October 10, 2002
Honorable Greg Nickels
Mayor of Seattle
Seattle Municipal Building, 12th Floor
600 Fourth Avenue
Seattle, WA 98104
Dear Mayor Nickels:
Re: Mayor's City Light Review Committee
The attached report represents the work accomplished by the City Light Review Committee
you appointed on May 2, 2002. During the past four months, our six-member group
developed the recommendations summarized below. If implemented, they should bring
a more disciplined and prudent level of oversight to the management of Seattle City
Light.
In the past six years, City Light experienced a period of exceptional volatility caused
by restructuring of the wholesale electric energy market. This changed business
environment was made worse by an extended drought of historic proportions. The
combination of these circumstances forced City Light to purchase power on the
open market at a time when electricity prices were spiraling out of control. This
confluence of negative impacts or, as some say, a "perfect storm," resulted in higher
rates for customers and long-term debt for the utility. There are many individuals and
organizations looking retrospectively at the choices made by City Light and elected
officials during this period. Although we were briefed on policy decisions made in the
recent past, our committee did not attempt to judge the quality of those decisions.
Instead, as you requested, we looked to the future. Specifically, we offer our advice as
to how the Mayor and Seattle City Council can provide oversight of Seattle City Light
that will help ensure the utility makes the best decisions on behalf of its citizen
customers.
Your letter requesting our participation in this committee asked us to focus on four
major strategy areas for City Light: financial strategies; power supply strategies;
risk management strategies; and governance. While attending our first meeting, you
stressed that governance is your top concern. You asked us to look at the other three
strategy areas to determine how they might be strengthened through improvements to City
Light governance and oversight.
We believe you were right to call for a review of City Light governance during this
period of rapid change. What has worked well in the past may not be sufficient for the
future. Past weaknesses in the system, if repeated, could result in severe adverse
consequences. The stakes are high. The risk and complexity of the new market and
regulatory environment could cause ill-formed decisions, and cost City Light customers
much more than ever.
Recognizing this, our committee considered a wide range of options, from marginal
improvements to a complete restructuring of City Light governance. Not surprisingly, we
found we are not alone in this effort. Tacoma and Los Angeles are among the other major
cities examining the governance structure of their electric utilities in light of recent
changes in the industry.
In the process of our review, we acknowledged the inherent strengths of our current
system of checks and balances provided by City Council and Mayoral oversight. Seattle
City Light enjoys a proud history of public power, providing affordable and reliable
electricity to residential and business ratepayers for 100 years. Indisputably,
low-cost electricity has been a key factor behind the City's economic development and our
quality of life. In addition, starting in the 1970s, City Light has developed one of the
nation's strongest conservation and environmental programs.
Through several difficult and controversial periods, the current system for governing
City Light helped make many good public policy decisions. Deliberate analysis and
discussion, even dissension between the Executive and Legislative branches, have served
to develop policies that provide for the long-term well being of City Light and its
customers. This has occurred, however, when both branches of government are fully
engaged and commit the resources necessary for the important responsibilities of
governance and oversight.
Fundamentally, the committee agrees that, at the very least, the current system needs
additional resources and discipline brought to bear on the task of governance. The
following summarizes the committee's ten recommendations for improving the governance of
City Light.
- The Mayor's Committee unanimously agrees that the complex and dynamic nature of the
electric utility industry requires the addition of a strong, independent board,
exclusively focused on City Light policy issues.
Such a board is critical to providing an independent voice regarding utility oversight,
helping to insulate City Light from the short-term political pressures that can occupy
elected officials, and to maintain the utility's focus upon its core mission.
Additionally, this board can bring a level of expertise, experience, and in-depth
consideration of policy issues that elected officials may not have the time or background
to provide. The board should be comprised of highly qualified individuals, from a
diverse range of backgrounds, each of them striving to provide the best-informed,
objective counsel to the Mayor, City Council, and City Light management.
