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Can Austin Beutner Save L.A.?


I. The
private sector paradigm: Alignment of Interest, Governance and Transparency

 

Austin Beutner has spent his entire career in
investment banking and private equity. His major accomplishments include
advising on major deals (GM bankruptcy, AT&T consolidation), or private
equity investments in which his firm, on behalf of limited partners, acquired
controlling stakes in electric transmission, cable TV, oil, or tire
manufacturing companies.


That’s how the mayor defined him when Beutner moved in as potentially the most powerful figure City Hall since Ron Deaton moved from Chief Legislative Analyst to run the DWP the last time it was in crisis and chaos just six years ago.

 

In the business world Beutner comes from, the art of the
deal and the science of making money are fundamental imperatives. But
relationships are the coin of the realm, and those relationships are cemented
by three fundamental values: Alignment of Interest, Governance and
Transparency.

 

Private equity firms like Evercore Capital Partners,
the investment arm of the Evercore Partners firm founded by Beutner and another graduate of the giant equity firm, Blackstone Group. Evercore’s goal was to raise
funds from institutional investors, commonly called LPs (or Limited Partners)
and invest that money on their behalf. These fund managers are commonly known
as GPs (or General Partners), and they don’t last long in the business if they
don’t create strong Alignment of Interest, effective Governance, and absolute
Transparency.

 

How important are those values? They are the three
pillars on which Private Equity Best Practices are build, according to the
Institutional Limited Partners Association.

 

II. The
dealmaker comes to
Los Angeles

 

On Jan. 11, Mayor Antonio Villaraigosa appointed
Beutner
as First Deputy Mayor and Chief Executive for Business Policy for the
City of
Los Angeles.

 

His mandate was to “revamp and retool the city’s
approach to economic development, business attraction and retention and job
creation.” And he was given extraordinary access to the city treasury in
order to do that, assuming responsibility for not only the normal economic
development engine, mainly the Community Redevelopment Agency, but also the city’s “juice” departments: DWP,
the
Port of Los
Angeles
and Los
Angeles
World Airports
.

 

In advance of the announcement, the mayor’s office
leaked the appointment to, among others, the Wall Street Journal — which after
interviewing Beutner suggested he was prepared to divert resources away from
the DWP and its core mission of serving ratepayers and customers if that would
serve his presumably higher purpose of economic development.

 

The Journal wrote:

 

“(T)he
city does have some tools at its disposal. The Department of Water and Power,
the biggest municipal-owned utility in the nation, has an enormous
capital-expenditure budget. It could try to lure firms to locate in the area by
promising to purchase equipment such as solar panels from them, for example.
The mayor’s office also concedes that institutions such as the airport, one of
the 10 busiest in the world, haven’t been managed to to maximize their business
development potential.”

 

In the past 30 days, Beutner fully seized the reins of
DWP as its interim general manager – while retaining his job in the mayor’s
office.

 

III. Enter
the Dragon: The BYD deal

 

On April 30, Villaraigosa, Beutner and Gov. Arnold
Schwarzenegger announced
on the steps of city hall that Chinese battery giant
and electric car manufacturer BYD Co. would establish its North American
headquarters in downtown
Los Angeles.


“We
leveraged our City’s many resources, tools and assets to prepare a package that
any company would be hard-pressed to resist,” said Beutner. “BYD’s move to
Los Angeles should send a loud message to
businesses overseas and innovative, growing businesses across the country that
Los Angeles will do what it takes to win their
business.”

 

OK, so what does that mean? What specific “resources,
tools and assets” did the city offer BYD to get it to choose
Los
Angeles
over other cities in California, Michigan, Idaho and Oregon?

 

That’s not entirely clear.


The city’s press release
indicated that BYD “p
lans
to take advantage of the City’s various incentives and programs aimed at
attracting and retaining cleantech companies such as the Port of Los Angeles’
proposed ‘ZERO Emission Vehicle Tariff Measure’ that would reduce the wharfage
rate for Battery Electric Vehicles by 15 percent. The ‘ZERO emission’ tariff
measure will be the first of its kind in the port industry.

 

But BYD also has made no secret of the fact that its
business plan is to enter the electric car vehicle market in the
United
States
through a variety of key channels -
notably, fleet sales to government customers utilities like the DWP.

In fact, the Wall Street Journal interviewed BYD
executive Henry Li
and reported in December that BYD plans to make
Los
Angeles
the “lead market” for its market
for its flagship e6 vehicle – which will be sold only to fleet customers
“such as utilities.”

