Got Mad, Got Even
Info:Correction Date: 04/13/95
Got Mad, Got Even
Two former HL&P workers took revenge against the Light Company, but say the city settled for "chump change"
By Michael Berryhill
On a Friday morning in mid-January, Charles Pace had backed Houston Lighting & Power into a corner that disgruntled ex-employees of monolithic corporations usually only dream about. Pace had worked for HL&P for 24 years and six days when the utility dismissed him and 1,600 other employees in April 1992. In another year he would have been eligible for retirement with benefits.
HL&P justified the layoffs as a cost-cutting step that would make the company more efficient. Pace and Kenneth Williams, an HL&P nuclear safety worker who was laid off after 12 years, had other ideas about the company's efficiency. Teaming up with a network of angry ex-employees whose knowledge of the utility ran deep, they filed a rate case with the Public Utility Commission in June 1993, accusing the company of inefficiency, mismanagement and excessive earnings. An administrative law judge ruled their issues had merit and should be explored. It was the first time in the 20-year history of the PUC that individual ratepayers had forced a rate hearing.
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Lawyers, auditors and economists from several state agencies and more than two dozen cities gradually joined the case as "intervenors." Their case, referred to as Docket No. 12065, became, Pace says, "like the county fair: bigger and better every year."
The intervenors had full investigative powers to probe nearly every aspect of HL&P's management decisions. That included everything from how the company had handled its troubled nuclear power plant to whether HL&P gave special treatment to politicians and its own executives when their lights went out. The complete record of Docket No. 12065 occupied 351 linear feet of shelf space at PUC headquarters, and that was just the beginning. The hearing before the PUC's administrative judges would take as long as nine months, and include 100 to 200 witnesses who would be cross-examined.
The best result was the amount of money the intervenors were talking about extracting from HL&P for the ratepayers. One of the highest-charging electric companies in Texas was facing a rate cut that could cost it from $2 to $3 billion over a five-year period.
No wonder HL&P was willing to negotiate. But when the intervenors broke up for lunch that day two months ago, Pace was dismayed to hear that Mayor Bob Lanier and the city of Houston had cut a deal with HL&P for less. Much, much less. And Pace and Williams and their colleagues in the Association of Laid-Off Employees weren't going to let that pass without at least raising their voices. They had fought too long and too hard for that.
Charles Pace and Kenneth Williams had never met in their years of working for HL&P. It was their firings that brought them together.
Pace, 53, grew up in rural Oklahoma and talks with a dry country understatement. He worked as a "materials technician" in HL&P parlance, or in his more straightforward description, as a warehouseman. He also worked in "investment recovery," helping the utility sell off used equipment. "We called it trash for cash," he explains.
Pace set out to be a schoolteacher, but his plans changed after he volunteered for the military and served in Vietnam. He's 30 percent disabled from post-traumatic stress syndrome, he says, and also suffers from side effects from Agent Orange, a defoliant that was sprayed widely in Vietnam. Before he helped bring the rate case against HL&P, Pace was a plaintiff in the Agent Orange case, where he grew familiar with legal maneuvering against large corporations.
A white-haired, tidily dressed man, he favors blue jeans, starched plaid shirts and sturdy walking shoes. He wears smoked, rimless eyeglasses and carries a black canvas shoulder bag full of the latest papers dealing with the complicated rate case.
Much of the work was done at the kitchen table at his Montrose house. A bachelor, he has spent $25,000 of his own money on the case, but he shrugs it off. "Money is not an issue to me," he says. "We did what we had to do."
Pace didn't know how much he needed Kenneth Williams when he first filed a complaint with the PUC in April 1993. The administrative law judge threw out his filing because Pace lived in Houston, and the city had original jurisdiction. But Pace remembered Williams from a meeting of the laid-off employees. Williams lived in northeast Harris County, outside the city limits. They refiled in his name.
Kenneth Williams is a sweet-natured, round-faced man who grew up in Houston and worked as a nuclear technician in submarines for the U.S. Navy. At HL&P he worked as a safety technician, helping inspect not only the South Texas Project nuclear plant but other power plants as well. His technical knowledge was invaluable, says Pace.
Because of company reorganization, Williams worked in five different departments at HL&P, he says, and in each of them "it didn't take a genius to see there were tens of thousands of dollars of waste."
As a worker in a safety training group that used video equipment, Williams got a close look at HL&P's management strategy. When the utility's lawyers rehearsed HL&P executives in how to represent the company's interests during rate hearings, Williams was running the video equipment.
"The attitude was that every two years we'll have to go back for a rate increase, so they were preparing."
