OC Grand Jury Report: Orange County Power Authority Come Clean

The Orange County Grand Jury has released a report on the Orange County Power Authority. Here are key excerpts:

As of early April 2022, past the start date for commercial customers, neither the OCPA notices that were required to be mailed to customers, nor the OCPA website, contained any direct mention of the increased charges that would be incurred due to the default ‘green energy’ tiers selected by member cities for their businesses and residents. OCPA continues to be reluctant to share information requested by the OCGJ, the public, and OCPA member cities.

“In recognition of the fact that OCPA manages a very large budget and commits to long-term power contracts worth hundreds of millions of dollars, the OCGJ is particularly concerned that OCPA is operating without in-house leadership with sufficient expertise to oversee the very complex decisions involved in energy planning and transactions.”

“Initially, the City of Irvine committed $250,000 in formation costs. It pledged another $2.5 million for start-up costs, along with $5 million in “launch costs” and/or collateral for the loan OCPA would need to secure in order to purchase power needed initially. To date, Irvine has invested some $7.5 million, which will be repaid beginning in 2027 assuming the CCE remains viable.4 Other member cities do not bear any such liability risk.”

Rocky Start for OCPA

Government agencies at all levels typically follow a strict set of rules related to filling open staff positions. These frequently include the use of recruiting firms for senior positions. For example, County executive job descriptions normally include the requirement of an advanced degree or significant managerial experience in the relevant field. According to OCPA’s published implementation plan dated December 28, 2020, three months were allocated to find and hire an Executive Director.

OCPA Board members were sworn in immediately before the inaugural Board meeting on December 16, 2020. During that meeting, the Board appointed an attorney from BBK as part-time General Counsel to OCPA. The newly appointed General Counsel presented the Board with a job description and a single candidate each for the positions of Chief Executive Officer (CEO) and Chief Operating Officer (COO).

Inexplicably, the position descriptions for COO and CEO were not made publicly available prior to the hiring decision. The job descriptions also lacked any requirement for prior education, experience, knowledge of the electrical utility or energy industries, or CCEs. Recruiting efforts were minimal at best, despite these public positions being highly demanding and very well compensated. This is not consistent with best practices. The positions require the public’s trust and, preferably, prior familiarity with CCEs. With no other candidates to consider, the Board voted to approve hiring of the CEO and COO on January 12, 2021The CEO began working immediately, while the COO began employment in March. A Chief Financial Officer (CFO) was hired about nine months later in October 2021.

The COO had a strong and extensive background in the clean energy field and municipal participation in that field. Despite her job description, the COO was not given a role in the process of vetting, retaining, or working with outside contractors critical to OCPA’s operations.

The COO resigned from OCPA on December 3, 2021, after less than a year of service. In the meantime, the CEO, who had virtually no employment experience with CCEs or energy purchase and trading prior to joining OCPA, was left in charge with a $34 million budget, significant signing authority, little meaningful oversight, and no OCPA governing bylaws.

The CEO’s duties are determined by the Board. However, after the COO resigned, Board members and the CEO maintained conflicting opinions about whether a replacement should be hired, who had the authority to make that decision, and who would interview and hire the replacement. With so much authority bestowed on the CEO, the OCGJ is concerned about what it found to be a continuing pattern of failing to follow best hiring practices.

Financial Risks and Oversight Concerns

OCPA has been faced with purchasing short and long-term energy contracts at a time when rates are historically high. OCPA has reportedly committed over $500 million dollars towards power deliveries through its contractor, Pacific Energy Advisors (“PEA”). PEA purchases power on behalf of a number of CCEs throughout the state. Due to the complexity and potential liability associated with these purchases, having experienced in-house positions or traders that oversee their short and long-term strategy and contracts is critical. This has not happened at OCPA.

With respect to the CEO position, other California CCE’s have employed leaders with years of experience in the energy industry, as illustrated in the following comparison chart:

At OCPA, the CEO has nearly unchecked authority over an annual budget exceeding $34 million, power purchasing decisions, and the selection and oversight of all contractors. This is no small matter. Requests seeking the amount that had been committed to power contracts went unanswered until April 2022, when it was disclosed in a public meeting that the figure was “in excess of a half a billion dollars.”

