Alameda's Utility in a World of Hurt 

A failing telecom effort, plus official shenanigans and poor communications, could leave city taxpayers on the hook for tens of millions of dollars.

Whoever wins in the brutal, nasty race for control of the Alameda City Council, one thing is clear: The first order of business on November 8 has to be cleaning up the profound mess at Alameda Power & Telecom, the city's publicly owned electrical and telecommunications utility. Ever since gambling on an expansion into the cable television and Internet service business in 2000, the utility has sunk itself into debt to the tune of $83 million — something officials have taken pains to hide from the public. Although civic leaders have been arguing about the utility's problems for months, the issue may be much worse than Alameda residents realize. While AP&T officials have repeatedly promised that the utility's telecommunications arm will no longer need subsidies by 2007, one City Hall source claims that the telecom operation could continue to lose millions for years longer than Alameda residents have been led to believe. Now, the city's own treasurer, Kevin Kennedy, claims the city's leaders have been unacceptably negligent. If the telecom venture fails, it could cost the city $40 million.

According to Councilman Tony Daysog, this story starts with California's disastrous electricity deregulation scheme of the mid-1990s. City leaders began to worry that someday, deregulation might mean breaking the power monopoly enjoyed by their municipal utility, and they had better diversify their products into cable and Internet access if they wanted to remain competitive. They put a measure approving the expansion on the 1998 ballot, but voters were worried that if the telecom experiment failed, the utility might be financially compromised. To counter this, ballot proponents promised over and over that the electrical side of the utility would never finance the telecom operation, safeguarding a future of cheap electricity.

Within years, that promise was broken. In a 2003 city council meeting, Daysog recalls, utility officials claimed to need another $7 million to finish laying fiber-optic cable for the city. Daysog reluctantly floated the idea of borrowing money from the power generation side, and claims that AP&T officials acted as if that was a novel approach they hadn't previously considered. In the days after that discussion, Daysog was reviewing audits of the utility and realized that, for all their feigned surprise, officials had been quietly transferring millions to the telecom operation: $10 million in 2000, $3.3 million in 2002, and an anticipated transfer of another $17 million in 2004. "I asked why don't we take some dollars from the electricity side, and at that point, they could have said, 'Oh, by the way, we already did that,'" Daysog says. "Instead, they pretended like it was a new idea when it had been going on all along."

By December 2003, the council was ready to figure out how to solve the telecom problems. But instead of transferring money from the electricity operation, the council voted to borrow the money, as well as refinancing another $16 million in outstanding debt, loading a total of roughly $40 million in bond indebtedness onto the telecom operation. Despite such a massive bailout, the telecom unit was losing so much money that utility officials continued to transfer millions from the electrical unit until the amount totaled $43 million. Each time, critics claim, the transfers were announced as line items in the budget, escaping the attention of many city councilmembers, until they finally realized how staggering the debt load was in February. "It hit like a ton of bricks," says Councilman Doug DeHaan. "I was talking to the city treasurer and said, 'Did you hear that right?'"

Matthew McCabe, the media spokesman for AP&T, did not return repeated calls seeking comment for this story. Valerie Fong, who until recently served as the utility's general manager, told the Alameda Journal that the telecom unit will break even by the start of the 2007-08 fiscal year. But according to one City Hall insider, that promise is flatly contradicted in a confidential report circulated earlier this year.

In February, the council and the Public Utility Board agreed to hire an independent financial consultant to analyze just how bad the telecom unit's problems were. When the consultant's report was ready, both city treasurer Kevin Kennedy and city auditor Kevin Kearney requested copies of the report. After all, they are the two men most responsible for keeping the city's finances on an even keel. But remarkably, the Public Utility Board refused to let either man see the analysis. "We had hoped to be able to contribute to the solution, but apparently that's the way it's working," Kennedy says. "I requested a copy of that report twice from the city attorney and had been told, 'No, you're not on the list.'"

Some people have speculated that city officials are afraid that if the true extent of the telecom unit's problems were made public, the utility's nervous creditors would call in their loans, perhaps driving the unit into bankruptcy. And according to one person who has seen the report, the news is grim indeed. While AP&T officials have publicly promised that the telecom unit will acquire enough subscribers to put it in the black by 2007, the report apparently projects that the unit won't be financially sustainable until 2014, seven years longer than the public is being told. Until then, it could well need millions more in public subsidies.

This lack of transparency seems to be a systemic problem for the leaders of both AP&T and the city. Last year, through its insurance agency, the city agreed to pay $25 million to the family of Jeptha McGee, a construction worker who was left brain-damaged, and missing an arm and a leg, after an AP&T official let him drill into a high-voltage electrical vault. Alamedans had no idea that the city had paid this remarkable settlement until Alameda Journal editor Jeff Mitchell broke the story last month. Mayor Beverly Johnson did not return several calls for this story, but Daysog has no idea why the news was kept from the public: "That, I can't answer. I think we just should have made a better effort at communicating this."

As far as city treasurer Kevin Kennedy is concerned, all that's in the past. What really concerns him, he says, is that no one is making a serious, timely effort to solve AP&T's financial problems. If city leaders don't fix the telecom unit's problems, and it goes bankrupt, its creditors would get the first claim on the assets, and any chance that the electrical unit could get its money back would be gone forever. "This thing is still hemorrhaging cash," Kennedy says. "I'd hate to spend the next year or two dorking around with a finger-pointing exercise while this thing is sucking us down. ... There's a fire burning, and it doesn't seem to be bothering anybody. If that were somebody's money going down the tube, they would be very involved in it. But it's not. It's just taxpayers' money."


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