SAN FRANCISCO — Los Angeles Mayor Antonio Villaraigosa ended a standoff with the City Council over electricity rate hikes, bringing to a close a political battle of wills that had hurt the city’s ratings and delayed a $720 million power revenue bond deal.

Villaraigosa agreed to accept a 0.6-cent per kilowatt hour, or 4.5%, rate increase that he and the Los Angeles Department of Water and Power previously rejected. The utility wanted a 0.8-cent rate increase as the first step in a year-long, 2.7-cent per kilowatt hour rate hike that would have amounted to a 22% rate increase.

The City Council passed the 0.6-cent rate hike for a second time Wednesday afternoon, and the LADWP Board of Commissioners, which is appointed by the mayor, scheduled a special meeting to consider approving it last night after press time. If approved by the board, the increase would go into effect July 1.

“I’d like to thank the members of the City Council who today offered a reasonable compromise which protects ratepayers, the financial health of the Department of Water and Power, and commits the DWP to renewable energy,” Villaraigosa said in a statement. “I urge the members of the commission to adopt this reasonable plan.”

The end of the stalemate clears the way for the utility to make a scheduled $73.5 million transfer to the general fund and meets the utility’s immediate financial needs, but it leaves the issue of further rate increases unresolved.

The City Council’s latest resolution said it would also assert jurisdiction over rate hikes planned for Oct. 1. To the mayor, that means the council has agreed to consider more rate hikes later this year. To members of the council, that means they aren’t going to allow the biggest U.S. municipal utility to hike rates again without making a strong case for it.

“Nobody’s happy about it,” City Council President Eric Garcetti said in a debate Wednesday. “We’re telling the commission, one step only at this amount.”

The council last month asserted jurisdiction over and rejected a 0.8-cent per kilowatt increase in rates approved by LADWP’s board. The increase had two components — a 0.5-cent hike to cover increased electricity costs and a 0.3-cent increase for a new renewable energy and efficiency trust fund the mayor championed . The fund would finance new renewable-energy development, subsidies for solar power, and energy-efficiency programs.

The council approved part of the increase that covers electricity costs, but it reduced the portion for the renewable energy fund. Council members said the city should go slow on new environmental initiatives while ratepayers are struggling with a recession that has pushed the local unemployment rate to almost 15%.

They also said they wanted more involvement in charting the city’s path to green energy. Villaraigosa has set a goal of eliminating the city’s dependence on coal by 2020 and recruited former Vice President Al Gore and other environmentalists to push the council to approve the larger rate hikes. LADWP currently gets 44% of its electricity from coal plants.

“Give us the detail on what you’re doing to go green,” Garcetti said. “Don’t just say 'trust us.,’ ”

The electric rate standoff had a big impact on Los Angeles’ budget because the utility subsidizes the general fund with transfers of about $220 million a year. Without its rate hike, the utility said it could not afford to make its final $73.5 million payment to the general fund to complete its payment for this year because it would have no surplus to transfer.

That grabbed the attention of the rating agencies. Moody’s Investors Service downgraded the city’s general obligation rating to Aa3 from Aa2 earlier this month and kept a negative outlook on the debt, citing ongoing trouble balancing the budget and the political stalemate over the electric rate hike.

Standard & Poor’s put the city’s AA-minus GO rating on negative watch because Los Angeles faced the prospect of nearly draining its reserves to make up for the loss of the LADWP transfer.

City Controller Wendy Greuel said the general fund could run out of money next month without the transfer, and Villaraigosa made plans to shut down non-essential government services two days a week. The transfer is particularly crucial this year because the city expects to run a deficit of $149 million for fiscal 2009-10. Without the LADWP money, the deficit would have ballooned to $222.4 million, eating up almost all of the city’s $261.7 million in reserves.

Fitch Ratings downgraded the city to AA-minus with a negative outlook in November due to the broader budget crisis and the failure to balance its budget this year.

Fitch earlier this month pulled its rating on a $720 million LADWP bond deal because of the electrical rate impasse. Analysts said the deal’s AA-minus was predicated on the utility’s rate plan.

The utility said it plans to return for new ratings once its board approves a rate hike. That looked likely at press time yesterday, given the mayor’s support and comments from LADWP acting general manager Raman Raj.

“We’re pleased with the council’s actions,” Raj said.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.