Rate increases have been a way of life for HL&P, creating what its top executive has called a "cost-plus" mentality. Under the terms of its monopoly, HL&P is guaranteed a return on its capital investments of nearly 12 percent. Every time it buys a truck or builds a power plant that is "used and useful" by the standards of the Public Utilities Regulatory Act (PURA), it can recover the cost plus a profit from the ratepayers. Critics of this approach -- and many of them are big businesses that can generate their own power more cheaply -- point out that this structure provides no incentive for efficiency. Instead, there is an incentive to spend money on capital projects, and HL&P has been busily building plants to meet the utility's projected demands. But unless capital projects are carefully scrutinized by regulators, even sloppy and inefficient capital projects can produce revenue for the light company.
Take the multibillion-dollar South Texas Project, the nuclear plant built and managed by HL&P. It represents a third of HL&P's capital investment but generates only 7 percent of its power when it is active, which is slightly more than half the time. A company working in the free market might have ditched the STP when its liabilities became evident early in its construction. But HL&P had a financial incentive to get the plant on-line and producing, even if the power it produced was expensive.
When Pace and Williams filed their rate case in June 1993, STP had been shut down by the Nuclear Regulatory Commission since February and would stay out of operation for 15 months. Clearly it wasn't used and useful, yet ratepayers were continuing to pay for the plant as if it were.
If Pace and Williams hadn't called for a rate hearing, the Office of Public Utility Counsel would have, says one of its attorneys, Stephen Fogel. OPUC is a small independent state agency of 21 lawyers, accountants, economists and office staff charged with protecting the interests of residential utility users and small businesses.
The STP problems were obvious, but there were other reasons to conclude that after years of rate increases, HL&P was due for a rate decrease, says Fogel.
"Even if you didn't consider STP," Fogel says, "their costs had come down since 1991 through lower interest rates and employee layoffs. The company had tightened its belt."
In their first complaint, Pace and Williams filed a dozen or so affidavits from ex-employees alleging mismanagement. Some of those allegations wouldn't necessarily affect the rate base, says, Fogel, but they made for interesting reading.
In one, an employee contended that the company buried scrap metal contaminated with lead paint and asbestos at a site upstream from a lake and rice farms. Another employee contended that the company's shop-built equipment for testing meters was faulty and would register inaccurate usage readings for customers. A $450,000 piece of monitoring equipment was said to be obsolete and overpriced the day it was bought. Another employee said the company gave repair crews lists of the addresses of state and city politicians as well as HL&P executives. During a power outage, those homes were to get turned on first. That allegation proved to be true, Fogel said.
But HL&P wanted the charges dismissed without merit, saying they were the accusations of disgruntled ex-employees. The company denied the allegations and challenged the expertise of its former workers.
The general counsel for the PUC, Charles Johnson, found that regardless of the ex-employees' motivation for making the claims, their allegations of excessive earnings had a basis in fact. In June 1993, the administrative judge granted the investigation "limited discovery," and Pace and Williams were on their way, requesting documents and examining the lengthier ones in the offices of their former employer. So were the lawyers and other experts of both the PUC and the OPUC.
HL&P again moved to dismiss the case, but in January 1994 the judge declared the case to be a full "Section 42" hearing, referring to that section of the law governing rate hearings. That declaration made it possible for other cities and ratepayers' groups to join as intervenors.
The tiny town of Beach City near Baytown was the first to try its hand, but HL&P immediately threatened to sue over the challenge, and Beach City backed down with a few concessions about its street-light service.
Then cities and ratepayers filed a Section 42 review against Central Power & Light, which operates in the Corpus Christi and Victoria areas and has a share of STP, contesting payments for the outage at the nuclear plant. Austin and eventually San Antonio, which own a share of the STP, sued over the outage. Because various municipalities had a share in STP, the PUC separated the outage issue and decided that it should be heard independently of the rest of HL&P's other docket case.
In July 1994, HL&P filed its rate package, a complex document that covered its fuel costs and accounting procedures. The utility said that although its numbers justified a rate increase of $239 million a year, it was not going ask for one.
At that point, the city of Houston showed up, attending meetings but not declaring itself as an intervenor. The city was standing to the side because then-city attorney Benjamin Hall had signed an agreement with HL&P attorney Hugh Rice Kelly not to call for a rate reduction. Pace obtained a copy of the agreement and leaked it to the news media. Frustrated by the failure of Houston to aggressively fight for a rate reduction, several cities, led by Friendswood Councilwoman Janice Lowe, broke away from the Houston-led Coalition of Cities and formed the Gulf Coast Coalition to join the Section 42 review.
