LADWP’s Ron Nichols: We Need Capital Investment

Ron Nichols: Former Deputy Mayor Austin Beutner was instrumental in talking me into taking this position. It’s been challenging, as I anticipated it would be, but I am really pleased to be here. 

The whole utility industry, whether it’s power or water, is facing the biggest transformation challenge that I think we’ve ever seen. Los Angeles for some reason seems to be the poster child for this challenge as everything hits us at the same time. We’re at the epicenter of dealing with changes from legal mandates and to infrastructure requirements. On the legal mandate side, for water we have been putting off compliance with safe drinking water efforts. That’s covering the reservoirs and how we treat our water and the standards associated with that. 

These are huge investments just in the next 12 months alone, just to comply with safe drinking water laws. We’re looking at $600 million of contracts that we’re going to be signing in the next twelve months. That’s the most intensive capital program that our water system has ever been though, by any measure that you want to use. We can’t get around that. 

On the power side we have the previously stated goal of getting to 33 percent renewable energy sources by 2020. We have a law as of April of this year mandating this, so that has taken all of the ambiguity out of that. It’s also taken all of the flexibility out of it. 

On top of that, we have the elimination of one-stroke cooling. That’s ocean water. Our three coastal plants, which are the center of the reliability of our system, along with another plant in the valley, currently use one-stroke cooling. They are old plants. They hold ocean water, and this has very deleterious effects on marine life. So there is a federal law and the state Marine Source Control Board which both say, “you will eliminate all of that by 2020.” I don’t think we can do that by 2020. So we went through a process a couple of months ago and agreed on a more relaxed schedule. For us, though, it’s not relaxed at all because we will be replacing every single one of those nine different units at those three different power plants between now and 2029. We had the groundbreaking for the first stage of that just yesterday. That is going to cost $2.2 billion. Even though that is stretched over 18 years, that’s an incredible amount of money. 

We have Air Quality Management District Emission Requirements that we have to deal with.  Up in Owens Lake we have a water agreement. Most people don’t realize that we have a major investment in reducing dust created by almost 100 years of pulling down the Owens Lake level. So far it’s cost over $1 billion, and it’s nowhere near done. 

All these are the types of things over which we pretty much have no control. We’ve stretched them out just about as far as we can, and it’s hitting us very hard right now. We’re also dealing with the requirements of our power system and our water system, both of which are around 100 years old. We want to invest in those, replacing things that need to be replaced. Those are all things that we just simply have to do. On top of that, there are a number of things that we want to do, things that we should do and if we don’t do now we’ll be paying more money later for it. We should also do even more than we were talking about in enhancing our infrastructure here, trying to make sure that it doesn’t get to be more and more of a reliability problem on both the water and power side. 

And we’re dealing with yet another: SB1368 was passed back in 2006, and it forbids increasing the percentage of your power that comes from coal in your existing service agreements contract. We get about 40 percent of our energy from coal. Both plants are out of state. So we have obligations to get out of those by a time uncertain. 

We have been putting off rate increases for a number of years, particularly on the water side. On the power side there was trouble last year with the rates. We didn’t get the adjustment that we were looking for, so we’re still trying to play catch-up on that. 

Earlier this year I had been confident and hopeful that maybe somewhere around November we would be able to get a rate adjustment, a rate adjustment that we should have implemented at the beginning of this year. We couldn’t get to it, however, until we cut costs to get as lean as we possibly could. If we had that rate adjustment a month from now, it would be about a 4 percent rate increase for the balance of this year in the water system and an average of over 5 percent per year for the next three years. 

We are challenged a bit more on the power side than we are on the water side in terms of the overall increases we are looking at. It would have been about a 6 percent increase for power for the balance of this year and a total of 17 percent cumulative increase over a three-year timeline. Those levels of rate increases are just enough to cover the basic business needs. Those levels will give us enough revenue to comply with all of those requirements, regulations, and legal obligations, but they are not enough to replace some of our aging infrastructure on both the water and power sides. 

On the water side, we have 7,200 miles of water pipelines in Los Angeles. We are presently replacing them to the tune of about 15-25 miles a year. The problem is that a growing portion of those 7,200 miles of pipes are over 100 years old, and they were never designed to last for longer than 100 years. We have good proof of that because these pipes are breaking to the tune of three or four a day. Some of them are little, and some of them are too spectacular for our liking. We’re getting really good at fixing them, and we’ve spent, over the last couple of years, on the order of $20 million doing it. We’ve also settled on almost $8 million worth of claims of damage that we’ve done to homeowners and businesses associated with those breaks. We’re getting really good at processing claims, but it’s not the right path to be going down. 

We want to conserve more water. L.A. has done a great job; we have the lowest per-capita water usage of any major city in the United States now. Most people find that hard to believe. But we need to do more instead of continuing to rely more and more MWD water. We want to have more local supply in terms of recycled water and storm water recovery to displace purchases from the MWD that continue to rise in cost every year. 

On the power side we’d like to do more energy efficiency, but we’ve had to cut back. We spend half the amount per year that the Sacramento Municipal Utility District spends on energy efficiency today, and they are half our size. That’s not right. We’re the largest municipal utility in the country. We should be doing what we want to be doing, not just what we are required to be doing. In addition to being required to phase out coal, we should be doing more with energy efficiency. It’s a cheaper way to go. We want to do a better job on renewable energy mix, and we want to do a better job on funding improvements in the reliability of our power system. We do have a need to start replacing our old resources. Do we just wait until the law says to do it, or do we try to get ahead of the game? 

