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Extracted from Consolidated Report

This investigation was originally published as part of a larger consolidated report containing multiple investigations. View the consolidated PDF for the complete document.

Los Angeles County Grand Jury • 2010-2011

Civil Grand Jury County of LOS Angeles

Published: June 30, 2011 18 pages
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Findings 7 findings

F13 Page 135
The Department has provided substantial funds to the City of Los Angeles in the form of Power and Water transfers for many years. The Power system alone has provided over $2 billion to the City in the last twelve (12) years with another $204 million from the Water system (up to the time the transfer was stopped by the Courts). Exhibit 16. Summary of Power and Water Transfer Amounts shows the money received by the City of Los Angeles for the last twelve (12) years. Exhibit 16 Summary of Power and Water Transfer Amounts Year Power % of Water % of Transfer Operating Transfer Operating Revenues Revenues 1998-1999 $108,145,800 5 $16,252,500 5 1999-2000 $112,000,000 5 $22,200,000 5 2000-2001 $119,800,000 5 $25,500,000 5 2001-2002 $179,153,000 5 $27,247,000 5 2002-2003 $185,358,000 7 $27,523,000 5 2003-2004 $210,214,000 7 $27,649,000 5 2004-2005 $160,166,700 7 $29,815,100 5 2005-2006 $157,894,300 7 $27,914,300 5 2006-2007 $174,747,200 7 0 0 2007-2008 $182,003,900 7 0 0 2008-2009 $222,505,900 7 0 0 2009-2010 $220,475,000 8 0 0 TOTAL $2,032,463,800 $204,100,900 Source: LADWP Summary of City Transfer Declarations for Fiscal Years 1999-2010
F14 Page 136
Although the Department had numerous reasons for not wanting to make the transfer without a rate increase, the Department felt it deserved, holding the City “hostage” under these circumstances was inappropriate. The Department had the cash to make the transfer, stating they had it reserved for other uses. The Department said it could not afford the transfer. This caused a substantial argument from the Council on their need for the money and a public relations nightmare with the public, who was told that the Department was unreasonable by requiring a rate increase before making the transfer. In reality, the money had previously been budgeted for the transfer. But since the Department had doubled its unrestricted cash balance to $300 million, it felt that it could no longer afford to make the scheduled transfer to the City without rate relief. Saying they did not have the cash was inappropriate and set off a series of events and negative public and Council perceptions that will take many years to correct. What is uncertain is whether the doubling of the amount of cash (from $150 million to $300 million) was “overkill” and whether or not a smaller increase to $225 million, for example would have satisfied the bond agencies and still have money left for the almost $75 million transfer. What is known is that by refusing to make the transfer, the Department’s credibility and reputation as a good “citizen” was in jeopardy. The real question is whether a cash position of $225 million (which would have been the $300 million less the transfer) in addition to the $547 million would have sufficed for the rating agencies, since that would also have brought LADWP’s minimum targeted liquidity levels to over one hundred (100) days, also in line with comparable peers. That difference would potentially have allowed the transfer without the ensuing problems. That will never be known for sure. Newspaper articles were relentless on the “greed” of the LADWP management. In reality, the Department was only trying to protect themselves and the ratepayer; but they had a poor way of explaining that to the satisfaction of the public. What then transpired was a battle between the Mayor, the Council and the Controller (all publicly elected officials) on who would be the greater 110 2010 – 2011 LOS ANGELES COUNTY CIVIL GRAND JURY friend of the public. The Department was caught in the middle of a situation that should never have gotten that far.