OCPA cannot claim it has effective oversight of its contractors with a CEO who had no prior relevant energy industry experience, no COO, no Director of Power Purchases, and no other senior level employee with the appropriate expertise for hands-on oversight.

As a safeguard to this and other potential risks, and as a standard practice for CCEs, OCPA adopted Policy No. 9, the Energy Risk Management Policy. Section 7.2 of that policy requires that the Board establish a Risk Oversight Committee (ROC) prior to the commencement of retail electric service. Among other duties, the ROC is charged with reviewing trading transactions and supply contracts and reporting their findings to the Board regarding OCPA’s adherence to risk management policies.

Once again, the CEO is provided exclusive powers when it comes to oversight. The CEO is charged with selecting the ROC members and scheduling those meetings, which are to take place at least quarterly. To date, after over half a billion dollars has been committed to power purchases and commercial service has begun, there is no public record that the ROC has been formed.

During the May 3, 2022, OCPA Board Meeting, the Board went into closed session to discuss the CPUC’s assessment of a Resource Adequacy (RA) fine. According to the CPUC website, OCPA has been assessed an RA fine of $1,962,845. The OCPA Board has appealed this fine. It should be noted, however, that according to the CPUC listing, out of the 117 RA fines that have been imposed since 2009, only one appeal resulted in a dismissal while two others resulted in a fine adjustment. Including OCPA, only six of the 117 fines listed exceeded $1.5 million, one of which was Riverside-based Western Community, the CCE that went into bankruptcy. The legal costs and time that will be required to address this fine is unknown. It is incumbent upon the Board to determine the root cause of this problem and take steps to avoid similar issues in the future.

The Importance of Transparency

CCEs are public agencies subject to the Brown Act and the Public Records Act. Board meetings are open to the public. CCEs produce financial reports on an annual basis subject to third-party audit.

Transparency, particularly financial transparency, helps keep corruption in check, bolsters public confidence in government, and promotes fiscal responsibility. In the case of OCPA, a hint to the attitude of the CEO and OCPA Board Chair is reflected by the Chairman’s comment in the December 21, 2021, special meeting of the Board when the Chair stated,

We’re not a typical agency; this is about as private as a public agency can get.”

OCPA is not a private agency. According to the California Public Utilities Commission (CPUC) website:

The Public Records Act broadly defines “public records” to include written and recorded records, unless the Public Records Act or other law exempts the records from disclosure. Pursuant to Government Code section 6252(e), public records “includes any writing containing information relating to the conduct of the public’s business prepared, owned, used, or retained by any state or local agency regardless of physical form or characteristics.” . . . The Public Records Act provides for public access to records the CPUC generates, as well as records created by others that the CPUC has in its possession.

Until at least March 2022, after more than a year in operation and unlike other CCE’s, OCPA did not have budgets, financial statements, or rate comparisons published on its website. OCPA was reticent in providing this information when it was requested, and this documentation only appeared on the OCPA website after the OCGJ investigation and interviews were underway.

Even as of April 2022, the website failed to clearly state the rate differences that would be imposed upon commercial and residential customers and made no direct mention of the increases customers would be paying based on their automatic opt-in to the program.

In addition, as of June 2022, no governing bylaws have been adopted. Such bylaws can be important in establishing internal procedures, such as approval processes, and clarifying what has not been spelled out in the formation documents. For example, the JPA’s provision describing a Board member’s term of office can, and has been, interpreted in two ways by different Board members and OCPA.

OCPA’s Contradictory Messaging About the Effect of Opting Out

During the [] February 8, 2022, Irvine City Council meeting, the question was posed:

“If more people opted out than the model, how would it affect electric rates?”

The OCPA CFO responded that the working model allows for a five percent opt-out rate for residential customers and a ten percent opt-out rate for commercial. The CFO then stated:

“If [the opt-out rate] increases more than our expectation or assumption, it won’t have a significant financial impact because the revenue will match with all the costs of energy.”