Those are the types of things that we’ve asked people throughout L.A. over the last three months. We’ve been to every corner of the city, and we’ve gotten a lot of good feedback. Sometimes we get together with eight or nine people; sometimes it is with a hundred. More than 1,600 surveys have been received either in person or online, and there are about 600 individual comments that we captured during the course of those discussions. We asked for input on the pipeline, on the local water supply, and on water conservation. Local water supply, developing recycled water options, capturing stormwater, and cleaning up the San Fernando Valley aquifer all scored very high on our surveys. People want us to do that. 

When we introduce these things, it’s more than just asking, “Do you want a cleaner environment?” Of course everyone would raise his or her hand for that. We laid out the costs. We laid out what the typical bill will be for an average water user, an average power user, a higher water user, and a higher power user. Each of these items ended up costing around 20 to 75 cents a month more. Cumulatively that’s about a $1.75 to about $2.25 a month. That’s one year. Then the next year it would go up that much again. Three years out on the water side you might be looking at $6 to $8 a month more than what everyone is paying today. That’s the price of a couple of lattes. 

The power side is a little bit more. We asked, “where do we want energy efficiency, and are we interested in a more robust renewable portfolio?” Should we build and own or have long-term rights to specific power resources? It costs more than going into the market and entering into a purchase agreement. It’s the difference between buying and renting. It costs you in the short-term more to buy, but it saves you in the long term. We also asked, “what should we do with power reliability? Should we be putting more dollars into that, and should we be accelerating pole replacement?” Most of the responses were similar to what we saw on the water side. People said, “Yes, please do that.” 

We voted last March on whether to have an independent ratepayer advocate, and that initiative passed overwhelmingly. The city council debated and now finally has a committee formed that had their first meeting recently. So I am confident that before the end of this calendar year we will have a ratepayer advocate on board, and I’m confident that the city council will adopt a motion that says, “We will not consider any rate increase from DWP until such time as that ratepayer advocate is on board.” Of course, they control the timeframe for which that ratepayer advocate comes on board, an interesting conundrum. I have been supportive of that since the day I got here. It creates an opportunity for somebody to understand what we’re about, to understand our challenges, and to focus on that while the city council concentrates on other issues. I’m actually welcoming, as odd as that sounds, to having a third party review what we’re doing if it gets this done. 

The environmental no-coal lobby actively attended all these meetings. We’ve received pushback from the business community questioning the costs. We are looking at what it’s going to take to replace our Navajo coal plant, which has to be decommissioned at the very latest by 2019. Truthfully, we don’t know right now what the cost of abandoning coal will be. We do intend to move forward and to find an explanation of what that cost will be and what it will mean to us if we change before 2019. 

DWP was a partial owner of the Mohave coal plant. We have a 160-megawatt piece of that plant, which is closed. We and the other owners were responsible for the costs of decommissioning that pant. We’re still paying for the decommissioning, but that is pretty much done. We own a share of the Navajo coal plant, free and clear—just under 480 megawatts of base load coal that comes in at a cost of around 4.5 cents per kilowatt hour. The plant has helped to keep our rates down, but it’s also our most carbon-intense resource out there. Do we sell our share of that before 2019, or do we wait until 2019? In either case by 2019 it’s gone. 

And then we have a much bigger plant that we don’t own. We have a share of the Intermountain Power Project in Utah. We get about 44 percent of that under a long-term contract. There are 36 Utah entities, most of them municipal power entities, and six more in California that use that plant. We need to be out of that by 2027. There is a strong interest in having us out of that much earlier. The mayor says we should get out by 2020. We don’t believe that we can actually get out by 2020 whether we want to or not because we don’t control that plant.

David Abel: How many megawatts is L.A. taking from Intermountain?

Ron Nichols: We have a minimum obligation to take 800 megawatts. There are another 400 megawatts of that plant that the other municipal utilities, principally the ones in Utah, have a right to take. Generally, they put that power back to us, and so most of the time we are getting between 1,000 and 1,200 megawatts out of that plant. We’re taking less per day out of it, however, than we could because we’ve cut back as we’ve ramped up our renewable portfolio. 

David Abel: What percentage of L.A.D.W.P.’s total power demand is that equal to?

Ron Nichols: It’s 40 percent of our total energy. We’re at 40 percent coal, about 25 percent natural gas, 20 percent renewables, 10 percent nuclear, about 15 percent hydro, and a little more between that. By the time we leave coal that 40 percent coal is going to swing towards natural gas, which will then be close to 50 percent energy supply. Renewables will of course be up to 33 percent; energy conservation will be about a 10 percent slice of that. We anticipate hydro and nuclear remaining about the same. This means that we need to keep making program and project cuts.

We’re cutting our energy efficiency program again. We did it last year, and we’re doing it again. We’re cutting our water conservation program back from where we want it to be, eliminating some programs and scaling back on others. We’re cutting back on our reliability programs. We’ve had to cut plans for going from 150,000 feet of pipeline replacement every year, which is about 28 miles worth out of 7,200 miles of pipelines, to about 90,000 feet per year. Even at 150,000 feet, that would mean replacing the whole piping system every 200 years or so for an asset that is only designed to last 100 years. At a rate of 90,000 feet per year it would take 430 years to replace the entire piping system. That’s a 430-year replacement cycle for something that lasts 100 years.

We are going to test the markets with regard to how low our national reserve can be and still not get a downgrade. It’s not a fun position to be in. But we’re not going to make any of those strategic investments this year. I’m hopeful that we’ll go through and get some reasonable adjustments that we can all live with. I think these are moderate adjustments. These are five or six percent per year adjustments. I know nobody wants to make them, but I think if you compare what Edison is doing, what PG&E is doing, what a number of the public power and water agencies are doing, we have a comparably lower percentage increase than other providers. 

To conclude, we’re trying to do everything we can to finish what we have to do. We’re trying to make plans. We’re trying to do the planning work right now so that when we do go forward, get some adjustments, and have a little bit more revenue we can resume some of these programs.