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.
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A Seattle City Light crew at work.

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.

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'ꀙs and the city'ꀙs 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'ꀙt 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'ꀙs overhead costs.

Overhead costs are calculated by the city and include expenses that do not clearly support the City Light'ꀙs 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'ꀙs 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'ꀙs 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.

While three reasons for the rate increase were cited, the need to show more operating margin to protect the city's credit rating appeared the most dominant. Council's central staff offered the council several scenarios that made clear that preserving our credit was very important. The staff analysis also noted in the executive summary that City Light had underestimated their income from power sales every year for the last ten years. While not stated in words, the comment leaves the impression anything different might be unlikely. The analysis did not discuss what City Light intended to buy or build that would require borrowing large sums of money. If City Light isn't borrowing money, their credit rating isn't as critical.

The effect on Seattle's bond rating is a somewhat complicated financial decision that normally would be carefully scrutinized by the city's finance department along with City Light administrators. In this case, the city council relied on the advice of City Light and not the finance division. Dwight Dively, the director of finance at the time, was informed what that decision would be, but not asked to advise. We don't know why that choice was made, but perhaps it's because Dively had been brought in by Nickels to help formulate Nickels recommendation of a lower 8.8 percent increase and maybe the Council thought they knew what he would recommend, or they might have thought they would demonstrate their independence or power now the Nickels reign became history.

Mayors and councils through the years clearly have advised on power policy and rates but haven't micromanaged the utility. Except for not re-appointing former superintendent Gary Zarker, the council has shown some restraint. City Light is the poster child of municipally owned power companies. They generally get what they ask for and few politicians have the horsepower to question them.

But noting stays the same. We are in a recession, climate change demands a response, and just as important is how much energy we use and how we generate it. Even with conservation, we invent more and more devices that demand power to operate. The electric car imagined as a solution to reducing our carbon footprint will need power to charge its batteries. Our wide-screen televisions and new industries of computer server farms, with vast memory banks for telecommunications, hog power big time.

While all this is happening, the sources of much of our power are aging, along with much of our power grid. The new reality, though, is that we will need new power sources and new, smart power grids in the future. Environmentalists aren't keen on new dams because of damage to salmon habitat. With an almost impossible approval process for new nuclear power plants, we may not see another one in the Northwest for half a century. The only other options are solar, geothermal, tidal, wind farms, and, of course, conservation.

City Light has argued over and over that we had lower rates than most cities. Very true, but it isn't because Seattle City Light is better managed, it's entirely due to the sheer good fortune of our geography and ability to tap hydro power. 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 to build new power grids and renewable energy sources, and to maintain what we have now. There would have been little or no need to borrow money and hence no need to pay high interest rates.

One thing the auditor's report didn't do that City Council might consider is comparing public and privately owned power. While difficult, there are some very tempting comparisons.

The closest comparison is Puget Sound Energy (PSE), the other local utility, which supplies power to more than a million power customers. City Light currently has 1,732 employees serving 390,000 customers compared to half as many employees as PSE.

Comparing just the electric power division of PSE with Seattle City Light, City Light has lower rates and a better service record. Both utilities have major programs in power conservation, rates for low income customers, and hydro-electric dams. Both are invested in wind farms and are focused on capturing more renewable energy.

While Seattle has a very compact power grid, PSE, a for-profit company, operates in nine Washington counties. A good many of PSE'ꀙs 1 million power customers live in rural or suburban areas, where weather and windblown trees take out power lines on a regular basis. PSE gathers 42 percent of its power from hydro, but they also own gas, oil, and one coal fired generation plant in Montana.

Where the rubber hits the road, Seattle City Light'ꀙs 2008 rate for the average residential customer was about 6.3 cents per kilowatt hour while PSE's rate in 2008 was about 9 cents per kilowatt hour. Since PSE is a for-profit company, the higher rate would partly reflect the need to provide profit to stockholders. Seattle City Light is wholly owned by the citizens of Seattle and they get no dividends to reflect their ownership, other than lower rates.

When the rate increase of 13.8 percent, approved in November, is applied to the Seattle ratepayers, their cost jumps to around 7.3 cents per kilowatt, a bit closer to PSE'ꀙs 9.1 cents but still cheap by comparison to the rest of the country. It's interesting that PSE had asked the Washington State Utilities Commission for a rate increase but was denied, while Seattle City Council was more generous with a rate increase.

The most intriguing question the five council members who voted to increase rates didn'ꀙt ask, is why the 1,732 City Light employees serve only 390,000 customers while for-profit PSE provides very similar service with half the number of employees? PSE has nearly three times the number of customers. PSE with a staggering 6000 Square Mile area and thousands of miles of power lines to maintain along with dams and investments in new green power, provide that power to two thirds more customers than Seattle and do all this with half the number of employees. The million- dollar question: if Seattle City Light'ꀙs employee-to-customer ratio were comparable to Puget Sound Energy, would our utility rates be much lower?

City Light would argue their level of service level is higher (fewer outages) than PSE. Very true, but City Light has only a fraction of the service area, fewer power lines, and millions fewer trees to fall on power lines in wind storms.

Carrasco pointed to deferred maintenance as part of the need to increase rates. Since some of that maintenance dates back to before Carrasco was hired, we are left with the conclusion that needed work was not done in favor of offering lower rates, using the money to hire more staff, or provide higher salaries. Fiscal conservatives will certainly ask if prudent management would have asked for a penny or two more per kilowatt for decades before and set it aside for future maintenance and power generation. While no responsible administrator or politician would suggest maintenance not be done, it raises still another question.

Is all of the maintenance work properly labeled? We are told that high-density growth areas, like Vulcan's development around South Lake Union, required new, expensive underground power distribution grids and transformer vaults to meet higher demands for power. If the rate increase is taxing all ratepayers to serve new development instead of using development fees like other jurisdictions, then it'ꀙs a fair to ask why. The state auditor agrees ratepayers are picking up the tab for work developers should be paying.

Without experience or training in finance, city council members rely on City Light's top management team (whose 2008 salaries amounted to $14,321,189) to make high level financial and power analysis decisions. To quote again from the city news release, "Due to the slumping economy and decreased demand, City Light will fall well below revenue projections from selling surplus energy." What might be puzzling about this comment is that Seattle City Light, along with most other power utilities, has moved aggressively toward energy conservation practices. Of course less power will be used and purchased from Seattle City Light. It's a challenge for the average citizen to comprehend the highest-paid administrators in the city didn't foresee that the more we conserve, the less we will sell.

Did the city council members who voted to increase power rates know that ratepayers were in reality being taxed rather than paying just for the electricity being used? In the end, the bean counters rule the day. As the public, we have no idea whether we have been paying too much or too little for years. Maybe we would not have deferred maintenance and would have set aside enough money to develop new alternative energy sources if we had for years paid just a penny more per kilowatt.

Finally, could City Light have performed as efficiently as its private sector counterpart? Again we don't know.


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