Past missteps by the Los Angeles Department of Water and Power continue to haunt the agency as it tries to push forward on a five-year, $6.1 billion capital plan needed to replace aging infrastructure and meet state and federal environmental mandates.
LADWP officials had hoped by Nov. 1 to have approved rate hikes of 15.3% for water and 16.8% for power spread out over the next three years to pay for the additional debt.
The rate hike would only cover the $1.5 billion necessary to meet California and federal environmental mandates, such as the state’s recently enacted renewable portfolio standard of 33% by 2020 and improvements needed to the water system. It will not cover upgrades to the infrastructure such as replacing the 100-year-old pipes in the city of Los Angeles’ aging water and sewer system.
The agency expects to issue debt to fund 60% of the $6.1 billion capital program, according to a Fitch Ratings report on the city’s power system.
The council said it wouldn’t approve rate hikes until a ratepayer advocate had been hired to review the proposal, however. The position is expected to be filled in mid-January, but the new person would need time to review the information before making a decision.
“I think we owe it to the people who voted for us to adhere to what we promised and have the ratepayer advocate in place before rate increases are approved,” said City Council member Jan Perry, chair of the council’s Energy and Environment Committee.
Accusations about the department’s lack of transparency over the past several years, combined with turnover in the top position with a new general manager nearly every year, came to a head in early 2010 when City Council members refused to approve proposed rate increases of 5% to 20%. The council finally approved a reduced rate increase of 4.6% in April 2010.
The ratepayer advocacy position was created following public disputes between elected officials and the department over the rate increases and the department’s perceived lack of transparency. The council approved legislation creating the position in March.
The delay in approval of the rate increases has caused concern for Fitch analysts who downgraded $3.39 billion of water system revenue bonds and $225 million of water system variable-rate bonds to AA from AA-plus on Dec. 14.
The rating agency, did, however, affirm the AA-minus on $6.3 billion of power system revenue bonds and the AA-minus on a $580.8 million bank bond on the same day.
The outlooks from Fitch were stable, but further delays in rate increases could result in downward pressure on the water and power ratings, according to the Fitch reports.
“LADWP’s current impasse regarding rates appears pronounced even in the context of LADWP’s traditionally long rate approval process and, at times, adversarial relationship with its regulatory body, the City Council,” the Fitch analysts said in the report on the power system. “Should continued rate delays or an unfavorable regulatory climate begin to have an adverse impact on the system’s ability to comply and fund mandated improvements, further pressure on the rating could occur.”
Moody’s Investors Service has rated LADWP’s power system bonds Aa3 and the water bonds Aa3. Standard & Poor’s rated the power system bonds AA-minus and the water bonds AA.
Even as Fitch analysts criticized the adversarial relationship between the council and the department, officials and some environmental advocates claim that the situation has improved.
“I think Ron Nichols, LADWP’s current general manager, has done a good job of moving in a very positive direction,” Perry said. “He has a great management style and an excellent way of presenting information to elected officials, their staff, and the public. I’m very appreciative and impressed with his performance to date. I know it’s been hard.”
Perry said she is not aware of any lingering acrimony between the City Council and the department.
“My attitude is, let’s move on and get the work done,” Perry said.
Nichols didn’t return calls seeking comment.
Even though she agreed that Nichols is a professional who has brought stability to the lead role, Cecilia Estolano, co-founder of Estolano LeSar Perez Advisors LLC, a development consulting firm, lent credence to comments made by the Fitch analysts.
“The council doesn’t want to approve the rate increase partly because they don’t trust LADWP and they also don’t want the backlash from voters,” Estolano said. “In order to dodge the decision, they decided to appoint this ratepayer advocate to help them decide. They still haven’t appointed this person — and some important decisions are being held off, because the council is not acting fast enough.”
LADWP has asked for an interim increase of 6.9% in water rates that would be effective in February, while the ratepayer advocate considers the longer-range rate increases totaling 30% over a three-year period for both the power and water systems, according to the Fitch report. The increase would enable LADWP to move ahead in awarding nearly $600 million in construction contracts needed to meet water mandates. Without this rate increase, LADWP indicates it will likely delay construction on these projects, increasing the overall cost of those projects in the long term, the report said.
“By one measure, LADWP is far ahead,” said Kristen Eberhard, legal director of Western Energy and Climate for the Natural Resources Defense Council. “They hit their goal of producing 20% of their energy using renewables this year, which is better than any other utility in the state has done.”
The problem is that the department has signed 18-month contracts for some of the power generated from renewable sources that will expire next year, Eberhard said. If the rate increases designed to help fund those contracts are not approved, the agency’s current achievement of providing 20% of its energy through renewable sources could drop to 14%, she said.
“They have put a hold on expanding renewables because of budget problems and a shortage of cash,” Eberhard said.
An LADWP official denied that the department’s progress in meeting environmental mandates has been put on hold because of the delay in rate increases.
“We have a number of shorter-term renewable contracts that will fall off, if we do nothing,” said Randy Howard, LADWP’s director of power system planning and development, during a hearing held Dec. 15 by state Sen. Alex Padilla, D-Los Angeles, in downtown Los Angeles to discuss LADWP’s progress. “But I wouldn’t describe our renewable efforts as suspended. We have been involved in the issuance of request-for-proposals on 200 projects.”
The department also has signed its second contract on the Milford II wind project in Utah that went online in May, of which LADWP is the major participant, Howard said.
Padilla asked officials if rates will end up being higher because of increased costs if the city waits to approve increases.
“Our general manager has said rates will remain lower the sooner the city starts working toward increasing the percentage of power generated by renewable resources,” said Ann Santilli, LADWP’s interim chief financial officer.
The area environmental advocates contend the department needs to put more emphasis on creating programs that increase energy efficiency, which would decrease the amount of energy LADWP needs to produce.
“I think anyone will tell you that the easiest gains are energy efficiency, because it literally pays for itself,” Estolano said.
The department, which has been holding public hearings on its long-range plan to achieve environmental objectives for several years, is on the right track, according to Perry.
But she adds that changing the way the city has done business for over a century, which includes reducing its current level of 39% of power generated by coal to zero by 2020, is a challenge.
“I think we have made steady progress,” Perry said. “LADWP has attained its objective of producing 20 percent of its energy using renewable sources by 2010. The challenge will be to maintain it and grow it to 33% by 2020. When you think of it that way, we don’t have a lot of time.”
But even Perry said the department still needs to work through systemic changes to make the way it conducts business more transparent.
The credibility gap that has existed over the last couple of years make it difficult to sell rate increases, Estolano said.
“Nichols has a challenge building a factual case and the political support to get off the finish line,” Estolano said. “We are just waiting to see if the city can pull together and build the support for a rate increase.”