Civil Grand Jury County of LOS Angeles

Recommendations 18

• R1
  The LADWP’s governance needs clarification and simplification. A stronger, independent Commission system may be warranted. Establishing a single governing board, with clear authority and considerable independence from day-to-day political influences, is an appropriate place to start. Strengthening the governance structure is essential to ensuring reliable electrical supplies, low rates, and adequate payments to the City, as well as to maintaining Los Angeles’ leadership among the nation’s municipal utilities. The LADWP should return to a commission system that restores integrity by balancing independence and accountability. A plan to decrease political involvement by the Mayor and Council would allow the LADWP to operate for the benefit of the ratepayers. Consider separating the policy making function of the Mayor and Council from the operational responsibilities of the Board and General Manager. The Council and Mayor could set policies and communicate them in writing to the Board which, in turn, would transmit them to the General Manager. It would require the Mayor or Council not give instructions to individuals who report directly to the Board or General Manager, directly or indirectly. Board policies should set out the utility’s purpose and ends to be achieved. They should also designate what actions of the General Manager are considered unacceptable to the Board, both general and in specific. The General Manager may then make all decisions and carry out any activities not expressly prohibited by the Board, without seeking further approval.
• R2
  Establish guidelines for Commissioner appointments, and reduce the politics of appointment, real or perceived. Examples of guidelines to be written and agreed upon might be to appoint Commissions based on specific levels of expertise (financial, utility operations, corporate governance, education level, or geographic representation). Also ensure that the candidates have the time, inclination and ability to stay the entire five years. It is important that “politics” (or political contributions) be taken out of the choice for Commissioners. There are a variety of ways to deal with this issue. One is to have a Citizens Council choose the Commissioners or have Commissioners themselves choose a replacement for a member whose staggered term is up. Another example might be to have the Mayor choose two (2) members, the Council chooses two (2) members and the Neighborhood Councils choose one (1) member. Whatever the approach, the perception and the reality must be that money does not buy a Commission position. 92 2010 – 2011 LOS ANGELES COUNTY CIVIL GRAND JURY
• R3
  Expect LADWP Commissioners to serve full five-year terms. LADWP needs a historical and continuous level of knowledgeable and experienced Commissioners who can make decisions primarily based on their independent judgment. The Commission may remain responsible to the Mayor and Council, but it should be insulated from undue political influences on normal LADWP business matters. To maintain independence and continuity, LADWP Commissioners should be expected to serve out their terms unless there is cause for their removal. They should not resign when succeeding Mayors are elected. An amendment returning to the previous Charter language allowing for removal by the Mayor with Council approval or for cause by a two-thirds vote of the Council, may be warranted.
• R4
  Reduce the bureaucratic impact to the Department due to Mayor or Council involvement. While citywide coordination of the Department is an important function of the Mayor’s office, the current wording of Executive Order 4 is all encompassing. Regular, informal consultation with the Mayor’s office rather than formal ED 4 submittals would potentially speed up and improve the decision making processes of the Commission. Likewise, the threat of Prop 245 fosters bureaucratic delay, takes up scarce management time, encourages more paperwork to justify decisions and adds uncertainty to normal business dealings. Pension Issue and Impact of Employee Transfers Finding and Recommendation 5. Although there was originally some concern that personnel were taking higher paying jobs at LADWP for only a short time (pension spiking) in order to increase lifetime pensions, such does not appear to be the case. However, the number of transfers from the City to the Department may have a negative impact on the pension funding for the Department. The City has taken advantage of the Department’s ability to accept additional personnel and provide pension coverage to them (eventually through increased rates) by transferring up to 1600 employees in the last five (5) years. Those transfers were part of a larger effort to keep City workers from losing their jobs in departments hit hard by the budget crisis. While it is a noble goal to protect employees from layoffs, it is unfair to place the financial burden (both salary and pension costs) on the backs of the LADWP ratepayer. The Segal Company performed an analysis of the Reciprocal Arrangement between the Water and Power Employee’s Retirement Plan (WPERP) and the Los Angeles City Employee’s Retirement System (LACERS) due to the financial impact the Reciprocity Program has had on the WPERP during the period from April 1, 2004 through March 31, 2010. Currently, when a former City employee transfers to the LADWP the WPERP recognizes prior service with LACERS, provided the member agrees to have their employee contributions transferred into WPERP. Under the Plan’s Reciprocity Program, when a member transfers, full credit for service is established in WPERP, but only their employee contributions are transferred from LACERS to WPERP; employer contributions made to LACERS associated with their service are not transferred to WPERP. Since only employee contributions are transferred, WPERP incurs an additional