F15 Page 140
The ECAF as currently constituted at LADWP contains several elements that typically would not be found in a cost adjustment factor. The CCF report does an excellent job of discussing the ECAF at LADWP, as follows: The ECAF operates as a ‘pass-through’ of renewable energy costs, fuel/natural gas costs, purchased power costs and energy conservation costs as well as providing rate stabilization requirements. Fuel costs and purchased power costs represent the traditional Fuel Cost Adjustment (FCA). These costs are dependent on market prices. While a utility can follow best- practice procurement and hedging plans, it cannot completely control the market price of fuel and purchased power. Some renewable energy costs are also dependent on market prices (long-term renewable Power contracts whose prices are indexed to gas prices or power prices) but others, such as long term fixed-price Purchase Power Agreement costs, prepaid energy costs, transmission costs or the capital costs of LADWP-built renewable resources, are not dependent on market prices and, therefore, would not typically be part of an FCA. Energy conservation costs such as the costs of energy efficiency programs are also not part of the typical FCA. On the other hand, revenue losses due to Demand Side Management (DSM) are often considered unpredictable and out of the utility’s control. Therefore, in many cases, including that of the California IOUs, these losses are passed through by an adjustment mechanism (revenue decoupling) similar to an FCA. The ECAF also contains a separate element that accounts for the City Transfer payments that are made as a percentage of total revenues. This adds 8% to all other ECAF costs such that the Department is essentially kept whole on the 8% of ECAF revenues that are transferred to the City as ECAF costs rise and fall. While this makes sense given the way City Transfer payments are calculated today, the fact that City Transfer payments are tied to volatile ECAF revenues at all introduces additional volatility both to customers and to the City, as well as adding additional complexity to the ECAF balancing account. The ECAF is intended to limit the speed at which rates grow. Cost increases in excess of the cap are accumulated in the ECAF account and deferred until the quarterly cost increase would otherwise be less than the cap. While this provides a limited amount of rate stabilization, it is at cross purposes with the role of the ECAF in enabling a quick response to uncontrollable cost increases. During times when the cap prevents revenues from increasing as quickly as costs, an under collection of ECAF costs accumulates. This under collection must be financed by the Department, negatively impacting cash levels as well as debt- coverage ratios. A well designed rate stabilization plan usually includes a method to amortize under collections within a defined time horizon; the ECAF cap can prevent timely amortization. In addition to renewable energy costs, a decoupling mechanism for energy efficiency improvements was introduced that incorporated into ECAF a charge for revenues lost due to energy efficiency improvements. This allowed LADWP to maintain base revenue levels while reducing overall electricity demand. Additional language changes created a small rate stabilization fund, updated language to reflect a 7% City Transfer (now 8%), expanded decommissioning costs from nuclear facilities to all generation facilities, and specifically included emissions fees, interest expense above 4%, uncollectible bills, asset write-offs, and extraordinary expenses. 114 2010 – 2011 LOS ANGELES COUNTY CIVIL GRAND JURY The ECAF rate is calculated on a quarterly basis by estimating the following twelve (12) months of costs, described above, adding any previous under or over collection of ECAF, and dividing by the estimated energy demand for the following twelve months. From this rate, an amount of 1.25 cents/kWh is subtracted to yield the ECAF rate to be charged to customers over the next quarter. This 1.25 cents is meant to reflect a portion of the ECAF charge that is included in base rates, implying that current base rates are higher than needed to cover base operations. In FY 2009, costs booked to the ECAF account totaled slightly over $1.3 billion. In summary, there are now six (6) distinct categories of expenses currently included in the ECAF rate: a. Fuel - Includes all costs associated with natural gas, coal, and nuclear fuel procurement, including emissions, greenhouse gas reduction and retirement costs b. Purchased Power - Includes all purchased power costs, including associated transmission, short-term energy market purchases as well as long-term purchased Power c. RPS costs - Includes all charges associated with renewable resource energy, capacity, RPS related prepayment expense, operations and maintenance, depreciation, and interest expenses for generation and transmission d. DSM expenses - Includes qualified DSM costs, defined as costs incurred for the acquisition and installation of devices and systems, including incentive payments, audit costs related to DSM, and administrative costs, which are part of those programs or projects designed to lower and control power system demand or consumption (limited to 10% of three (3) items above) e. DSM Revenue Loss Recovery - Includes lost revenue due to the implementation of DSM programs, helping to preserve LADWP’s rate base as demand is reduced through energy efficiency f. City Transfer - Includes a factor of 8% added to all ECAF expenses to cover the portion of the City Transfer associated with ECAF revenues. (This does not include the City Transfer component associated with base rate revenues, which is built into the existing base rate structure.) In effect, only a few of these costs are considered “uncontrollable” and, therefore, should be included in ECAF: fuel, some renewable costs tied to fuel and DSM revenue losses.
