Political Piracy at the Expense of DWP Customers : City Hall

For the next few months, the Department of Water and Power’s 3.5 million customers should closely watch the progress of AB 318, authored by Assemblyman Richard Katz, because the legislation bears directly on utility bills. Katz’s bill would end the practice of transferring 5% or more of DWP revenue--a “surplus” totaling $196 million in 1993-94--to the city’s general fund. Instead, savings would be returned to DWP customers in the form of lower utility rates. It is a change long past due.

Ending DWP transfer payments would prepare the department for the brave new world of deregulation planned by the state Public Utilities Commission. The current City Council-set rate system, which subsidizes residential customers at the expense of industrial users, is on a collision course with the commission’s plans. Should industries flee DWP’s high rates, residential rates would skyrocket. Halting transfers would substantially improve DWP’s competitive posture and help preserve low residential rates.

A no-transfer policy would be a welcome return to the original intent of municipal ownership. The DWP’s storied founders, William Mulholland and Ezra Scattergood, were pioneers of utility-rate reform. They believed all savings, consistent with reliable, quality service, should be returned to customers in the form of lower rates. They opposed transfers as the first step in politicizing the rate-making process. Their customer-first policy, embraced by generations of DWP professionals, long prevailed in Los Angeles. DWP rates, the lowest in the nation, served as catalysts for the region’s explosive growth and helped drive down rates of competing private utilities.

The city’s politicians, not the DWP, inaugurated the practice of transfer payments. While the City Charter permits the transfer--with the approval of the Board of Water and Power and the City Council--of unspecified surplus amounts, for years there was no “surplus” to transfer because savings were passed on to customers.

Inaugurated after 40 years of municipal ownership, transfers serve the narrow interests of two groups. Elected officials tapped a new source of budget-balancing revenue. And transfers reduced competitive rate pressures on investor-owned utilities. In effect, the practice penalized the efficiency of the nation’s largest municipal utility.

City politicians even contributed a rationale for these side payments--the in lieu tax. Because a municipal utility pays no property taxes and business fees, so the claim goes, a 5% transfer is roughly equivalent to what a private utility would pay the city. Nowhere does the charter mandate this--or any--amount.

A look at the books of the DWP and Southern California Edison shows the in-lieu idea to be dubious. In 1994, the DWP paid 10% of its gross revenue to utility taxes; investor-owned SCE paid 8% to taxes. Add that year’s 5% transfer, and DWP’s tax rate jumped to 15%, nearly double Edison’s.

And how is that DWP “surplus” of 5% arrived at? Each year, DWP staff prepares a bare-bones budget. Before sending it to City Hall, however, the DWP board tacks on 5% of estimated gross revenue. Then, at year’s end, a comparable revenue surplus is “discovered.” In reality, there is no 5%--or any--surplus. The money could as easily be used for capital investment, maintenance or, as originally intended, for rate relief. Instead, it’s used to balance the budget.

The Riordan Administration has sharply escalated both the rhetoric and practice of DWP revenue diversion. Eli Broad, a member of the mayor’s fiscal-review committee, has criticized what he calls DWP’s inadequate 5% return to citizen shareholders. For Broad, “no shareholder-based company would tolerate such a stingy return.”

True enough. But as has become all-too familiar with this Administration, Broad’s private-sector standard is off the mark. The mayor’s fiscal committee was only charged with finding departmental savings that would yield more general-fund revenue. Here’s what the mayor’s committee ignored: Compared with SCE’s higher rates, DWP customers save a whopping $450 million a year. This rate relief is a substantial benefit to citizen shareholders from municipal ownership.

If power-revenue transfers were returned to DWP ratepayers, as the Katz bill provides, the rate benefit would increase to $620 million annually. This represents a 13% return--hardly stingy by anyone’s standards--on the DWP’s $4.8-billion power-plant investment.

Nonetheless, City Hall now charges that DWP inefficiencies seriously threaten shareholder dividends. Its restructuring program intends to save another $200 million annually. In practice, the program threatens to divert more money to the general fund, lower employee morale and result in understaffing, deferred maintenance and less capital replacement. A program that risks serious deterioration in DWP’s infrastructure is hardly the way to ensure low rates and competitiveness.

While there always is room for improvement, the DWP, historically, has introduced new methods to improve service delivery. Savings were designed to be passed on to ratepayers. What does City Hall’s restructuring plan do for ratepayers’ pocketbooks? Nothing City Hall only promises no rate hikes in the foreseeable future.

The real losers, then, are ratepayers. In the pre-transfer era (before 1938), customers benefited from nine rate reductions--and no increases--as savings were passed along. In the post-1938 transfer era, they have been saddled with 33 rate increases--nearly all greater than 5%. Inflation and rate-sensitive financing generated pressures for postwar rate increases, but transfers clearly have hurt DWP customers. Since 1950, more than $1.5 billion in transfer payments--3 billion in 1995 dollars--has been handed over to City Hall by DWP ratepayers.

An unconscionable political piracy of funds from ratepayers, not DWP inefficiency, is the real culprit behind rising utility bills. DWP bills have risen more than necessary because of a 10% utility tax imposed by the City Council, the inclusion of sewer and other charges by the council and the dubious practice of creating and transferring “surpluses.”

As they review their utility bills, DWP’s millions of customers should direct their anger where it belongs--at City Hall. While SCE seeks to lower its rates through deregulation, City Hall remains committed to a transfer-payment regimen that handicaps the DWP’s competitive position. City Hall needs to find a less harmful and deceptive way to balance its budget. Ending the dubious practice of contrived transfers is a badly needed first step on the road to rate relief and rate competitiveness.