Follow-up questions led the CFO to explain further:

“If more people chose to opt out, more than 10 percent let’s say, the costs of energy will decrease as well as our revenue. So, because of the matching principle, there will be no significant financial impact to us.”

This statement is inconsistent with the information contained on the OCPA website and the prevailing wisdom that low opt-out rates are important to the success of any CCE.

The percentage of customers and the energy load those customers represent are crucial figures to OCPA’s success. Yet, dissemination of the information regarding the opt-out load percentages has been restricted by OCPA. Member cities and others requesting that information have been denied access to or received few specifics about the opt-out and opt-down activity, and what impact that has on the overall OCPA financial picture.

Public Information Not Reaching Board Members or the Public

To properly perform its oversight function, the Board must have access to all documents related to OCPA, even if that information is not subject to public disclosure. Unfortunately, this is not the approach that has been taken at OCPA. Based on interviews and our review of documents, there has been a pattern of failure and/or resistance to providing information to the Board, even when the information has been specifically requested. This lack of transparency does not align with public agency obligations and can create suspicions of wrongdoing.

There are also examples of OCPA presenting information in a way that misled the public. At the March 1, 2022, OCPA Board meeting, approval of the mid-year operating budget was on the agenda. During the budget presentation, the Board was informed that the year’s anticipated legal costs would be increasing by $446,000, from $354,000 to $800,000. OCPA explained – in writing and orally – that the anticipated increased costs were “primarily due to a large number of PRA (Public Record Act) requests, non-legal board clerk support services, legal support for unanticipated matters, and power supply procurement transactions and negotiation services.”

Listing the PRA requests first overstates the significance of their associated costs. When asked for clarification, OCPA General Counsel explained that legal staff were needed to support OCPA in “day to day operations” and that there had been “quite a bit” of PRA requests. Finally, when asked directly how much of the budget was dedicated to handling PRA requests, the answer was $22,000 for the year. Aside from the fact that responses to those PRA requests had, in large part, not been forthcoming, this is a trifling percentage of the $800,000 budget request. Attempting to blame the doubling in legal costs on PRA requests seems indicative of OCPA’s attitude towards individuals who seek information and transparency.

FINDINGS

F1 – OCPA has not properly implemented bylaws and other procedures to promote and ensure transparency.

F2 – OCPA unreasonably delayed the formation of the CAC, has failed to properly utilize CAC member expertise, and has stifled the CAC from functioning as an advisory committee as intended.

F3 – OCPA hiring practices and procedures for both employees and contractors have failed to follow best practices, potentially damaging the credibility of the agency and raising questions of cronyism.

F4 – OCPA has failed to hire a Director of Power Purchases or other experienced senior staff as appropriate for a CCE, resulting in a lack of oversight of contractors and fewer checks and balances in its operation.

F5 – OCPA lacks experienced in-house staff to develop and implement a long-term strategic plan as well as short-term plans to mitigate economic risks.

F6 – OCPA Board meeting agendas and staff reports are distributed at the last minute and Board meeting minutes are not always accurate, complete, or posted in a timely manner.

RECOMMENDATIONS

Based on its investigation described herein, the OCGJ makes the following recommendations:

R1 – Implement OCPA and Community Advisory Committee by-laws consistent with those of other CCEs within California. (F1) Timeline: October 1, 2022.

R2 – Include the Community Advisory Committee as a standing item on the OCPA Board minutes and recognize the Community Advisory Committee as an advisory committee, and not simply a mouthpiece. (F2) Timeline: October 1, 2022.

R3 – Hire a Director of Power Purchases or other qualified staff positions to properly oversee Pacific Energy Advisors and CalPine contractors utilizing best practices. (F3, F4, F5) Timeline: December 1, 2022.

R4 – Utilize a member agency clerk or assign a qualified OCPA staff member to handle the agendas and minutes for the OCPA Board and OCPA Community Advisory Committee to ensure that they are prepared properly and posted in a timely manner. (F6) Timeline: October 1, 2022.

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Click here for all Irvine Watchdog’s reporting on the Orange County Power Authority.

Click here for all Voice of OC’s reporting on the Orange County Power Authority.