as the new DWP General Manager, you will remain with DWP on the power side. Therefore, could you comment on current proposals to raise customer rates, why such increases are needed, and what the future holds for rates for Los Angeles residents?

Well, I think in general the aspect of rates has been a very controversial issue, particularly when you precondition customers to expect predictable rates for many, many years, such as we've done for the water and power system. I think the realities of the matter are that they are both business and special issues that need to be addressed over time. And ultimately, there's a balance between what you can continue to do internally without raising rates when the rates are required. Now it is our function – the department's role and responsibility – to state and give a business case as to why the rate is required. And, to the process we have, we understand that it's maybe a little more complex than before, particularly the creation of the neighborhood councils, now that they have been established and chartered throughout the city. So the constituency has changed drastically and I think the challenge for us has maybe escalated to the extent that we have to have more of a well-understood and well-developed presentation for more members of the constituency of the community to be able to explain why these rates are required, how they are going to bring value to the city, how they are going to bring value to the consumers, and I think, bottom-line, the necessity of those rates as requirements, not as options. I think that's going to be a major challenge for all of us here in the department to shift our emphasis in that arena and basically simplify the message and make it very straightforward and clear to understand.

Clearly, DWP is a very successful and well-managed municipal utility. Yet some, to assure continued success, would assert that DWP's earnings/dividends ought to flow back to the utility's operations or to the rate payers in the form of lower rates as opposed to subsidizing the city's general fund. What's the logic for the current policy?

Well, I think for me it's the equivalent of DWP having a franchise from the City. In industrial utilities there are always fees paid to the municipalities for the right to function in their own city or service territory. From the municipality perspective, DWP is paying the equivalent of a franchise fee to the city for the right to operate. Furthermore, the city transfer from DWP to the City has been a long-standing practice – a practice that has been done throughout the municipal utility industry for many, many years. Many municipalities throughout the nation have rates equal to or greater than they reinvest in their own operations. Moreover, in our case in the City of Los Angeles, this has been done through a public process where annually, through a public meeting, the Board of DWP Commissioners declares the transfer. It is done in an open, agendized forum. So I think that the process validates the practice. There's nothing secretive that's done, it is annually laid out for the public to comment, protest or to support.

I think, lastly, that the net effect of the transfer is consistent with DWP's mission. I think the challenge for the department is not only to maintain stable rates, but also to continue to bring efficiencies into our system so that the rates themselves can become predictable. I remember a few years ago the argument between the retain rates and IOUs as to whether you give back additional dividends to the consumers, or I should say in this case the stockholders, or to repay them for investment in future earnings, and levelize the income or a cycle they may have in rates and rate of returns, etc. I think we have somewhat of a similar argument ourselves if every year we're in the process of credit or increase, when you're constantly changing the rates or adjusting them based on a net income for the year versus levelizing the stabilizers, splitting up the rate increases or decreases throughout the years. I think it's something more predictable and beneficial to the consumer because they can actually plan better than just to figure it out on a year to year basis where they're going to be under electric rates. So there are a number of rationales for our City's transfer policy. While the consumer may want to see a credit ultimately at every single step of the way, I think smoothing out the cycle on a year to year basis adds a lot of stability for all of our consumers.

Within DWP, there's something like a Chinese Wall between water and power operations. Some suggest that this leaves the water side a disadavantage. Could you address, as the neutral interim GM, the water challenges for DWP?

Well, I think the challenges for water will continue. One, of supply. We depend heavily on the aspects of snowpack and other acquisitions of water for both the Owens Valley as well as the for the state water resources and regional departments and water districts. With the crowd, the changing dynamics of the department, on a source of water and its acquisition, and the acquisition costs. So I think from the perspective of having a predictable source of water that enables us to maintain a supply for the city is going to be an ongoing challenge and one that we have faced this year.

Secondly, the infrastructure itself is in many cases pretty old. It's been around for many, many years. And ultimately, the large price and trunklines that have been laid out throughout the city for many, many years will have to be replaced and upgraded. That itself brings not only a lot of cost to the process, but again ultimately you're disturbing a lot of citizens throughout the city because of the construction activity.

Third is the water quality itself. The requirements for water quality continue to escalate. Federal laws that dictate the water quality have become more and more stringent. And again, consequently we have to provide ongoing technology and improve the technology to guarantee that the water quality maintains federal standards and., indeed, that it's a good product for the consumer.

And I think lastly, security. Since 9/11, it's been a main focus of attention for us. We have to make sure our customers out there feel secure that the water is safe, and that the water is protected, and that the water itself is deliverable on an ongoing basis – in spite of all the challenges that we have with all alerts we get from the federal government and all the alerts we have dealing with terrorism. I think all those factors are going to be ongoing challenges for this department on the water side. And I think from our perspective, it's an evolving objective but nonetheless we need to continue to focus on the security of the water and delivery of that water in a safe and economical way.

Lastly, if you were leaving in your drawer a few choice thoughts for your successor, what would be in that letter? What would be the list of suggestions you might make?

Well, I think you already mentioned one of them. You talk about this Chinese Wall between the power side and the water side. I think this is an opportune time to really look at the rationale behind maintaining the Chinese Wall. There are many synergies between the water and the power system. And ultimately, I think this is an opportune time to really look at the structure and look at the functions of the department. I think the objective would be for efficiency and optimize the synergies between the two organizations.

I also would also pay attention to the internal workforce and the needs of the workforce going into the future. There's no doubt that the technology incursion has occurred within the department and I believe will continue to do so in the future. Which leads us to kind of a higher level of a qualified workforce to continue to evolve and meet the challenges of the future as they come down. And I would also would suggest paying a lot of attention to the consumer.

Is Ron Deaton up to this challenge, returning home to DWP?

Well I think he is. I think he has a good sense of what the city requirements are. I think he's navigated himself quite well for what the city requires, the city needs. And I think he'll bring a different level of viewpoint that some of us who have grown up here in the department may be missing or at least be able to bring a new perspective. So I think the combination of the internal people here with the experience in the city I think will make a good combination to make this department meet the next tier of performance. I think it's a good change.