LADWP Unaffected by Financial Crisis, But Cautious on Future

By Published On: October 24, 2008

Global financial woes have not substantially affected the nation’s largest municipal utility to date and may help increase its renewable supplies. However, as the Los Angeles Department of Water & Power pursues massive investments in renewable energy and upgrading its power distribution system uncertainty looms, according to muni officials. “We are in very fine shape now compared to other entities,” said LADWP commissioner Lee Kanon Alpert, noting that the multi-billion dollar department has only $2 million of its own money “at risk” In other ways the financial crisis is helping the department’s plans to meet 35 percent of its power needs with renewable energy by 2020. That’s because the crisis has sent renewable project developers scurrying to LADWP in search of what the muni’s general manager David Nahai called “financial sanctuary.” In contrast to renewable energy project developers seeking to serve investor-owned utilities–which generally enter contracts prospectively, leaving construction and financing risk to the renewable developer–the muni offers contract arrangements that may prove more workable in today’s sluggish and skeptical credit market. The department still operates as a vertically owned utility and favors renewable energy deals structured on the “build, own, operate, and transfer” model, explained James Caldwell, LADWP assistant general manager for environmental affairs. Under these deals, he said, developers benefit from the federal tax incentives for renewable energy by building and operating plants until those advantages expire. Then the facilities can be transferred to LADWP to own and operate on a long-term basis. Sweetening the pot further for renewable developers, he said, is that the department sometimes pays up front for the power from projects, in effect providing financing for their construction. This arrangement can be very favorable for renewable energy developers because the department can pay for the power in a lump sum by borrowing funds at generally lower interest rates in the municipal bond market. It pays lower rates because interest on municipal bonds is tax free. Nahai said, however, the department is moving with caution given the financial crisis and after seeing sharply higher interest rates on its outstanding variable rate bonds in recent weeks. The prospect of a possible sea change in interest rates prompted the muni’s board of commissioners October 21 to approve rolling over $1 billion in outstanding power system bonds. The refunding, which must be approved by the Los Angeles City Council, is to begin next month. Interest rates have soared on the muni’s outstanding power system variable rate bonds–which at $1.1 billion tally a fourth of the system’s $4.4 billion of outstanding debt. The weekly reset rate on those bonds traditionally has averaged around 1.5 percent. However, that rate jumped to as high as 7.3 percent the week of September 22, LADWP president Nick Patsaouras wrote in an October 10 letter to Los Angeles mayor Antonio Villaraigosa. By October 6, Patsaouras indicated that the weekly reset rate had dropped down to a maximum of 3.97 percent, hopefully indicating “the variable rate debt market may be stabilizing.” However, that rate is still more than twice the historical level. In anticipation of a higher interest rate environment, the muni’s plan to roll over the variable rate bonds would authorize a maximum interest payment rate of 12 percent. But the department would pay that rate only if necessary to meet its refinancing goal of saving at least 3 percent on variable rate debt cost. In another change, the department is considering revising its investment policy to take advantage of new U.S. Treasury Department emergency rules, said commissioner Kanon Alpert. Earlier this fall, the Internal Revenue Service ruled that municipal agencies can purchase their own variable rate bonds and hold them through 2009 without forfeiting their tax exempt status. The ruling gives municipal agencies, like LADWP, a tool “for effectively managing, albeit partially, its variable rate debt exposure,” said Patsaouras. Municipal agencies can possibly save money by selling the bonds in the future if interest rates decline. However, they are limited by the amount of money they can afford to spend to purchase their own debt. LADWP’s board of commissioners also approved a $550 million bond issue for grid improvements in the coming year. The bonds are to help finance $5.7 billion in capital investment planned over the next five years, including $1.86 billion on renewable power and $2.3 billion on upgrading its distribution system. The rest is slated for modernizing existing generating plants and upgrading customer service capabilities. The muni’s plan to raise the $550 million occurs while there is a “backlog of municipal issuances,” Patsaouras noted. He said the department recognizes that “the potential inability to access the credit and capital markets may put a strain on its business operations and may ultimately hamper its ability to continue to fund construction projects.” Accordingly, the department is calling for a number of steps to help municipal agencies. Patsaouras said the department wants the Federal Reserve and Treasury to expand to municipal agencies their commercial paper funding program, which recently was announced to help private corporations meet their borrowing needs. He also called for federal guarantees for municipal bonds without loss of their tax exempt status. Finally, he called for changes at state pension system funds to help support municipalities and for different municipal agencies to coordinate their bond issuances so they do not compete against one another in what is now a limited debt market.

Share this story

Not a member yet?

Subscribe Now