City Light audit: Are rate games being played?
City Council approved a double-digit rate increase late last year on a close vote. Now, a state performance audit raises more questions about what the rest of city government puts into City Light's rates.
Kent Kammerer/Crosscut
A few months ago, in a rare divided decision, the Seattle City Council voted 5-to-4 to grant a 13.8 percent rate increase to Seattle City Light. The vote was unusual because Seattle progressive legislators aren't known for expressing divided opinion. Most votes are 9-0 or 8-1.
The large rate increase became even more interesting with the release on Tuesday (March 16) of a state auditor's performance audit of Seattle City Light. Observers had wondered why City Light had pressed the council for a rate increase if they knew the auditor's report might produce valuable information useful for such a decision. City Light was certainly aware of the audit, and the State Auditor's Office had released information to the public in November 2008 about the upcoming review of Seattle City Light.
But were all the members of the council aware of the audit? With council central staff doing research, one would assume the council members themselves knew about the audit. But it's puzzling that the council press release on the rate increase made no mention of an audit, and the majority of the reason for moving quickly was described as the need to protect City Light’s and the city’s bond rating along with providing revenue to compensate for lagging power sales.
City watchers have become curious why the quick rate increase just before an audit? Did the city know something and want it over with before the public started asking questions?
The reality is that City Light is, and has been for years, a culture of its own, the elephant in the room so to speak. It is the nature of publicly owned power systems. Private power companies like Puget Sound Energy are somewhat more straight-forward operations. They are in business to make money. They create a product and sell it hoping to reward investors.
Public power, on the other hand is quite different. They aren't about profit, but seem to be about many other things. They are also about, salmon, renewable green energy, the recession, trading power futures, steel mills, aluminum plants, irrigation, new low- or no-tax server farms, global warming, conservation, creating environmental businesses, changing public behavior, and — not to be forgotten — making elected officials look good by having low power rates.
The real story isn't the rate increase or the auditors' report but how the culture of a public utility grows into an a very big fat elephant and becomes an entity very different than just a supplier of power.
Just what did the audit tell us? First, like all reports it was long and technical. And, in general, it speaks very favorably of City Light. There is a section where the city could respond to the auditor's conclusions. It did point to efficiencies that could be maximized and, in only one area, did the report point to a set of practices that might upset the public.
Oddly, the potentially upsetting activity really isn’t something that City Light did, but something the city itself does. Here is how the report puts it, in the understated language of an audit:
City Allocations of Indirect Costs: Some city departments are not charged their fair share for city services and some Ccty services charged to City Light are questionable. Both conditions cause City Light to pay more general government expenses than it should.
City Light is charged questionable general government costs: City Light appears to be paying more than its fair share of the City’s overhead costs.
Overhead costs are calculated by the city and include expenses that do not clearly support the City Light’s operations, such as the Mayor, City Council and City Clerk departments. This may shift general government costs onto City Light and its customers.
The full report can be found here.
What does it all mean? It means that the City cooks the books and bills City Light for expenses that would normally come from the general fund. City Light must then recover that cost from ratepayers. The practice, in essence, uses the City Light utility as a taxing system. You aren't paying just for your power you are paying for overhead from other city government expenses that should be operating within their revenue budgeted from the general fund. The accounting sleight of hand makes city spending look better. In the private sector it's like padding the expense account.
The many people new to Seattle might be interested in how the elephant (City Light) became so big, and why our power rates are cheaper than many other parts of the nation.
When Seattle City Light was created, it was a response to a populous movement. While competition tends to keep private enterprise in control, monopolies can result if there is no competition. Unfortunately, the very nature of power generation and distribution make it impractical for two sets of distribution grids and dams to operate in the same physical environment. Seattle decided to own and operate its own system.
By reason of geography, with access to clean renewable energy from hydroelectric sources, Seattle's own dams, along with the Bonneville Power Administration dams, produce some of the lowest rates in the nation. Our rates are three times lower than New York and Seattle leads many other utilities in conservation and carbon-free power. Seattle is both cheap and green.
