The city of Los Angeles’ already shaky budget outlook took a potentially ominous turn Tuesday after a judge ruled that the Department of Water and Power intentionally overcharged other government agencies for electricity for nearly two decades, and owes them more than $200 million.
In a decision issued late Monday after a six-week trial, San Bernardino County Superior Court Judge John P. Wade held that the massive city utility must pay nearly $224 million in damages for its illegal conduct.
“The court finds that the DWP and the city have, for many years, since at least 1988, intentionally ignored the plain language” of the California Government Code and failed to determine how much it should legally charge, Wade wrote in his ruling.
The judge also criticized “the lack of a sense of responsibility to good government exhibited” by the city and the DWP.
Ron Deaton, the DWP’s general manager, said all the plaintiffs “have benefited from electricity rates that are far below those charged to other government entities by investor-owned utilities across the state. We believe these extremely favorable rates were fair and appropriate and in full compliance with the law.”
City officials immediately said they would appeal.
The Los Angeles Unified School District would be the largest beneficiary of the ruling if it stands -- garnering $94.7 million. But the decision potentially has serious implications for the city of Los Angeles, which for years has counted on revenues from its municipal utility to help balance its more than $6-billion annual budget.
The city, by law, must balance its budget each year -- even though its expenses currently outpace revenues. One way of doing that over the years has been to take revenues collected by the DWP and transfer them to the city’s general fund.
About $175 million was transferred in the current fiscal year between water and power revenues, and the city expected to transfer $184.6 million in the budget adopted for the coming year.
But city revenues are also threatened on another front. The city is facing a lawsuit over its right to collect up to $270 million in cellphone taxes each year. A state appeals court ruled against the city in May.
The news could be bad for Mayor Antonio Villaraigosa as a sapped budget could harm his ability to accomplish goals -- such as greatly expanding the Police Department -- as he prepares for a 2009 reelection campaign and potential gubernatorial bid in 2010.
Villaraigosa could also find himself in an uncomfortable position with the new majority on the school board, which he helped elect. A successful appeal could save the city from a devastating financial blow, but would deny L.A. Unified a huge influx of cash. Since taking office, Villaraigosa has made reforming the district a cornerstone of his administration.
The prospect of extending the court fight drew the ire of veteran school board member David Tokofsky. “I hope City Hall will not send us into two to three years of appeals but instead will look at a child- and city-centered settlement immediately,” Tokofsky said.
In addition to the $94.7 million earmarked for L.A. Unified, Los Angeles County would receive $45.2 million under Wade’s decision; the Los Angeles County Metropolitan Transportation Authority, $39.4 million; the Los Angeles Community College District, $7.8 million; UCLA, $5.3 million; and several state agencies, $31.3 million.
“DWP boosted its revenues at the expense of schools and county taxpayers for years,” said Eric R. Havian, a San Francisco lawyer with the firm of Phillips & Cohen who was the lead attorney for the plaintiffs. “It’s unfortunate that the county, the school district and others had to sue the DWP to get the money they are owed.”
The lawsuit asserted that the DWP was charging the plaintiffs up to 60% more than their legitimate share of capital costs. Havian said that evidence presented at the trial showed the DWP was aware it was acting unlawfully from studies it conducted. However, he said the school district and other government agencies did not know that they were being overcharged until a whistle-blower came forward in 2000.
Originally, the case was filed under seal. After an investigation, several governmental entities joined the lawsuit, and it was unsealed but drew little attention because the case was conducted in San Bernardino County. State law provides that when there is litigation between government agencies from the same municipality the case must be heard in another county.
Wade concluded that the plaintiffs were entitled to compensation because the DWP violated California statutes and the DWP had unjustly enriched itself.
But DWP spokesman Joe Ramallo said the state statute at issue in the case had been modified last year. That change in the law appears to give the agency greater flexibility, but there has been no definitive court interpretation of what the change means, legal experts said.
For now, Ramallo said, “we can continue to charge in the manner we have been.... In the intermediate term, this decision does not have any impact on the transfer of funds from the DWP to the city budget.”
Wade denied the DWP’s attempt to have the case thrown out in April, rejecting the agency’s assertion that the plaintiffs could not prove that it was knowingly overcharging. The judge said there was ample evidence to conclude that the city had violated the law.
Both sides said settlement negotiations were held during the last year, but they would not provide details.
“It was insane for the DWP not to settle” after the judge rejected the agency’s summary judgment motion, said former Los Angeles City Atty. Ira Reiner, who worked with the plaintiffs. After that ruling, it was only a question of how big the damages would be and the judge who would make that decision was the same person who already said he had found ample evidence to rule against the DWP, Reiner said.
The two sides presented competing experts on the damages issue and Wade concluded that the plaintiffs’ expert was more reliable. He said the defense expert had improperly “included the annual transfer of revenues to the city as a cost to the DWP.”
The ruling was hailed by state Atty. Gen. Jerry Brown, whose office represented 11 state agencies, including the California Department of Corrections and Rehabilitation, the California Department of Transportation and the California Department of Parks and Recreation.
“It is a little shocking that the city would try to fund its programs on the backs of other taxpayers who are equally hard-pressed,” Brown said.
DWP board President H. David Nahai, who was appointed by Villaraigosa, said he was troubled by what he considered sweeping conclusions in the judge’s six-page ruling without a detailed analysis.
But San Francisco attorney Wayne Lamprey, co-counsel for the plaintiffs, said that Wade’s decision was in line with rulings by other courts in the state who had interpreted the section of the state government code that was at issue in this case.
Times staff writers Steve Hymon and Joel Rubin contributed to this report.
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A court ruling may jeopardize the Los Angeles Department of Water and Power’s contribution to the city’s budget.
Estimated receipts for 2007-08 budget, top 6 sources (in millions)
*--* Percent of Amount budget Property tax $1,397 20.6% Utility users tax 627 9.2 Fees and fines 615 9.1 Business tax 478 7.0 Sales tax 349 5.1 DWP transfer 185 2.7
Source: City of Los Angeles 2007-08 proposed budget