LADWP vs. Los Angeles: Expensive Renewables Hit the Fan

Just what shape is California in?

Several weeks ago, credit default swaps on state bonds were at 200 basis points. Kazakhstan’s were at 170. At the end of 2009, California’s cost of debt was the treasury rate plus 310. Mexico’s was plus 185. The state is temporarily solvent thanks to a great legislative fix: they took an extra month of state income tax withholding from all state workers’ paychecks, which they get back (without interest) in their next tax refunds.

When it comes to gauging the state of California’s government, however, you can’t do better than follow the conflict between Los Angeles’ municipal electric system – the Department of Water and Power (LADWP) – and the city’s mayor and council.

Municipals are an odd American institution, a significant presence of publicly funded entities in a system that is largely private. Exempt from regulation in most states, municipal utilities are governed by local officials or appointed independent panels. LADWP has the latter. Cities usually get a percentage of the utility’s revenue off the top (the analogue of a corporate utility’s taxes), and some, including Los Angeles, give municipal agencies “free” power.

LADWP is governed about as well or poorly as any other electric system, public or private, and it does give the city $200 million a year. There have been embarrassments – two years ago, for example, it spent $50,000 on “lactation consultants,” hoping to discourage absenteeism by certain employees.

And now renewables and global warming. California’s regulated utilities are all far from compliance with a requirement for 20 percent renewable energy by the end of this year, and now they face a 33 percent requirement for 2020. The Air Resources Board says that without those renewables its cap-and-trade program can’t possibly succeed. Municipal utilities are exempt from all this, and LADWP’s board knows what renewables and transmission will really cost.

Nevertheless politics has given it informal renewables “goals” of about the same size. Like the other utilities, LADWP’s progress is largely a series of creative fibs, such as counting signed contracts with experimental solar generators as real resources. 44 percent of its power comes from out-of-state coal, and the idealistic City Council says it wants zero coal, lots of renewables, and soon.

But now we get a “Democracy in Action” vignette, the kind that never turn up at the Public Utilities Commission because most folks don’t even know where it meets. This January, LADWP cancelled a bunch of renewable projects (more precisely, contracts) because it claimed to be losing $6 million a week. It told the city council that if they wanted renewables they would have to raise rates, and in March LADWP’s board recommended council approval (required by law) of a 22 percent rate increase over the next year, growing to 37 percent by 2014.

At this point we bring in Mayor Antonio Villarigosa, who plans on becoming governor (not this year – that’s Jerry Brown at 71) thanks to diversity and renewables. Villarigosa saw DWP’s request as his very own opportunity to be a profile in courage, so he proposed a four-step increase to get to 22 percent in a year. Only the City Council wasn’t biting, so it was time for persuasion. The literally immortal (yes, an inside joke) S. David Freeman, LADWP’s Interim Administrator, said that without passage the city would lose its AA bond rating and be unable to pay its percentage of revenue into the general fund.

Villarigosa outdid him. First came good cop: He got the person in charge of the state carbon program to call the rate increase “an example of fiscally responsible long-range thinking and investment.” Then came bad cop: He said that the city council’s rejection would be “the most immediate and direct route to bankruptcy the city could pursue.” And finally, dumb cop: Villarigosa turned up at a council meeting with a live satellite transmission from Al Gore.

Oblivious to Gore’s charm, the council rejected the 22 percent series. In near-desperation Villarigosa proposed a 0.6 cents/kwh increase for three months that would only be extended if LADWP agreed to increase its “transparency,” whatever that was. Then the fun really started. Next day DWP’s board voted to reject the increase, but noted that it would be acceptable if changed to 0.7 cents/kwh. In a rare late-night meeting, the city council voted to reject the rejection. DWP came back and informed the council that absent the increase its general fund payment might not happen.

Within the next two days Moody’s and Fitch dropped LADWP bonds to AA, and the Department cancelled a $720 million revenue bond issue. A day later, DWP announced that it was withholding $73.5 million currently due the city.

Then came events like Chicago.  In a cloud of dust, Freeman was gone, and the mayor appointed his “Jobs Czar” to run the DWP board.  Last Thursday the City Council again sent DWP a 0.6 cent increase starting July 1, to last three months while everybody thought things over.  This time DWP approved it, and agreed to send over the $73.5 million.

Then came events like California.  Some members of last week’s narrow council majority weren’t clear on the duration of the increase and belatedly asked for a legal report, which will appear soon.  The council members thought they were voting for three months, the same length as DWP said it was.  The Mayor now says that they really voted for a cleverly disguised permanent increase.  Early next week the council gets one last chance to kill the whole thing, and a new majority just might.

Meanwhile, the city would have survived even without the $73 million.  The life saver was $26 million more in property tax collections than had been anticipated, which will float everything a bit longer. Stay tuned, but think about going long on Kazakhstan.