We got cheap power and didn't ask too many hard questions on how efficiently City Light was run. City Light enjoyed high wages at all levels and the number of employees would rise slowly through the years. Nepotism wasn't unknown. Friends and relatives of mayors and connected people could sometimes get the wife’s college roommate from Radcliffe a job at City Light.
While the auditors were at work, Jorge Carrasco, the head of City Light, and his management team were able to convince City Council that rates needed to go up far beyond what outgoing Mayor Greg Nickels had requested.
According to the council’s news release, the decision was rationalized on three primary issues. Council members believed City Light's credit rating and ability to borrow money would be damaged unless they could demonstrate more income. Second, they were told the extra money was necessary to make up for the revenue losses from the sale of surplus power, some of which may have resulted from energy conservation programs in other utilities. And, last, council members were told that there was a huge amount of deferred maintenance needing attention. While all three reasons for a rate increase convinced five of the council members, four others obviously weren't so sure both the rationale and amount of increase was necessary.
Jay Lapin, a former General Electric executive and a previous member of a City Light citizens advisory committee, said turmoil in the wholesale power market was likely to continue and that the rate increase was likely necessary. Responding to a question about deferred maintenance he said that while City Light executives always mentioned the need to insure maintenance was included in the budget, they didn't point to any emergency need or serious deferred maintenance. As a former executive in private industry, he felt that City Light administrators faced very difficult decisions that were influenced by politicians, an inconsistent snow pack affecting generating capacity, and the very uncertain nature of anticipating power needs. It's a very unpredictable business.
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Comments:
Posted Thu, Mar 18, 9:04 a.m. Inappropriate
As a former member of several City Light rate advisory committees, and previously as a SCL employee, I appreciate the numerous good points made in today's article on the recent rate increase.
We've known for some time that City Light rates have included overhead expenses that should be paid from the city general fund. The piece could have referenced, for example, the infamous street light case, in which a former SCL manager filed a court case charging that SCL had incorporated street light costs in its ratebase. The court ruled that this had in fact been the case, and ordered SCL to pay refunds to ratepayers. State law is very clear about the distinction between "rates" and "taxes", and the court ruled accordingly.
It's also clear that the SCL payroll is padded with more (and higher) staff salaries than necessary. I recall that during my time as an employee there, working in the old City Light building on Third Ave, the elevators were regularly full of staff going out for coffee or bringing their Starbucks cups back to their desks. This is still probably true in the large city hall tower, although it's not possible to distinguish there between SCL staff and other city employees.
Lastly, the point is well taken that an additional penny or two per kilowatt hour over the years may have precluded the need to borrow for maintenance funds. This in turn would have made moot the excuse that the SCL bond rating justified the recent rate increase.
Posted Thu, Mar 18, 9:37 a.m. Inappropriate
with the allocation of general City of Seattle expenses to City Light, who serves many OUTSIDE the city, it causes those not living in the city to pay in effect, a city tax, but without services or represenation.
For years I paid an almost 11%hidden tax to Tacoma City Light, for running Tacoma City gub'mint, but did not live inside the city.
Now I see that as a Shoreline resident, I get to pay for my city's operation, and chip in on Seattle's too.
What was that old saw I learned in High School civics class? Something about taxation without representation, but I am old, and have CRS, so I could be wrong.
Not!!!!!
The Geezer
Posted Thu, Mar 18, 5:28 p.m. Inappropriate
The article makes several good points, but a few are off base. First, PSE has fewer employees because they use contractors for a lot of their maintenance work. If you counted the contractors, the number of employees would be roughly equivalent for the size and service area covered. Second, PSE executives earn substantially more than City Light executives. Our neighboring public power utilities (Snohomish PUD and Tacoma) pay more than Seattle. Many top executives have left City Light for just that reason.
