City Light audit slams Zarker

An audit report on Seattle City Light lays most of the blame for the utility's current financial crisis and high rates squarely at the feet of Superintendent Gary Zarker and raises questions about his future at the utility.

The report, presented to the City Council yesterday, bashes Zarker's efforts to portray City Light as an innocent victim of bad weather and greedy energy corporations.

It slams City Light for poor planning, a lack of utility experience among top managers, an insufficient effort to cut costs and a defensive attitude that impedes reform.

"When all is said and done, there is fault among all parties. However, SCL management must take the lion's share of the responsibility for the current state of the utility," the audit concludes.

City Light is in a tenuous financial position, with $1.7 billion in debt, and rates that have increased 58 percent in the past two years are expected to remain high in the foreseeable future, the report says.

While the energy crisis of 2000 and 2001 "exacerbated" problems, the audit says, the underlying weakness in City Light's finances began long before that, the result of policies that jacked up the utility's debt and left it reliant on volatile market power without an adequate understanding of the risks.

The audit, conducted by Vantage Consulting, a Florida utility-consulting firm, lays out 39 recommendations for improving the financial health and oversight of the utility. They range from hiring more-experienced staff to manage and oversee City Light to urging elected officials to get better educated about energy matters.

"We can all be Monday-morning quarterbacks," said Walt Drabinski, the lead consultant on the report. "What's important is the game plan for the future."

Zarker yesterday sat stone-faced through most of the audit presentation before a City Council committee, occasionally rubbing his eyes. In a letter responding to the report, he said he accepted all of its recommendations and would begin work immediately on them.

But Zarker disputed some of the audit's most critical language, arguing it amounted to more opinion than fact. For example, he took issue with the audit's characterization of City Light's $1.7 billion debt as "enormous." Of the top 19 public utilities in the country, Zarker said, City Light ranks 10th in debt per customer.

And Zarker said the consultants who wrote the audit did a "pretty superficial" assessment of the history that led City Light to increase its debt during the 1990s. The reliance on debt was an effort to keep rates low after huge rate increases in the 1980s, Zarker said. Portraying that as irresponsible was an insult to "some pretty wise people," he said.

Change at the top?

The audit also raises the question of Zarker's continued tenure, suggesting Mayor Greg Nickels or the City Council launch hearings on whether to keep him as head of the utility.

City law says the superintendent of City Light is subject to reconfirmation every four years. But that hasn't happened in the eight years since Zarker was confirmed as superintendent in 1994. With an annual salary of $158,000, Zarker is the city's highest-paid employee.

"We don't think of the confirmation issue as a punitive thing," Drabinksi said.

Rather, the audit report says, it would be a way of providing Zarker with "clear expectations" for his performance.

It's not clear whether reconfirmation hearings will take place.

Marianne Bichsel, spokeswoman for Nickels, said it was up to the council. "The mayor believes Gary is doing a good job," she said.

Zarker is a friend of the mayor and splits Mariners tickets with him and others. Nickels axed four city-department heads when he became mayor this year, but Zarker stayed.

City Councilwoman Heidi Wills, who chairs the committee overseeing City Light, said she might consider reconfirmation hearings "if we don't see improvement" in the utility's performance.

Councilwoman Jan Drago said if the mayor won't start a reconfirmation process, the council ought to. At the very least, she said, there needs to be new blood injected into City Light management at some level.

"I think there has to be change. I don't think you can keep the same coach and same team," she said.

Repeated warnings

Some of the audit's findings reinforce similar warnings to City Light during the past few years.

For example, the audit criticizes the utility's lack of "loss limits" — automatic risk thresholds designed to insulate it from massive market losses.

That deficiency was pointed out to City Light in an audit two years ago by Deloitte & Touche. It was noted again by a Seattle Times series in March that questioned City Light's and elected officials' decisions leading up to the energy crisis. And a Municipal League report this year also asked why City Light had not set loss limits.

Yet City Light still has no loss limits. Zarker said the utility will move to remedy that.

Tom Albro, chairman of the Municipal League, said he hoped the latest audit would be taken seriously. "This is a good first step," he said.