F16 Page 141
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). The presence of so many elements into a single cost adjustment factor reduces transparency into the cost drivers behind ECAF increases. Understanding the causes of ECAF increases today requires a detailed decomposition and analysis that is difficult for policy makers and customers to understand. The act of bundling market-driven elements with less volatile costs that lie within the Department’s control can limit overall transparency and potentially lead to a lack of accountability for those costs. Under the current system, ECAF increases are passed through to customers automatically without detailed rate review. Long-term commitments have predictable costs and, as such, they can be made with specific consideration for their impact on costs. Under the current structure, commitments that are both predictable and within the Department’s control can be passed through to ratepayers without review. This includes major capital project commitments that represent strategic (and therefore changeable and not operational) decisions. Finally, rate responses to volatile fuel and purchased power costs should not be constrained by the presence of a very tight cap on ECAF changes. Exposure to market prices should be passed through uncapped to the ratepayer to avoid the potential for financial distress. CCF concluded that the costs associated with ECAF are set to increase rapidly over the next two (2) years. Without a significant increase in the ECAF rates, this will put significant pressure on LADWP’s debt ratios, with the potential that ratios in 2011 will be well under target levels. At the same time, a cap on market-based drivers presents a significant risk to the Department in the event of a market price shock, providing support for the argument that the ECAF should be decomposed into separate elements with their own individual mechanisms for rate review. Any effort to reconstitute the ECAF won’t be simple. Any effort to promote transparency must not be at the expense of expediency, and care must be taken to prevent disproportionate impacts on individual classes of ratepayers.
F17 Page 146
The implementation of a Ratepayer Advocate at LADWP would be unusual in the municipal utility industry. While the majority of states have Ratepayer Advocate positions or groups, those organizations monitor rates imposed by IOUs, not for publicly owned utilities. The concept is that public utilities are owned by the people, and the people’s representatives (the elected City Council) would ensure that the people were protected and would do what the people want. However, in many locations including Los Angeles, Council members have complained that they could not get the information that they needed from the utility and that, at times, the information was not consistent, informative or transparent. There is also concern in many jurisdictions, including many in Los Angeles, that special interest groups, such as unions (who have substantial political power due to their monetary contributions) have greater input into the reviews and decisions of elected representatives than they have in the public at large. For example, it might be in the City’s best interest and the utility’s best interest to have an immediate focus on solar or wind power, but a Ratepayer Advocate could provide a transparency on the cost of such proposal and present alternatives in terms of focus or timing that might benefit the consumer. As shown in Exhibit 18. Ratepayer Advocate Organizations at Surveyed Municipal Utilities, there are very few “official” Ratepayer Advocate organizations in other municipal utilities that could found. 120 2010 – 2011 LOS ANGELES COUNTY CIVIL GRAND JURY Exhibit 18 Ratepayer Advocate Organizations at Surveyed Municipal Utilities Utility Ratepayer Advocate Organizations LADWP Office of Public Accountability recently passed during the municipal Election CPS Energy No indication of Ratepayer Advocate. They have a newly formed Citizens Ratepayer coalition but it is not independent or government (it is non-profit). They ask for donations to help with legal costs on the website. SMUD No indication of Ratepayer Advocate function. MLGW No indication of Ratepayer Advocate function. JEA No indication of Ratepayer Advocate function. Austin Energy No indication of Ratepayer Advocate function. CSU No indication of Ratepayer Advocate function.
