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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