Third, Seattle elected officials have been so anxious to maintain low rates for decades that they sacrificed investment in maintaining the utility's infrastructure. Most of that infrastructure is 50, 60 or more years old. Those short term gains have now forced the utility to invest in long over due upgrades. How else can we provide electric power to the high rises downtown, the UW, the ever growing high tech sector, hospitals on First HIll, the development of South Lake Union, light rail, etc. Like them or not, they all require power. The incredible growth Seattle has experienced over the last decade requires investment in all utilities. We all take these essential services for granted until they aren't there. Remember the out cry several years ago when a wind storm took out power for tens of thousands?
Finally, City Light's low rates are subsidized by the sale of excess power on the open market. The city's policy is to generate more power than necessary for the utility's own needs and to sell the excess as a way to keep rates low. They represent over 20% of the utility's revenues. We've had a succession of "good water years" combined with high energy prices. (City Light's excess electricity is sold to utilities in the southwest in the summer when air conditioning demand skyrockets.) Risk is an inherit element of this strategic policy. So, we're now in a recession, demand for and the price of power on the open market is down, and this year's snow pack is minimal. The only way to make up the loss of our subsidy is to increase rates - at least temporarily. This isn't rocket science.
Posted Fri, Mar 19, 11:30 a.m. Inappropriate
This article states:
"Critics of City Light have asserted for years that a penny more per kilowatt for the last 20 years would have set aside enough money..."
The critics could have stated that it would have meant a 20% increase in rates 20 years ago to avoid a 13% rate increase today.
The fact of the matter is that SCL has cheap rates is because this 'green' city loves exploiting the natural resources in a far off distant county to subsidize its electrical rates. Hydro power is greener than coal, but if you subsidizes its costs, people use more of it and there is less greener hydro power to sell and more of a need for coal to generate electricity for the rest of the country.
Geezer -
Stop crying, you can't get your power from anywhere else cheaper. Get your own city to provide you power if you don't like buying cheap SCL power.
Posted Sat, Mar 20, 8:39 a.m. Inappropriate
City Light has always been a child of politics. In the 1920s, the City Council tried to redesign the Skagit River hydro project. In 1931, Mayor Frank Edwards was recalled by voters and rate payers for firing Department of Lighting Superintendent J.D. Ross. For the next 35 years, City Light became a third rail of politics. In the 1960s, reform members of the City Council started asking questions and learned that City Light was spending money set aside to bury overhead wires in residential areas for a new dam. The superintendent bought an island for a nuclear power plant - then told the City Council. In 2002, Superintendent Gary Zarker's tenure was not renewed by the City Council mostly to show the mayor it still had some say in municipal government.
The question is not whether City Light should be a for-profit enterprise (not!), but whether a city council is qualified to be a board of directors for a complex industrial enterprise. Perhaps City Light needs to be a public utilities district with a dedicated board of commissioners who specialize in its operation.
Posted Sun, Mar 28, 1:45 p.m. Inappropriate
Charging and saving "a penny more per kilowatt" over the past years to pay for future maintenance and construction would have been criticized by any audit. That's because utility rates paid by current users must be tied to the service received by those same current users. Generally speaking, you can't overcharge current ratepayers for something that will primarily benefit future ratepayers. That's why all utilities take out loans to fund projects that will benefit future users. It's not because they weren't thinking ahead. Furthermore, public utilities such as City Light can issue low-risk, tax-free bonds to fund their capital projects. That's a win-win for the ratepayer and the bond investor. The author should have done more homework regarding this issue as well as numbers of employees at City Light vs. PSE (see SteveC's comment above). However, I do agree that a different management model could benefit City Light (as Sawman suggests above--take a look at Tacoma Power's structure). Unfortunately, Seattle City Council often seems more interested in getting reelected through low power rates than in actually managing the power utility in its care.
Posted Sun, Mar 28, 10:37 p.m. Inappropriate
Excellent analysis, Kent. My gut feeling is yes, rate games are being played. Any time there is a lack of accountability, and the public sector often has more than the private sector, it's too tempting to play such games. Plus, I know people who work for the city, and problems such as these are fairly rampant. Having independent performance audits would help in assuaging the public's fears.
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