DWP: River of Questions, Mountain of Debt
LA WATCHDOG - On Saturday, Ron Nichols, the new General Manager of our Department of Water and Power, walked through a 51 page power point presentation (link) to the Energy and Environment Committee, the DWP Board of Commissioners, and a host of Ratepayers and environmentalists that filled the City Council Chambers. While the presentation did not discuss the budget for the year beginning July 1, 2011 or provide any details on the actual rate increases that will be requested, it was evident that DWP will be incurring inordinate amounts of additional debt.
- 07 Jun 2011
- Written by Jack Humphreville
On June 30, 2010, the Water System had outstanding debt of $2.7 billion, an increase of over $500 million the previous year. And over the next four years, the DWP Water System will need to borrow an additional $1.1 billion, implying a debt burden approaching $4 billion.
This increase is caused in part by $1.4 billion of Regulatory Mandates over the next five years, primarily related to reservoir covers and bypasses such as Elysian Park, Upper Stone Canyon, and Griffith Park, and to a lesser extent, water treatment facilities and dust mitigation in the Owens Valley.
As of June 30, 2010, the Power System had outstanding debt of $5.7 billion, an increase of $500 million the previous year. In five years, the level of debt is projected to be $10.4 billion, an increase of over 80%.
Likewise, this massive increase is caused in large part by $3.3 billion of Regulatory Mandates over the next five years, including those related to solar power ($0.4 billion), other renewables ($1.7 billion), and Once Through Cooling ($1.3 billion).
And this does not include additional “Strategic Investments” for the Water and Power Systems that are estimated to cost an additional $83 million and $520 million, respectively, over the next three years, a total of over $600 million.
To support the projected $14.4 billion mountain of debt, the DWP anticipates that it will need to increase our water and power rates by an average of $235 million a year to maintain its current AA- credit rating.
But this begs the question: Given the high level of debt as a percentage of capital, does it make economic sense to maintain the current credit rating? Or would the Ratepayers be better off with a lower investment grade rating?
One of the major themes of Nichols’ presentation revolved around the 15 to 20 year “transformation” of the sources of DWP’s power and water, mandated in large part by new environmental legislation and regulations.
For example, today, the source of 39% of DWP’s power is from coal fired facilities. However, in less than 20 years, DWP is projected to have no coal in its power mix, offset by the increased use of natural gas and to a lesser extent, renewables and conservation.
For the Water System, about 43% of our future water supply will come from local sources such as local ground water, recycled water, storm water capture, water transfers and increased conservation, compared to 18% today. This will result in a significant decrease in the ever increasingly expensive water purchased from the Metropolitan Water District.
Another theme, one which we heard during the rate increases of 2008, involved the need to maintain the infrastructure by developing a more realistic replacement program for water mains and pipelines, power poles, transformers, cables, and other assets so as to avoid costly emergency repairs and to improve reliability.
In reviewing the presentation’s revenue graphs, it appears that revenues over the next three years will need to increase by 34% and 13% for water and power, respectively, before the impact of any “Strategic Investments.” However, the increases for the Power System seem to be low given the comments in the Integrated Resource Plan and PA Consulting report during the Mayor’s ECAF Fiasco.
Nevertheless, the City Council, PA Consulting, the City Council’s advisor, the Ratepayers, and the Ratepayers Advocate all must have more detailed financial information, including the 2011-12 budget before they can even begin to consider the legitimacy of any specific rate request for both water and power.
Furthermore, all of these parties must also have a better understanding of the efficiency of DWP’s operations. This will require that DWP implement the “benchmarking” recommendations of the last two charter mandated Industrial, Economic, and Administrative Survey, even if Union Bo$$ D’Arcy continues to object.
Furthermore, the City Council and the DWP need to develop a thorough analysis of the impact of the recently enacted Proposition 26 that requires that certain fees be approved by a two-thirds vote. (Link) http://www.voterguide.sos.ca.gov/propositions/26/
But most importantly, will the DWP be able to support this aggressive transformation and infrastructure program that is being financed through inordinate increases in debt without jeopardizing DWP’s credit rating and its very existence.
And what is the impact of these aggressive spending programs on the already beleaguered Ratepayers, especially homeowners who have been slammed with the Power System’s Rate Restructuring Plan, the Water System’s Shortage Year Water Rates, and higher Sewer Fees?
While the goals of the unfunded mandates are noble, we need solid, detailed information, facts, figures, and analysis before making any decisions. The 51 page power point presentation did not receive a passing grade. Nor will the seven Community Collaboration Sessions beginning on June 15 make the grade unless the DWP is willing to make specific recommendations and provide detailed financial information.
DWP needs to regain the trust and confidence of the Ratepayers. But the longer DWP plays games, the more unpopular DWP will be with Angelenos, not dissimilar to Pacific Gas & Electric’s relationship with its constituency.
And to add to the lack of credible information, we need to ask Eric Garcetti, the City Council President, “Where is our well funded, empowered and truly independent Ratepayers Advocate to oversee the operations, finances, and management of our Department of Water and Power?”
Tags: DWP, Humphreville, Eric Garcetti, Ron Nichols, Jan Perry, energy, ratepayers, ratepayers advocate, rate increases
Vol 9 Issue 45
Pub: June 7, 2011