In September the administrative judge forced the city of Houston to join as an intervenor or get out of the way. By December the intervenors and their experts had combed through the utility's numbers and were talking about hitting HL&P for up to $433 million a year for five years to make up for excess earnings and mismanagement. That figure excluded the additional costs of the STP outage. The intervenors would have to fight for these huge reductions in the hearing, which might prove embarrassing to HL&P. The lawyers could probe such issues as how the utility shares its earnings with the money-losing subsidiaries of its parent company, Houston Industries. The hearing would investigate "phantom taxes," taxes for which the utility collects money in its rate base but which it never has to pay.
While the intervenors turned on the heat, the city of Houston made a deal that sounded impressive: a total of $1.2 billion in lower bills over a period of three years.
But as Pace and Williams, as well as utility consultants around town, pointed out, much of that reduction would have come anyway, because it was required by PUC regulations. HL&P had to give back its overcharges for fuel, incurred primarily because the price of natural gas dropped. Other refunds were due because of expired cogeneration contracts. What the city actually got from the utility was $62.2 million in rate cuts for three years, plus a $70 million one-time refund to compensate for the outage at the South Texas Project nuclear plant. In exchange, the city exempted itself from any further rate reductions resulting from the ongoing investigation of STP.
As Williams likes to put it, the city gave away the possibility of $2 billion more. Pace and Williams filed a protest, saying the mayor had settled for "chump change."
Mayor Lanier defended the settlement, saying he didn't want to gamble that a larger reduction might result from the hearing and the ruling of the state's three public utility commissioners. The city's agreement will be accepted by most of the intervenors, Pace and Williams say, because the loss of Houston took away most of their negotiating leverage.
But Pace and Williams continue to relentlessly pursue the utility. At the end of February, HL&P employees supplied them with a morale-building speech that Don Jordan, the chairman and CEO of Houston Industries, made at the company's annual management conference in January. In it, Jordan pointed out that the utility has strong friends both in Congress and the Texas Legislature. Among them is state Senator Ken Armbrister of Victoria, "a proven friend of the company," Jordan said, who is also the co-chairman of the Sunset Advisory Commission, which is reviewing the PUC this year.
Armbrister is carrying a bill this year that will nicely help HL&P if it is passed. The legislation would, among other things, make it harder for OPUC and municipalities to initiate rate cases; remove the PUC's jurisdiction over subsidiary companies owned by utilities; make cost-recovery policies more liberal; and allow utilities to mark up cogenerated power, which they currently cannot do.
Houston Industries can count on such support because, like other highly regulated industries, it makes significant political contributions. How long utilities can get such favored treatment remains to be seen.
"The danger with having a new Republican governor and Legislature," Jordan pointed out to his management, "is that they are pro-competition. They are friends on alleviating tax burdens on businesses, but they don't have much sympathy for monopoly status. They would rather open it up and let the best company win."
Among the companies challenging HL&P is Destec Energy, a subsidiary of Dow Chemical that is calling for the deregulation of electrical power in full-page newspaper and television ads. In February such big industrial users of electricity as Exxon Corporation and Amoco Corporation announced the creation of their own transmission utility company to supply power in the Houston Ship Channel area.
Williams and Pace doubt that HL&P will be able to adapt to competition. "They don't know how to compete,"says Pace. "When in doubt, get if from the ratepayers. That's their whole mindset."
The two would like to see HL&P turned into a distribution service. The company would be paid a fee to move power over its lines.
Until that happens, they will continue to fight HL&P and refuse to sign the agreement. If they do get a hearing and win further concessions resulting from HL&P's mismanagement of STP, Harris County ratepayers could be paying a different rate than those who live in the city of Houston. Pace has accused the company of mismanagement in a class-action lawsuit filed on behalf of Houston Industries shareholders, who have seen their stock drop from a high of nearly $49.50 to just under $40 a share.
Pace acknowledges there is a certain satisfaction in facing down his former employer's battery of lawyers. But the best satisfaction, he says, came from a phone call he received from an elderly lady thanking him for initiating the rate case. She said the rate reduction, when it is approved, would enable her to buy prescription medications she has had to forgo.
So why did it take two citizens to initiate a rate case that the city of Houston might have started?
"We're still waiting for an answer to that one," says Williams.
Published:Remarks attributed to Houston Industries chairman and chief officer Don Jordan in the March 23 Houston Press were contained in a draft copy of a speech prepared for Jordan's appearances at a January conference of management personnel of Houston Industries, the parent company of Houston Lighting & Power. Jordan did not make the remarks during his two speeches at the conference.
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