 

“BYD Co.,
the Chinese auto maker part-owned by one of Warren Buffett’s companies, is
likely to choose the
Los
Angeles
area as
the lead market for the electric car it plans to start selling in the
U.S. late next year, a senior executive said.

“BYD
is also leaning toward choosing the West Coast metropolis as home to its U.S.
headquarters for the auto business, Henry Li, a BYD senior director in charge
of its auto business outside China, said in an interview…

Mr.
Li said that to pick the lead market for the five-seat e6, BYD has spent the
past couple of years talking to different local governments to discern their
attitudes toward clean-energy vehicles, and what kinds of incentives or other
support they might offer the industry.

BYD
plans initially to make the e6 available only to fleet customers in the U.S.,
such as utilities, and will sell it directly to them instead of using
dealerships, “most likely through some type of lease program,” Mr. Li
said. BYD plans to develop a dealer network later, as the company makes more
products available in the
U.S.

BYD
expects to later expand e6 sales north to San Francisco and eventually to
cities such as Seattle, Chicago, New York and Boston, Mr. Li said, without
specifying a timetable. “Any of those markets is our potential
market,” he said, adding that BYD also wants to expand its offerings to
include other new-energy cars as well as gaso-
line-fueled cars.

BYD
Chairman Wang Chuanfu said during an interview in August that the company wants
to use the e6, one of its most advanced cars, to build its brand in the
U.S. He said the company will target government agencies,
utilities and “maybe some celebrities” as potential customers. BYD
hopes to enter
Europe with a similar strategy in 2011 or later.

So
what did city officials promise BYD? Have they agreed, either implicitly or
explicitly, to expand or replace the city’s or the DWP’s vehicle fleet by
purchasing BYD e6s?

IV. Who is
BYD, anyway?

 

If you paid close attention to the Wall Street Journal
excerpt, this might have jumped out at you: “
BYD Co., the Chinese
auto maker part-owned by one of Warren
Buffett’s companies…”

 

You
read that right. BYD is a publicly traded Chinese company headed by Chinese
billionaire Wang Chuanfu. But it’s major investors include Buffett’s Berkshire
Hathaway, which agreed in September 2008 to pay $231 million for nearly 10
percent of BYD through its subsidiary MidAmerican Energy Holdings Co.

 

If
you take nothing else away from that, understand this: BYD’s success in
Los Angeles is very important for some very big
investors. The company’s ability to establish a beachhead in
Los Angeles – presumably selling cars to the
city and DWP fleets – is a very big deal.

 

IV. The public sector paradigm:
Alignment of Interest, Governance, Transparency

 

The
public sector operates differently from the private sector. Competitive bidding
rules, labor contracts, stewardship of the public’s money — the rules are
different in the  public sector.

 

But
the three critical pillars outlined at the top – Alignment of Interest,
Governance and Transparency – are equally important in the public sector. Maybe
more so.

 

As
it relates to the Los Angeles DWP, think of the ratepayers as the equivalent of
LPs and the department’s commission and executive management as the GP. Their
interests should always be aligned.

 

In
this case, GP/DWP should make decisions based on what’s best for ratepayers –
cheap, reliable water and power service.

 

It
should never sacrifice the LP/ratepayers’ interests for GP initiatives –whether it’s bailing out the general fund or driving economic development — if
those initiatives detract from the core mission and harm ratepayers by either
driving up the price of power and water service, or making the delivery of that
service less.

The
DWP needs to align its interest with ratepayers. The appointed commission and
executive staff should not be pressured or permitted to subvert that alignment
of interest.

 

Which
brings us to governance. The department needs a ratepayer advocate. Former GM
David Freeman argued that the General Manager serves that role. That was always
debatable, to say the least.

 

What
is NOT debatable is that proper governance requires that the ratepayers
advocate be independent from other forces in city government that want to use
the DWP – and divert ratepayers’ capital – to other purposes. This is especially true because recent events have shown beyond a shadow of a doubt that the DWP Board, the citizens who are supposed to provide oversight and server as a buffer between the political leaders and the bureaucrats, has demonstrated it is irrelevant, a mere rubber stamp for political strategies.

 

That
would suggest that Beutner is inherently conflicted in serving
simultaneously as DWP General Manager AND First Deputy Mayor responsible for
economic development. He is part of the appointing authority of the commission as well as the DWP general manager reporting to the commission.


This is unprecedented at City Hall and would not be tolerated by investors in Evercore or any other equity fund because the governance structure is compromised.


From
a transparency standpoint, many questions remain.

