Ratepayers Lose in Game of DWP Monopoly

DWPIt’s easy to say the Los Angeles Department of Water and Power is bloated and inefficient, but it’s even easier to prove it.

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All you have to do is read the “Benchmarking Analysis” produced in February by LADWP’s Corporate Performance Division with the help of two outside consultants, PA Consulting Group Inc. and PwC’s Strategy&.

The report on the first phase of the multiyear, three-part “benchmarking effort” recommended that LADWP conduct an “enterprise-wide examination of labor and benefit costs, including the administrative and general function.” The “ultimate goal,” the experts concluded, “will be to identify specific areas/process with the highest potential for improvement and/or cost savings.”

Translation: They are wasting so much money that it will be 2017 before they even figure out where to begin to address it. However, LADWP doesn’t intend to let this leisurely beard-tugging exercise delay its five-year rate increase, which could be approved in just a couple of weeks.

It’s an outrage.

The benchmarking study reveals that LADWP spends more money on payroll, measured by total payroll dollars per customer, than more than 75 percent of comparable utilities. LADWP also spends more on pension and health benefits than other utilities.

The report notes that wages in the L.A. metro area are 13 to 33 percent higher than wages paid by “peer utilities.” But a report in March from the California Policy Center found that “the average DWP employee receives compensation that is 155 percent greater than their non-DWP counterpart.”

The DWP also lagged its competitors in its debt ratio, having borrowed more money than comparable utilities. Is this a problem? Not for investors who buy the bonds and collect the interest payments. In August, Moody’s gave a positive rating to $300 million in LADWP power system revenue bonds, with an admiring nod to “LADWP’s strong flexibility as an unregulated monopoly providing an essential service to the city of Los Angeles.”

Translation: LADWP can always pay the bondholders by forcing its customers to pay more for water and electricity.

Bond ratings analysts at Moody’s, Fitch and Standard & Poor’s all lamented the slow and politically charged process for raising base rates, but they were cheered up by the presence of “cost adjustment mechanisms” that enable LADWP to quietly add extra charges to everybody’s bills. “About 50 percent of costs can be automatically passed through to customers without City Council action,” Moody’s explained to investors.

And that number could go higher. Fitch analysts said the new rate hike proposal “includes revenue stability features that would enhance the consistency of cost recovery.”

Translation: The “adjustment mechanisms” are about to be adjusted upward.

You can’t blame investors for wanting the money that was promised to them, but it’s fair to ask why LADWP has borrowed so much money – more than $23 billion over the last 30 years, according to data from the California state treasurer – while comparable utilities seem to be able to pay their bills more easily.

The problem could be that every year, LADWP transfers 8 percent of the power system’s gross revenue for the previous year to the L.A. city treasury. The city grabbed $247 million in 2013, $253 million in 2014, and $266 million in 2015. Standard & Poor’s projects that by 2020, the city transfer will be more than $320 million.

The annual transfer equals or exceeds the $270 million in annual revenue that would be raised by the five-year rate increase. Without the city transfer, the rate increase would not be needed.

Although L.A.’s city charter allows the transfer of surplus revenue, there is no surplus revenue, not while LADWP is raising rates and planning to borrow billions more. Is the city transfer even legal? Maybe not. Three lawsuits challenging it were recently consolidated into one case and set for trial.

Mayor Eric Garcetti and the City Council have the power to approve or block the DWP’s rate hikes, upcoming salary raises and transfers of “surplus” funds. At the very least, the city transfer should be halted until the legal challenge is resolved, and LADWP’s rates and salaries should be frozen until the “enterprise-wide examination of labor and benefit costs” is completed and made public.

It’s a disgrace that a publicly owned utility that is also an unregulated monopoly operates like a political slush fund. Feel free to call the mayor at 213-978-0600 and your City Council representative at 213-473-3231, and ask them what they plan to do about it.


Susan Shelley is a columnist for the Los Angeles Daily News. Reach her at Susan@SusanShelley.com or follow her on Twitter, @Susan_Shelley.

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