unfunded liability when an employee transfers to LADWP from the City. (The Department makes a 110% contribution into WPERP after the employee contributions have been transferred from LACERS. This has the effect of providing immediate employer funding for part of the actuarial loss caused by the transfer but that contribution may eventually impact rates.) The Segal Company found a large unfunded actuarial accrued liability (UAAL) as a result of these transfers. The total of the increases in UAAL, determined as of each valuation date due to the 1,331 members whose service and employee contributions has already been transferred to the WPERP as of March 31, 2010, is approximately $128.4 million. These amounts, accumulated with 8% interest to July 1, 2010, total $152.4 million. The average age for these members, years of service and average employee contributions transferred are 41.3, 6.9 years and $28,400 respectively. In addition, The Segal Company received partial information for 292 members that were identified by the Retirement Office as transfers but whose service and employee contributions were not yet transferred to WPERP as of the end of the observation period. The UAAL as of each valuation date due to these members is about $30.5 million. The average age for these members, estimated average amount of service and average employee contributions to be transferred are 40.7, 7.8 years and $37,900 respectively. The grand total of the increases in UAAL for LADWP accumulated to July 1, 2010, including both groups, is about $183.1 million. Worried about the cost of those transfers, LADWP officials moved to suspend full retirement benefits for any new worker who comes to the utility from another City agency. The City Council vetoed that measure.
• R5
  The City and LADWP should come to an agreement to rescind the reciprocity agreement until such time as the number of employees transferred back and forth between the City and LADWP reaches equilibrium. Personnel should only be transferred as required by LADWP and then only with full financial contribution to the pension fund. 94 2010 – 2011 LOS ANGELES COUNTY CIVIL GRAND JURY Succession Planning Finding and Recommendation 6. Succession planning does not take place within LADWP to any meaningful extent. Given the high turnover of senior management, it is essential that the next several layers of management have the necessary tools, including trained professionals as replacements, to accomplish their functions. Additionally, there are many positions that will be in need of replacement in the next several years; and succession planning will assist the Department in meeting those needs. This is a City-wide concern. The Los Angeles City Controller conducted a performance audit regarding the City of Los Angeles’ hiring practices and determined that “The City of Los Angeles does not strategically plan for its workforce needs.” In a department where so many people who serve the citizens of the City are eligible to retire in the next several years, this is also an intolerable situation for LADWP. It is difficult in a civil service environment to accomplish succession planning for specific positions. Because employee selection in the City of Los Angeles is based on a well established civil service system in place for well over 100 years, LADWP relies on the Civil Service Commission and the City Personnel Department to assist in meeting their hiring needs. Although filling entry-level positions is important, succession planning to fill supervisory and managerial positions is even more important and must be a priority for the Department. Once identified, a substantial amount of training and leadership development will be required. The key is the successful transfer of technical and operational knowledge to adapt to the current environment. According to the Department, as of January 1, 2010, approximately 40% of LADWP’s workforce was fifty (50) years of age or older. Within the next five (5) years, approximately 20% of the workforce will be eligible for retirement. LADWP must determine how to continue to deliver its services in the future with decreased staff due to upcoming retirements. To ensure that LADWP has the appropriate resources and positions needed to meet the business goals and objectives, there must be a sufficient number of candidates available to be considered for each job classification, especially those that are critical or have been difficult to fill. This issue alone will require collaborating internally as well as with the Personnel Department’s various divisions to consider ways to address this, such as allocating positions, consolidating job classifications, submitting examination requests and pursuing regular and executive recruitment activities. Additionally, a specific manager may not identify a replacement prior to departure. This does not provide an opportunity for training in the specifics of any job. Personnel are thrown into a job situation that may be new to them and, given all the other personnel scheduled to depart, the institutional knowledge necessary for effective performance may not be available. A change in the civil service rules may be necessary on at least a temporary basis to allow personnel to train their replacements. The Department has responded to some of these challenges by creating a Workforce Planning Group within the Human Resources Section of the LADWP. This is a good beginning to ensure that services continue to be provided to the citizens of Los Angeles. The Department’s Human Resources Manager appears to have a strong grasp of what is required to accomplish this goal and has developed a well thought out initial plan. But the process will need more resources than the current four (4) individuals assigned to assist him. Additionally, some changes in the current methods of hiring and promoting personnel may be required to ensure continuity of knowledge and ability.