F18 Page 147
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. As the deadline for the March 8, 2011 ballot measure drew closer, there were competing proposals from public advocates and Council members. At one point, the Council voted for three (3) supposed LADWP reforms: a. Creating an Office of Public Accountability with a Ratepayer Advocate b. Requiring LADWP’s budget to be submitted earlier with a guarantee that “surplus” funds will come to the City of LA for General Fund uses c. Granting the City Council the authority to remove the LADWP’s General Manager or LADWP Commissioners with a two-thirds Council vote. The Council could also override the Mayor’s removal of the General Manager or Commissioners with a two-thirds vote. Only the first two (2) items were on the March 8, 2011 ballot (and both passed with large majorities), with the third being vetoed by Mayor Villaraigosa so that it would not go before the voters. The Mayor’s obvious goal was to ensure that he kept control over the appointment and removal of Department management and governance. There were seven (7) votes from the Council to override the Mayor’s veto, which was insufficient by one (1). The thought by some of the people who proposed these changes was that as long as the Mayor controlled the appointments of LADWP Commissioners and General Managers, any attempt at serious Ratepayer Advocacy would be minimized. The end result is that the Office of Public Accountability will be limited to the review of Water and Power rates and will rely on the City Council and Mayor to pass ordinances to ensure the thorough review and analysis of LADWP’s strategic plan, operations, finances and management. As one consumer activist stated, “…the establishment of a Ratepayers Advocate supported by the Office of Public Accountability is a hollow and symbolic gesture unless they are supported by subsequent ballot measures that reform the Commission process and establish a City Prosecutor…..The last thing LA needs now is oversight reform that consists of more audits and advice with no authority or mandate to enforce the law…..it is important to remember that oversight and accountability mean little, if anything at all, without enforcement authority and a mandate for prosecution.”
F19 Page 148
Although the final wording of the Ratepayer Advocate ballot measure may be interpreted as being effective, the implementation of the measure, and therefore its strength, is up to Council ordinance. There was an original version of the Ratepayer Advocate position which declared “the role of the OPA shall be to (1) promote efficiency and effectiveness of the Department; (2) provide centralized focus on ratepayer protection and consumer complaints; and (3) provide independent analysis of Department actions, particularly as they relate to Water and Electricity rate actions. The OPA shall advocate against excessive rates and shall provide expert advice on rate actions and strategies which most economically accomplish the City’s policy goals and protect the Department’s long-term interests.” The final wording of the proposed ballot measure indicates that the proposed focus will be on determining if rates are too high, not if LADWP is using revenues to overhaul infrastructure and move towards green energy and a sustainable, local water supply. The issues are if the Ratepayer Advocate should be expected to question whether, for example, the use of wind power (which is substantially higher generation cost compared to any other RPS item) is appropriate or whether, given the decision to go with wind, the rates are minimized and accurate. It is a subtle but very important distinction that will have huge impacts to both the work load of the Ratepayer Advocate and to his/her overall impact and effectiveness. After numerous motions from various Council members on the wording of a Ratepayer Advocate ballot measure, and after considering a higher level of funding (0.1% rather than 0.025% of annual revenues), the following was the actual wording decided upon and the wording that went to the public for voting on March 8, 2011. Section 683. Office of Public Accountability (a) The role of the Office of Public Accountability (OPA) shall be to provide public independent analysis of Department actions as they relate to water and electricity rates. (b) The OPA shall be headed by an Executive Director, who shall be exempt from civil service. The Executive Director shall be appointed by a citizens committee to a five- year term, subject in appointment to confirmation by the Council and Mayor. The Council shall by ordinance provide for the removal of the Executive Director in a procedure similar to that set forth in City Charter Section 575 (e), and only for the reasons provided by ordinance. The Council by ordinance shall prescribe the composition and manner of selection of the citizens committee. (c) The Executive Director shall (1) report directly to, but shall not be instructed by, the board; (2) have full charge and control of all work of the OPA; (3) be responsible for the proper administration of its affairs; (4) appoint, discharge, suspend, or transfer all of its employees, subject to the civil service provision of the Charter; (5) issue instructions to OPA employees in the line of their duties, subject to the civil service provisions of the Charter; (6) prior to the beginning of each fiscal year and in accordance with a schedule prescribed by ordinance, submit to the City 122 2010 – 2011 LOS ANGELES COUNTY CIVIL GRAND JURY

Recommendations 5