We observed that under the current governance system there is a potential conflict
between preserving the long-term financial health of City Light and responding to more
immediate public policy and political pressures. This imbalance is often caused by the
higher political profile of near-term public policy decisions, such as rates and
environmental impacts. For instance, plenty of loud voices urge low electric rates,
but many fewer thoughtful voices warn of the risks low rates might present in terms of
long-term financial stability, including the levels of debt incurred. An independent
board would help bring balance to this equation by creating a respected, knowledgeable,
and influential body to provide strategic advice, even advocacy, on key policies.
- While the Mayor's Committee unanimously recommends the creation of an independent
board, we are evenly divided on the question of whether this board should possess
governing authority or whether it should be advisory only.
Half of the Mayor's Committee (Craig Gannett, Randy Revelle, and Sam Sperry) believes
an advisory board will address most of the shortcomings in the present governance system.
They recommend an advisory board rather than a governing board because they believe the
Mayor and City Council should retain accountability for governing City Light. An
advisory board preserves the direct linkage between Seattle's elected officials and
the voters who, in effect, are the utility's ''stockholders.''
The other half of the Mayor's Committee (Sharon Nelson, Richard Sonstelie, and Keith
Warner) is not confident an advisory board will provide the required level of expertise,
nor sufficient insulation of utility governance from short-term political pressures.
They fear that an advisory board with no governing authority will be marginalized and
eventually ignored, and will cease to attract the caliber of members required.
Fundamentally, these committee members believe the magnitude of changes that have taken
place and are likely to continue in the electric utility industry mandate a more systemic
change to City Light governance.
Nelson, Sonstelie, and Warner think an independent governing board should be established,
possessing the powers that are usually exercised by corporate boards such as setting
rates, issuing debt, and approving budgets. They believe the board should also have
the authority to hire and fire the Superintendent of City Light. Members of this board
would be appointed by the Mayor and confirmed by the City Council. These
three committee members argue that such a governance structure would better position
City Light for an energy future that will require focused, flexible, and quick decision
making.
Gannett, Revelle, and Sperry disagree with this recommendation. They fear the addition
of an entity outside the current City structure would diminish accountability for City
Light governance. As officials elected by Seattle voters and ratepayers, the Mayor and
City Council should be responsible to them for the governance of City Light. These
three committee members cited examples in Washington State government where authority
has been dispersed to independently elected offices such as those of the Commissioner
of Public Lands and Superintendent of Public Instruction, limiting the Governor's
ability to provide effective leadership and oversight of those critical state functions.
In their view, establishing a new governing board might be an appealing departure from
tradition in response to today's energy environment, but once established, it could
prove to be an impediment rather than an aid to more effective governance. They fear a
new governing board could lose touch with the public purposes and values elected
officials are expected to nurture.
Establishment of an independent governing board with the responsibilities proposed above
would require changes to the Seattle City Charter and to state law, which provides that
the City Council alone can issue debt and set rates for City Light. The entire Mayor's
Committee is mindful of the difficulty of amending the City Charter and convincing the
Washington State Legislature to change state law. Furthermore, even if the Legislature
could be convinced to do so, the committee recognizes the timeline would be lengthy.
- Given the fast-paced changes in the electric utility industry, the Mayor's Committee
believes the creation of an independent advisory board should be pursued promptly.
Therefore, the committee is united in calling for the early establishment of a City
Light Advisory Board, with the recommended requirement that the Mayor and City Council
assess the efficacy of the board within three to five years of creating it.
The Mayor's Committee is united in proposing the City Light Advisory Board be composed
of five to seven members appointed by the Mayor and confirmed by a majority vote of the
Seattle City Council. Board members should possess demonstrated expertise and experience
in one or more of the following areas: business, finance, energy conservation,
environmental protection, energy law, utility operations, and power/risk management. In
appointing the board members, the Mayor should strive not to select one each from a list
of political constituencies, but to assemble the best balance of experience and expertise
to advise the elected officials and utility management on policies related to City
Light's finances, power supply, and risk management.
To increase the likelihood the advisory board's advice will be given due consideration,
the ordinance establishing this board should include the following language:
- "The Mayor, Seattle City Council, and Superintendent shall give every serious
consideration to all recommendations of the advisory board."