While City Light currently has surplus power to sell, meaning it is not as vulnerable to swings in market prices, the audit says loss limits remain essential for future protection. Such limits could have insulated the utility from the crazy market swings of the past two years, the report suggests.

"It has been proven time and again that we simply cannot rely on typical human responses when markets go awry," the report says. "We have all said at one time or another: 'It can't get any worse,' 'The market can't go much lower,' 'It has to rain soon' ... and we were often wrong."

Defensiveness cited

The audit also offers a reason why City Light may have failed to heed warnings on loss limits and other matters.

In some of the report's strongest language, it accuses Zarker of breeding a defensive culture at the utility, one where managers have "a tendency to dismiss criticism and attack its source, even when such criticism appears to have at least some merit."

The report says City Light has still failed to confront its shortcomings in the energy crisis — more than a year after the fact.

"Its official chronology of events focused on elements outside its control and railed at the failure of others," the report says. That was a clear reference to Zarker's repeated efforts to blame federal regulators, energy-market manipulation and bad weather for City Light's woes.

The audit also criticizes City Light's response to the Seattle Times series in March, and to a subsequent Municipal League report, which both raised questions about Zarker's management and oversight by elected officials.

"Their authors may not be experts in the energy industry, but their observations were not unreasonable and they raised questions that deserved better answers," the report says.

Zarker, in his written response to the audit, admitted "some truth" to the observations about City Light's defensive attitude. He said he'd "work to improve in this area." But he couldn't resist adding that his early criticisms of energy companies such as Enron "have turned out to be true."

Even Zarker's spin on the audit itself is called into question by the final report.

Zarker recently posted a letter on City Light's Web site responding to early reports about the audit's findings. In it, he described the audit as "a strong affirmation of our quality as an organization and a sharp reminder that we can do better."

The final audit yesterday retorts: "It is inaccurate to suggest that our audit is a strong affirmation of quality."

The report does not suggest fundamental changes to the way City Light is overseen by elected officials.

A task force commissioned by Nickels recently suggested the creation of a volunteer board to advise the mayor and City Council on City Light issues.

But the audit says the main focus ought to be on hiring more city staff to advise elected officials. It suggests the creation of an independent Office of Utility Oversight.

Nickels and City Council members said they plan to hire additional utility experts onto their staffs as soon as possible.

Drabinski also suggested hiring a chief operating officer with extensive utility experience to aid Zarker in running the day-to-day operations of City Light.

It was an idea that several council members embraced yesterday, but Nickels' office and Zarker indicated they were less than enthusiastic.

The report also takes a shot at Nickels, saying "the flow of information" from City Light to the council is being "stifled by the executive branch," a problem that limited the "basis for making informed decision."

In another key recommendation, the report notes that City Light lacks an up-to-date strategic plan to set goals and performance measures that can be tracked. The utility's strategic plan has not been updated since 1996.

City Councilman Jim Compton, who sought the audit earlier this year, called the report "a landmark" for the utility and said a new strategic plan was among its most important recommendations.

Cutting costs

The report also suggests City Light has not done a good-enough job of cutting its costs in response to its financial woes.

Drabinski said he arrived in Seattle with three other consultants on the audit expecting to see a utility that had cut its costs dramatically.

"I have to say we were underwhelmed," he said. The report notes that City Light has more employees per customer than some other large municipal utilities.

Drabinski urged the mayor and City Council to scrutinize City Light spending to wring out more savings.

Zarker criticized that finding, too. He noted that since he became head of the utility in 1994, its total work force has dropped from 2,000 employees to about 1,600. City Light also cut $37.5 million out of its budget this year, mostly by delaying planned construction and maintenance projects.

Zarker said the characterization of City Light as being in a crisis is simply wrong. He said rates are still relatively low, and the utility should be able to pay off its short-term loans and reduce rates sometime in 2004.

"It's a question of which month. It could happen in 2003 if we get good water and prices are good," Zarker said.

Jim Brunner: 206-515-5628 or jbrunner@seattletimes.com