• R6
  Fully staff and fund the Workforce Planning Group to encourage a full review of options for future LADWP employment. Also work with City Personnel Department and the Civil Service Office to allow some changes in hiring and promotional practices for high level essential jobs. An example would be to allow a process whereby individuals could be chosen for certain jobs prior to the departure of a senior or highly essential position. Current methodology for position listing, testing and choice could be followed, but the timing of the replacement may differ. That way, the individual could have access to the current incumbent’s knowledge, techniques and contacts to ensure a seamless transition. It may also provide reduced costs since it would not be necessary to potentially hire the incumbent to return as a consultant to assist in the transition. It is clear, given the immediate nature of this issue, that “out of the box” thinking will be necessary within LADWP as well as support provided by City and civil service personnel. 96 2010 – 2011 LOS ANGELES COUNTY CIVIL GRAND JURY II. IBEW POLITICAL INVOLVEMENT
• R7
  Determine if the current state of union/management relations is equitable and not favorable to one side at the expense of the other. LADWP management personnel can only accomplish what they try to accomplish. If they continue to allow the Union to “win” the majority of issues, they only have themselves to blame for future problems. Elected officials should strongly consider an effort to reduce continuing union involvement in the management of the Department, other than through normal channels. Of course, this may impact the level of support and money provided to the elected officials but efficient and effective management of the Department should be the overwhelming goal. The ratepayer should be the primary concern.
• R8
  Immediately develop a confidential strike preparation plan and ensure that cross-training and documentation of essential functions is included in the process and plan. It is incumbent on management to ensure that operations continue under a variety of circumstances, including a work stoppage. Additional attention from management to the possible contingency of a work action is warranted and ratepayers need to be assured that the Department management is looking out for their interests. III. CITY TRANSFER AND ECAF ISSUES
• R9
  Take steps to ensure that this transfer problem doesn’t recur. Some steps to be taken include: a. Develop an earlier budgeting process so Council will know what transfer funds to expect ahead of any grandstanding. b. Provide a presentation of the budget to the Council in clear and concise terms that are not “technical engineering oriented”. c. Conduct a proactive review of RPS and capital project alternatives including goal extension or reduction. d. Develop long-term projections of costs associated with RPS and major projects to ascertain if additional transfers will impact consumer costs.
• R10
  The CGJ agrees with the CCF recommendation that a “new proposal for rate restructuring should be drafted and analyzed. One aspect of this proposal would be to split the current ECAF into several separate rate components. This will provide the Council (and the public) with greater visibility of LADWP’s cost structure and of the justification for any rate increases.” CCF goes on to state that: a. Costs that are clearly out of LADWP control should remain in the ECAF. b. At an appropriate frequency, Council should approve an LADWP procurement plan. As long as procurement has been in accord with the plan, ECAF cost recovery should be a pure, uncapped pass through. c. Costs that are predictable, such as long-term contract costs or energy efficiency costs, should be removed from the ECAF. d. Revenue losses attributable to DSM should be passed through without a cap but as a separate bill component in addition to ECAF. e. The City Transfer should not be tied to fluctuating ECAF revenues but rather entirely to more stable base rate revenues. This will create greater certainty of City Transfer payments and remove elements of the City Transfer from the current ECAF structure. 116 2010 – 2011 LOS ANGELES COUNTY CIVIL GRAND JURY While such a change means that the City Transfer will fluctuate as a percentage of total revenue as ECAF revenues change, it will result in lower volatility in rates as well as in payments to the City. f. The Council should separately define a rate stabilization program that will mitigate or spread out rate increases. Rate stabilization has the effect of financing a cost increase and its impact on City finances and LADWP capital adequacy should be explicitly considered. g. Develop a clearer, more pure, definition of the ECAF rate (for review by Council and the public). h. An automatic rate change based on a pure ECAF rate should be approved. It should be pointed out that the Department has received this type of recommendation previous to the CCF Report. In July of 2007, a Revenue Requirements Study prepared for the Chief Legislative Analyst and the City Administrative Officer states, “Energy Services has bundled several different cost recovery elements in the ECAF…….neither the Board nor management are presented the ECAF budgeted revenues by element.” The recommendation made in that report was to “Unbundle the ECAF into its elements for presentation to management and to the Board.” In their response to the report, LADWP agreed that all future presentations to management and the Board would unbundle the ECAF elements.
