Mayor’s green-energy goals could be in jeopardy after electric rate battle
The recent fight over electric rates in Los Angeles exacted a political toll on Mayor Antonio Villaraigosa and executives with the Department of Water and Power, eroding their influence in the wake of their feud with the City Council.
Although both sides have taken steps to make amends, the dispute could have a lasting effect on one of the mayor’s original 2005 campaign promises: securing at least 20% of the city’s electricity from renewable fuel sources by Dec. 31.
Despite his demand for an immediate rate hike, Villaraigosa had to settle for one that is both smaller and takes effect three months later than he wanted. With his push for three additional increases up in the air, his green energy goal for 2010 and beyond looks increasingly in doubt, utility officials said.
Since the rate fight, the utility has tabled plans for a $19.5-million contract to purchase wind energy from Utah. And with other agreements scheduled to run out, the renewable energy portfolio could fall back to 12% within four years, DWP officials warned.
“We have contracts that will expire in the next two years,” said DWP spokesman Joe Ramallo. “To replace them, we need to begin planning now and have an adequate revenue stream to support them. We cannot simply turn a switch on and off…to reach our targets.”
That warning has cast a shadow over the DWP’s announcement that during the month of March, the utility secured 20% of its electricity portfolio from renewable power, according to preliminary estimates.
The City Council has until Tuesday to change its mind about the compromise plan to increase rates by 4.8% on July 1. But Villaraigosa is already working to put the rate dispute behind him, acknowledging in his recent State of the City speech that the disagreement had become too negative.
Villaraigosa has repeatedly warned that the DWP needs money because it has been overspending from a fuel account by a rate of $6 million per week. On Friday, he argued that he and the council should work together to create a ratepayer advocate who would show whether the utility truly needs more money.
“There is no question that with the kind of deficits that we’re looking at, that is the approach both the council and the mayor have to take,” he said.
The shortage of money to pay for the mayor’s renewable energy plans can be traced back to changes made in 2006 by the Villaraigosa administration to a little-known surcharge added to customers’ bills.
When it was established in 1978, the surcharge — known as Energy Cost Adjustment Factor — was supposed to shield the utility from dramatic swings in the market price of coal and natural gas, passing those unexpected costs directly to ratepayers. The size of the surcharge was frozen in 1997, during the administration of Mayor Richard Riordan.
When he campaigned in 2005 against incumbent Mayor James Hahn, Villaraigosa argued that the DWP should get 20% of its power from renewable sources within five years. Hahn had the same goal, but wanted it done by 2017.
Looking to achieve Villaraigosa’s more ambitious timeline, the mayor’s appointees on the DWP board made a pivotal decision in 2006, deciding to tap the surcharge to pay for not just fossil fuels, but the cost of his ambitious renewable power program and the utility’s energy efficiency initiatives.
At the same time, board members put in place a mechanism that allowed them to increase the surcharge by no more than 0.1 cents per kilowatt hour every three months, if the money was needed.
The council signed off on that plan weeks later. Starting in October 2006, the DWP board approved 14 consecutive quarterly increases that helped the utility buy wind power from the Pacific Northwest, geothermal power from Mexico and various other sources of renewable energy.
Four years later, a city-hired consultant concluded that the surcharge had become a grab bag for DWP expenses, making the cost of each initiative difficult to determine. An even sharper critique came from former Interim General Manager S. David Freeman, who blasted the decisions of 2006 earlier this month, days before he stepped down.
Because the board had limited the amount that the surcharge could be increased, the DWP lacked the money to pay for its various policy commitments, he said. Those limits allowed the DWP to be “set up for failure,” he told the board at its April 6 meeting.
Freeman also questioned the wisdom of paying for the mayor’s renewable program — a discretionary undertaking that involved the acquisition and development of new power plants — out of a fund set up to cover swings in the market price of fuels that the DWP has no control over.
“We’re not facing up to the enormity of the hole that we’re in, and the responsibility has to be shared by everybody,” he said.
Former General Manager H. David Nahai, Freeman’s predecessor, defended the 2006 decision, saying the utility wanted to limit the amount that the surcharge could be increased to shield ratepayers from harm. But he acknowledged that the limit on the size of the increase may have been too strict.
Sarah Hamilton, the mayor’s spokeswoman, said that at the time the decision was made, DWP officials believed the quarterly increases imposed on ratepayers would be enough to pay for fossil fuels, conservation programs and the mayor’s renewable energy initiative.
By 2008, however, former DWP Board President Nick Patsaouras had become increasingly convinced that the utility was not confronting the true cost of the renewable program, which included the purchase and development of solar and wind power.
“We should have dealt with the deficits much earlier than we are now,” said Patsaouras, who stepped down nearly two years ago. “But I don’t think anyone realized how expensive the renewables would be.”
As he pushed for higher rates over the last two months, Villaraigosa sided with a city-hired consultant, which concluded that the surcharge should be increased by more than 50% over 12 months. The mayor also said some of the proceeds should help him lay the groundwork for his latest promise, offered during his 2009 inauguration speech: reaching 40% renewables in 2020 and weaning the DWP entirely off of coal.
If the utility fails to comply with state laws that will soon crack down on the usage of fossil fuels, it could be hit with fines of $300 million in 2012 and $600 million in 2013, the mayor said.
That focus on carbon fines was applauded by Rhonda Mills, who represents the Clean Power Campaign, a major backer of Villaraigosa’s package of rate hikes.
“It’s either pay now or pay later, and he gets that part,” she said.