LOS ANGELES -- Los Angeles and Inyo County, Calif., officials signed an agreement Friday to end a 19-year legal dispute over an important water source for the city in a move that should benefit the Los Angeles Department of Water and Power.

The agreement, which had been expected after officials reached a tentative settlement two years ago, is "basically favorable for Los Angeles," said Philip Edwards, a senior vice president of Standard & Poor's Corp.

He said the development is not as important as certain other factors affecting the department's bond rating, but it is positive because the city is "actively moving on these issues rather than letting them fester."

The Los Angeles Department of Water and Power, the nation's largest municipal utility, plans to take bids Tuesday on $100 million of water works revenue bonds. Moody's Investors Service rates the bonds Aa; Standard & Poor's and Duff & Phelps rate them AA.

The preliminary official statement for tomorrow's issue describes the Inyo County dispute in a section on the department's pending litigation it considers material.

"Both Los Angeles and Inyo County have much to gain from this historic agreement, which signals a permanent end to the long-running legal debate," Mayor Tom Bradley said in a statement.

The agreement produced a plan that preserves the city's water rights in Inyo County, but also requires the department to manage groundwater resources in a manner that protects the environment of the Owens Valley.

The seeds for the dispute trace to early this century, when the city's quest for additional water supplies prompted it to construct the 233-mile Los Angeles Owens River Aqueduct, The aqueduct enabled the city to tap water supplies feeding into the Owens Valley off the eastern slopes of the Sierra Nevada.

In 1970, the department completed a second Owens River aqueduct. Shortly thereafter, however, Inyo County sued the department over its pumping off groundwater from the valley. Further legal battles ensued in the 1980s, after Inyo County adopted an ordinance requiring the department to obtain a permit before continuing to pump groundwater on land it owns.

An interim settlement in 1985 provided for a joint agreement on annual groundwater pumping rates and a five-year groundwater management plan. The agreement signed last week reflects a settlement by the city, department, and Inyo County over a long-term groundwater management plan.

The agreement and an associated environmental impact report will be submitted for final approval on Oct. 21 to the state's Third District Court of Appeals in Sacramento.

Inyo County residents have charged that the exporting of water from Owens Valley turned the region into a desert environment from a former farming area. Under the agreement, Los Angeles will help to mitigate certain earlier environmental damage.

Environmental groups also are challenging the department over other water supplies, and have obtained a temporary court order blocking the city from exporting water from streams that feed Mono Lake north of the Owens Valley.

Since 1971, the Owens River aqueduct has supplied on average about 70% of the city's total water supply. Due to the current drought, however, the aqueduct only provided about 20% of the total water supplied by the department in fiscal 1991, which ended June 30.

Los Angeles covered this shortfall by increasing its water purchases from the Metropolitan Water District of Southern California. Nevertheless, Los Angeles's ability to protect its existing water sources in the Sierra Nevada remains a key issue because of the challenge facing all of Southern California in maintaining sufficient and reliable future water supplies.

For Los Angeles, last week's agreement "provides greater security for the Owens Valley groundwater supply and provides a forum for dispute resolution," Michael Gage, president of the department's board of commissioners, said in a statement.

Proceeds from this week's sale will finance various improvements to the department's water system. The department expects to spend $1.2 billion on water system capital construction from 1991 to 1996, with $650 million of this total raised from bond sales.

Including tomorrow's sale, the department will have about $547 million of water works revenue bonds outstanding.

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