Greece and Los Angeles are up against a financial wall. Los Angeles had its bond rating cut on April 7. Greece managed to hold out until April 9. Greece has endured public employee strikes as it has attempted to reign in bloated public payrolls. Los Angeles Mayor Antonio Villaraigosa drew the ire of the city's unions and city council opposition in proposing two-day a week furloughs for city employees.
A Bankrupt Los Angeles?
Most recently, the context of discussions has been an expected $73 million payment to the city from the Los Angeles Department of Water and Power (DWP). Mayor Villaraigosa raised the possibility of a city bankruptcy if the payment was not received.
The Mayor attempted to encourage the city council to approve an electricity rate increase, which was sought by DWP. In support of the rate increase, Villaraigosa submitted a report to the city council saying that "Council rejection of the DWP board’s action [to increase rates] would be the most immediate and direct route to bankruptcy the city could pursue."
DWP Interim General Manager S. David Freeman added such action would lead the "utility would think twice about sending" the money o to the city. Despite these warning, the city council then rejected the proposed rate increase.
The Price of Renewable Energy
For its part, DWP says that that the rate increase is necessary to cover the costs of investing in renewable energy sources, as required by state and federal regulations. They cited a Mayoral directive to increase generation from renewable sources (solar and wind). Right now the bulk of Los Angeles’ power comes from fossil fuels, much of it from coal-fired plants outside the state.
Switching from this relatively inexpensive energy is proving very expensive. Indeed, the rejected rate increase is just the first of four planned hikes. The result, if all four increases are ultimately granted by the city council, would be to increase residential electricity bills up to 28% and commercial electricity bills up to 22%.
How Much Will the People Pay?
There is a much larger story here than the immediate financial difficulties faced by the city of Los Angeles. It is clear that council members are concerned about the impact of rate increases on their constituents. It is a particularly challenging for consumers in the city of Los Angeles. Unemployment is high, with Los Angeles County consistently above the national average The city, with its higher concentration of poverty, is likely to be somewhat higher. Many households are having difficulty paying their inflated mortgages and hardly in the position less more for electricity. The city has more than its share of poverty. And, finally, the city's lack of business competitiveness is so legendary that it repeatedly ranks near or in the Kosmont “cost of doing business” surveys.
This larger story is likely to be played out in communities around the nation, as politicians, such as the President, who expect and perhaps even would favor that electricity bills "skyrocket." One would think rising expenses in any critical sector are a "non-starter" in the presently hobbled economy. It will be interesting to see what eventually gives in Los Angeles those who advocate for consumers (including some on the city council) , or those, including the DWP and its unions, who wish to add additional costs to the budgets of those already in distress. In the longer run, this will not be sustainable, in Los Angeles or anywhere else, because the public appetite for higher prices is not unlimited.
But the behavior of DWP is a matter of curiosity, regardless of how or why the city of Los Angeles reached its present financial embarrassment.
What if it Were Southern California Edison?
As is indicated from its name, DWP is a publicly owned utility, owned by the city of Los Angeles. Its rate increases are subject to approval by the city council. DWP appears intent on withholding payment from the city because its proposed rate increase have not been approved. Imagine, if instead, the city of Los Angeles were served by a private but publicly regulated electricity utility, such as Southern California Edison (SCE). Imagine further that the California Public Utilities Commission denied a rate increase and that, in response, SCE announced that it "would think twice" about sending some or all of its taxes to the state in response. When DWP officials undertake such a strategy, there is apparently no legal sanction. The legal sanctions against SCE would be manifold. It is a paradox that a publicly owned utility can be less subject to restraint than one that is, in essence, owned by the taxpayers.
Who is in Charge?
But there is an even more curious situation. The Los Angeles Department of Water and Power is, in fact, an agency completely under the control of the city of Los Angeles. The Mayor and the city council represent the sum total of the policy authority over the city of Los Angeles and all of its commissions, departments and other instrumentalities. The DWP board of directors is appointed by the Mayor and must be confirmed by the city council.
Regardless of the Mayor's authority to remove DWP board members, he has considerable persuasive political power, which could be used to encourage a more cooperative attitude on the part of the DWP. This was proven in 1984, when predecessor Mayor Tom Bradley asked for (Note 1), and received, the resignations of all 150 city commissioners, as well as his two appointees to the Southern California Rapid Transit District.
Mayor Bradley then announced a practice that required new appointees to submit an undated letter of resignation upon appointment, to ease removal should it be necessary. This became a bi-partisan practice, also followed by Bradley's successor, Mayor Richard Riordan (Note 2).
The Crisis Passes
Within the last couple of days, the immediate crisis appears to have passed, but the fundamental problems wil continue to fester. The city has found $30 million, the result of higher property tax collections. The Mayor is now asking DWP to pay $20 million, instead of $73 million. However, as Mayor Bradley showed, the Mayor can do much more than "ask."
The Mayor's two-day furlough plan for city workers now has been shelved. Ray Ciranna, the city's Acting Administrative Officer told the Los Angeles Times that: "We are still in a budget crisis, but we will end the year paying all of our bills." Things, however, may not be so rosy for residents facing stiff electricity rate hikes tied to the inordinate costs of renewable energy. Many of them already face financial distress every bit as serious as the city's was just a few days ago. This is one Hollywood movie that, sad to say, we may see repeated in other locations around the country as cities, localities and citizens try to cope with the high costs of draconian “green” energy policies.
Note 1: The author was, at the time, a Tom Bradley appointee to the Los Angeles County Transportation Commission. He was not included in the Mayor's call for resignations.
Note 2: While elective offices in the city of Los Angeles are non-partisan, Bradley was a Democrat and Riordan was a Republican.
Photo: John Ferraro Department of Water & Power Building (City Council President Ferraro was the first chairman of the Los Angeles County Transportation Commission, whose meetings were normally held in the DWP board room).
Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris. He was born in Los Angeles and was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley. He is the author of "War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.”