- "Should the Mayor and/or City Council determine it is necessary to reject or modify
any written recommendation of the advisory board, the Mayor and/or the Chair of the
Council's Energy and Environmental Policy Committee, or successor committee, shall,
within thirty days of rejecting or modifying such written recommendation, explain in
writing why the advisory board's recommendation is being rejected or modified."
The board's recommendations and the Mayor and/or City Council's reasons for rejecting
them should be publicly available, including posting on the City's website.
Once the board is formed, it should work with the Mayor and City Council to reassess the
role of the Rate Advisory Committee. The Mayor's Committee believes there will be an
important need for customer review of rate recommendations that can complement, but not
be replaced, by the work of the advisory board.
The other recommendations of the Mayor's Committee, which follow in this report, should
also be put in place promptly. We all agree the success of City Light cannot be placed
on the shoulders of an advisory board alone. The Mayor and City Council should commit
to redirecting resources to ensure an upgraded oversight of City Light and should
implement the other recommendations contained in this report.
- If within three to five years the Mayor and City Council cannot demonstrate the
efficacy of the advisory board, the Mayor's Committee unanimously recommends the Mayor
and City Council attempt to change the City Charter and state law to allow for the
establishment of an independent structure to govern City Light.
Among other models to be researched at that point, the committee suggests looking
closely at the structure of an independent city agency, such as the one governing
the Jacksonville Energy Authority in Jacksonville, Florida; or a city-owned public
corporation such as the one used in Toronto, Canada.
- The Mayor's Committee recommends providing more staff resources in the Executive and
City Council offices. Specifically, a senior-level staff person should be added to the
Mayor's Office or the Office of Policy and Management. Additional staff resources in
the Budget office and City Council office should focus on policy development and
oversight, rather than daily operational issues of City Light.
To make the best policy decisions, the Mayor and City Council need access to thorough,
well-developed proposals, analyzed independently from Seattle City Light. Experienced
analysts need to be knowledgeable enough to ask tough questions of utility management
and staff, be able to challenge assumptions, and frame the implications of policy
decisions. This analytical staff capacity needs to be increased in both the Executive
and Legislative offices to facilitate policy review in both branches.
This change should strengthen the necessary policy development dialogue that must occur
among the Executive, the City Council, and City Light staff to ensure thoughtful,
well-informed oversight actually occurs. The committee specifically recommends a
senior-level staff person, experienced in the electric power industry, be added to
the Mayor's executive staff. This person should focus exclusively on City Light's
top priority issues of intermediate and long-term importance, not daily operational
matters.
Staff dedicated to the oversight of City Light has ebbed and flowed too often at the
mercy of political tides and near-term budget concerns. Now, more than any time in
City Light's past, continuity, stability, and well-informed oversight are critical
to its success.
The City needs to prioritize its resources to provide this greater level of dedicated
staffing. If an advisory or governing board is formed, it will require staff support
as well. To the extent feasible, the additional staff should be provided within
existing resources. If necessary, they should be funded with additional resources.
- The Mayor and City Councilmembers should commit a greater amount of time and effort
to governance and oversight of Seattle City Light.
In recent years, the amount of attention paid to City Light by Mayors and City
Councilmembers has varied significantly. These elected officials need to commit
the time and effort to examine and understand highly complex and technical utility
issues. Indeed, if they cannot or will not, then a separate utility governing board
may ultimately be the only answer. There is an undeniable correlation between time
and effort spent and the quality of governance and oversight. In the absence of
informed direction from elected officials, the role of guiding the utility necessarily
falls to non-elected management staff. Such an outcome does not keep faith with the
voters.
- In addition to committing the time and effort to understand the complex and
technical issues influencing Seattle City Light, the Mayor in particular and City
Councilmembers as appropriate must lend their stature to regional partnerships and
other efforts to influence the direction of state, regional, and federal decisions
that affect public power utilities directly and indirectly.
The job of advocating for City Light's interests in the face of federal and state
legislative and regulatory changes has fallen recently to utility management staff.
