First & Spring

Lawsuits threaten DWP payments to city

LA's Department of Water and Power sends about $250 million a year to the city to pay for basic services

Ratepayers have had reason to gripe in recent months about the Los Angeles Department of Water and Power, whose fumbled rollout of a new billing system in 2013 produced some breathtakingly inaccurate charges for customers.

Still, the public does get something back from the DWP. Once a year, the city-owned utility sends about a quarter of a billion dollars to L.A.'s general fund budget, which pays for police officers, firefighters and other city employees. Budget officials describe that money — currently 8% of the utility's electrical revenue — as surplus, available cash.

When Mayor Eric Garcetti unveils his yearly budget Monday, he will almost certainly rely on another DWP windfall to balance the books. But that transfer, critics say, is now in jeopardy — because of both the city's billing debacle and an array of legal challenges.

A recent audit of the agency's troubled customer information system found that, as of November, the utility had $681 million in uncollected bills — $245 million more than under the previous billing system. If the DWP doesn't reach its revenue projections this year, it "could end up not having any profits, and therefore they couldn't have a transfer," said Jack Humphreville, a member of the Greater Wilshire Neighborhood Council who writes about the DWP for the website CityWatch.

Asked about the transfer, Garcetti referred The Times to DWP officials, who dismissed the idea that the billing woes would have any effect on next year's payment to the city budget. Utility executives said they have cut the amount of money not collected from customers for more than 60 days by nearly 25%, or $70 million, over the last three months.

That leaves the utility with $284 million in bills that are more than 60 days overdue, or 5.1% of total yearly revenue, utility officials said. More than a third of the uncollected money, they added, is for non-DWP items on customers' bills, such as sewer and trash pickup fees.

"DWP has sufficient revenues" to provide next year's payment to the general fund, Jeff Peltola, the utility's director of corporate performance, said in an email.

As the DWP works to catch up on its collections, its ability to send extra cash to City Hall faces other threats. Two lawsuits filed this year have challenged L.A.'s annual transfers. Similar cases involving city-owned utilities are in play as far away as Shasta County.

Foes of the transfers contend they are back-door tax increases designed to get around required approvals from voter. The utilities raise rates, this argument goes, which generates surplus revenue that is sent to city officials to use for general government purposes.

Attorney Walt McNeill, who represents a ratepayer group in Redding, Calif., said municipal utilities in L.A., Anaheim, Riverside and elsewhere are legally barred from making such transfers from their electrical utilities under Proposition 26, a statewide initiative passed by voters in 2010. The measure says government agencies cannot charge more for certain services than they cost to provide.

The transfer is "a hidden tax in your electric bill," said McNeill, whose clients won a court victory this year restricting such uses of ratepayer funds.

In Los Angeles, the loss of the DWP transfer could blow a sizable hole in the city budget, which already faces an array of pressures and obligations. Garcetti's plan to cut the business tax would remove $15 million from next year's revenue. The City Council recently agreed, as part of a legal settlement, to spend $31 million annually fixing sidewalks. And city unions are attempting to repeal a reduction in pension benefits that was supposed to save up to $70 million over five years.

The elimination of the transfer is "something the city could survive," said City Administrative Officer Miguel Santana. "But obviously it would make it difficult to provide the same level of services."

Santana sees the DWP transfer as a dividend for the public, which owns the utility. That payment sets the agency apart from investor-owned utilities like Southern California Edison, which are accountable to shareholders. But it also makes for some treacherous City Hall politics.

In 2004, Mayor James K. Hahn came under fire for securing an extra $60 million from the DWP to erase a budget shortfall. Before approving the payment, one Hahn appointee to the utility's board called the request "an abuse of this department's generosity."

Five years later, a judge struck down the DWP's practice of sending nearly $30 million from its water operations to the general fund. After that ruling, the utility expanded the size of its transfer from its electrical system. This year, the transfer totaled $265 million.

A major dispute over the transfer erupted in 2010. DWP officials threatened to withhold roughly a third of the surplus after City Council members refused to back a package of rate increases sought by Mayor Antonio Villaraigosa. The issue became a public relations nightmare for the utility, which ultimately backed down.

An appellate court in Northern California ruled in January that the annual payment made by Redding's electrical utility to the city budget is a tax — and therefore needs voter approval — unless officials can show the money was directly related to the cost of electrical service. That ruling has been appealed to the state Supreme Court, McNeill said.

Cases also have been filed against the city of Glendale, whose electrical utility sent $20.6 million to the general government fund last year. The International Brotherhood of Electrical Workers Local 18, which represents municipal utility workers in both Glendale and L.A., has argued in one pending lawsuit that the yearly transfer made by Glendale Water and Power requires approval from two-thirds of city voters.

That position puts the union on the same side as anti-tax activists, who have long criticized the transfers from utility agencies.

In January, a resident of Mt. Washington filed a separate lawsuit challenging L.A.'s transfers. And in April, a law firm in San Diego filed a class-action lawsuit on behalf of Patrick Eck, a 30-year-old West Hills resident also seeking to overturn the DWP practice of supporting the city general fund.

Eck wants the DWP to refund ratepayers an amount equal to the payments made to the city's budget since February 2014, attorney Eric Benink said.

"L.A.'s transfer is illegal, so it's just a matter of time before that is struck down," Benink said.

A spokesman for Los Angeles City Atty. Mike Feuer declined to comment.

Twitter: @DavidZahniser

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