• R11
  Increase the transparency of the cost of each current ECAF item by showing the item and amount on the ratepayer’s monthly bill. The CGJ suggests following the CCF recommendation with an additional recommendation intended to provide transparency, not just to Council but to the public at large. Print on each residential bill a statement indicating the costs associated with any “controllable” large expenditure that was previously in the ECAF. A statement showing the cost to the consumer for the RPS program, DSM program and the City Transfer (separately) should be clearly available to the public for their review and ultimate approval. Statements might read as follows: “The portion of your bill collected by LADWP for the City of Los Angeles to support government services not related to LADWP (City Transfer) is $XXX or XXX%. The City contribution shown here reflects the amount of your bill that goes toward government transfers. However, on your actual bill, this charge is included in the Electric or usage charge.” In addition to City transfer costs, the Department should also present similar information for “Renewable Program Charges” or “DSM charges” to the ratepayer. This provides the ultimate level of transparency to the public and allows for discussion of each element at the Board and Council meetings. IV. RATEPAYER ADVOCATE ISSUES
• R12
  Ensure that the Ratepayers function is clearly defined and that the function is not captured by politicians or a bureaucracy that will stagnate their independence and ability. It is important to identify what the function will be focused on and, as importantly, what it will not be focused on. The Ratepayer Advocate will have enough work to do without taking on the “savior of LADWP operations and public perception” role. The position should not be involved in the management of the Department or have the right to veto management decisions or set rates. The OPA should not be involved in holding LADWP accountable for meeting the City’s or Mayor’s goals, some of which will be extremely expensive to the ratepayer. That should be the job of the Board of Commissioners, City Council and the Mayor. They should, however, have input into various rate alternatives and timing differences prior to the policy decision being made so that the impact to the ratepayer is known. The OPA should take a long-term perspective on its review of rates. For example, it should shine the light on long-term plans that will have massive implications for residential and commercial rates, not just on the rate increase that may be mentioned for next year. It is important that the position provide advice and counsel to lawmakers on balancing LADWP’s plans to invest in clean power, as one example, with its need to fulfill Charter responsibility to keep rates lower than others. The primary focus should be what is best for the ratepayer. The Advocate can highlight the long term implication of these decisions. This long term perspective and visibility is more important than just blocking specific rate hikes, which may be desired by many, but may not be in the long term best interest of the City or the ratepayer. In summary, the function should provide visibility to the public and guidance to the Council on various anticipated rate increases, and provide expert advice on rate actions and strategies which will protect the ratepayer by identifying the most economical method to accomplish the City’s policy goals and the LADWP’s long-term interests. The ratepayer should be placed first in implementing the Advocate’s responsibility. The Advocate can also be instrumental in ensuring that large categories of costs, such as DSM, RPS and the City Transfer, have visibility on the customer bills. (Also see Recommendation 10.)
• R13
  Ensure that the public has primary input into the appointment of the Ratepayer Advocate. The “citizen’s committee” should have ample representation from Neighborhood Councils and other citizen-based organizations. It is only with broad based input that the public will have the confidence that the position won’t bend to any specific political will. As important as the actual information provided by the Ratepayer Advocate is the fact that the existence of the position itself should be viewed by the public to be honest, independent, trustworthy and knowledgeable. This is probably the single best opportunity for the City and Department management to improve the perception of LADWP with the rate paying public. 124 2010 – 2011 LOS ANGELES COUNTY CIVIL GRAND JURY Summary of Report Findings and Recommendations
• R14
  Although the Department had numerous reasons for not wanting to make the transfer without a rate increase that it felt it deserved, holding the City “hostage” under these circumstances was inappropriate since the Department had the cash to make the transfer, although they had it reserved for other uses.
• R15
  The ECAF as currently constituted at LADWP contains several elements that typically would not be found in a Cost Adjustment Factor.
• R16
  The current ECAF design does not provide for adequate oversight and transparency into long-term commitments made by the Department, particularly with respect to Renewable Portfolio Standard (RPS) and Demand Side Management (DSM).
• R17
  The implementation of a Ratepayer Advocate at LADWP would be unusual in the municipal utility industry.
• R18
  Some people believe that the impact of the Ratepayer Advocate ballot measure is minimized because other proposed Charter amendments were not approved for the same ballot. RECOMMENDATIONS