Instead, the Mayor of Seattle, as the most visible and influential representative of
the City, should be advocating for the utility in federal and regional discussions.
As the recent past shows, we have much to gain and even more to lose in regulatory
restructuring. Heading off ill-advised legislative or regulatory proposals could be
one of the most important actions taken by a Mayor to protect City Light.
- The Mayor and City Councilmembers must carefully examine the issues and challenges
of the power/risk management functions, and then adopt by concurring resolution clear
policies to guide them.
The power management branch of City Light is given the task of selling surplus
electricity to maximize revenues, and buying electricity to meet supply deficits at
the minimum cost. Although this sounds simple, it is an incredibly complex task, made
infinitely more difficult by the rapid changes in the wholesale power market which will
probably continue to evolve, perhaps dramatically, over the next few years.
Because the financial risks associated with these activities are so large, City Light
must have an effective policy framework for managing these risks, and the City's
elected officials must provide the utility with strong policy direction for these
functions. Based on our review, the Mayor's Committee believes there has been an
insufficient focus upon assessing the utility's approach to power/risk management,
and the Mayor's and City Council's oversight of these management processes must be
intensified.
- Mayoral and City Council policy staff should become more directly involved in City
Light's power/risk management decision process by participating regularly in City
Light's weekly Risk Management Committee meetings.
Regular participation in these meetings would raise the overall knowledge level of this
complex business activity, better inform policy decisions, and provide more timely
awareness of emerging challenges. The Executive and Legislative staff will need to
respect the potential confidentiality of market sensitive information and to honor
the decision-making authority of City Light executive personnel.
- City Light requires the flexibility to operate outside some City systems,
particularly those governing salaries.
City Light's power management staff is charged with decisions that require an
exceptional level of knowledge, extensive experience, and business sophistication. The
choices they make can earn or cost the utility hundreds of millions of dollars each year.
There is no parallel to this function elsewhere in City government.
In recruiting qualified risk/power management staff, City Light competes against the
private sector, not against other City departments or other public agencies. Thus,
power management staff salaries need to compete with those of the private sector.
Mayor's Committee members noted that on a dollar-for-dollar basis, failure to pay
sufficient salaries could result in a shift of a million dollars to or away from the
utility based on the experience of the person making a transaction. Not to raise
certain of these salaries could well prove to be a policy that is penny wise and pound
foolish.
Many other utility jobs besides power marketing require a high level of technical
expertise. City Light competes for the services of skilled engineers and other
professionals as well. Many of City Light's professional staff appear to be
underpaid in comparison to their private sector counterparts. The benefits of working
for the City can help to compensate, but these intangible advantages cannot be relied
upon to make up the difference. The utility needs the flexibility to compete for
top-flight talent in the marketplace by setting competitive salary scales.
Conclusion
To develop our recommendations, we received very informative and candid presentations
from a former Seattle City Light Superintendent, the current City Council Energy and
Environment Committee members, the Power Committee Chair of the Northwest Power
Planning Council, Vantage Consulting, Inc. (the firm being retained to conduct a
thorough audit of City Light), and utility management staff in Seattle and Tacoma.
We read volumes of information. We plumbed our own extensive experience working on
electricity issues in both the public and the private sectors.
Repeatedly we heard there are no panaceas, no perfect, one-size-fits-all governance model
for an electric utility in these times. After four months of study, we would share this
view. Each existing model governing public utilities throughout the country offers the
ability to succeed or fail based upon the quality, experience, and dedication of the
individuals who make the decisions and who do the work. Thus, our report makes
recommendations for enhancing the knowledge of those individuals, including elected
officials and utility staff within the system.
The unique responsibilities of Seattle City Light to the economic development of the
region require a unique brand of governance and oversight by elected officials. With
regulatory and market changes happening so rapidly, each day can bring difficult new
challenges, with implications for the long-term well being of City Light and the
community it serves. We respectfully urge the Mayor and City Council to consider our
recommendations seriously, and to begin implementing them promptly.
Respectfully submitted:
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