The DWP is the most secretive agency in a city notorious for conducting much of its most important business behind closed doors and using its vast public relations and political operations to produce public messages that often have little or nothing to do with what is going on behind the scenes.

That is not to say that many insiders don’t know what is really going on when their interests are aligned.

DWP, BYD and the Alignment of Interests

It’s clear that from a general partner’s point of view in a private enterprise that the city’s BYD deal creates an alignment of interests of the investors in the electric car firm since they are getting a number of subsidies that are visible now with more to come if they deliver on building an assembly plant for its electric cars in north L.A. County.

It is clear the city through the DWP and possibly other agencies plans to buy as many of BYD’s vehicles as it can so that the firm can use LA to sell to other municipal and government agencies — the basis of its strategy to invade the U.S. market.

We know of Buffett’s stake because of its size and the importance of his credibility and influence. But who else has a stake in BYD’s venture, are there people who have known details and the direction of the negotiations with the city during the last six months or so?

Faced with massive budget deficits and the mayor’s high priority goal of attracting green technology businesses and jobs, the city’s interests from the point of view of the leadership are also in alignment. They also have control of the governance to implement all aspects of this deal, including the circumvention of bidding rules and the writing of specifications for bids that would effectively eliminate any chance for competitors. Transparency of the deal is entirely within their control

Whether the public’s interest, the interest of ratepayers and taxpayers, is in alignment is far from clear.

Is buying electric cars and solar panels from BYD that are made in China really in the interests of the people of LA or America when there are domestic competitors whose expansion would provide jobs locally and nationally?

What we are getting is 150 BYD America headquarters jobs, that might someday become as many as 2,000 jobs and maybe 1,000 electric car assembly jobs in the Antelope Valley, assembly accounting for only a tiny fraction of the cost of vehicle manufacture.

Is it worth it for the city to use DWP and other monies to buy these electric cars when it means raising rates even higher at a time when many people are struggling financially and the city is cutting basic services and eliminating by its own count nearly 4,000 jobs?

Given the economic climate, shouldn’t the city be deferring vehicle purchases, especially of foreign-made vehicles, until times are better and need is greater?

We don’t know the answers to these or many other questions. because the transparency that Beutner is giving to those whose interests are aligned has not been given to the owners and investors in the city’s business, the people of L.A.

Transparency is the issue and like any investor in any enterprise Beutner has an obligation to come totally clean about all aspects of this deal and of the DWP in all its dealings.

He is appearing before the City Council on Tuesday so its members will have the opportunity to broach all these matters with him.

They have the power to refuse to approve any deals until true transparency has been achieved, until the governance structure is changed to provide oversight and protection for the public interest, until the public interest is in full alignment with what Beutner is doing and proposing to do.

Surely, it is the duty and responsibility of the Council, as the elected members of the governance team, to make sure the public has all the information it needs to determine that their interests are being served.

Just as certainly, Beutner knows from his long years of experience and great success in the private equity world what investors expect and have the right to know.

The question is does he, the Council, the mayor, the commissioners regard the public as the owners and investors with the rights that status entails?




Which
brings us to governance. The department needs a ratepayer advocate.
Former GM
David Freeman argued that the General Manager serves that role. That was
always
debatable, to say the least.

 

What
is NOT debatable is that proper governance requires that the ratepayers
advocate be independent from other forces in city government that want
to use
the DWP – and divert ratepayers’ capital – to other purposes. This is
especially true because recent events have shown beyond a shadow of a
doubt that the DWP Board, the citizens who are supposed to provide
oversight and server as a buffer between the political leaders and the
bureaucrats, has demonstrated it is irrelevant, a mere rubber stamp for
political strategies.

 

That
would suggest that Beutner is inherently conflicted in serving
simultaneously as DWP General Manager AND First Deputy Mayor responsible
for
economic development. He is part of the appointing authority of the
commission as well as the DWP general manager reporting to the
commission.


This is unprecedented at City Hall and
would not be tolerated by investors in Evercore or any other equity fund
because the governance structure is compromised.


From
a transparency standpoint, many questions remain.

The DWP is the
most secretive agency in a city notorious for conducting much of its
most important business behind closed doors and using its vast public
relations and political operations to produce public messages that often
have little or nothing to do with what is going on behind the scenes.

That
is not to say that many insiders don’t know what is really going on
when their interests are aligned.

DWP, BYD and the Alignment
of Interests

It’s clear that from a general partner’s point
of view in a private enterprise that the city’s BYD deal creates an
alignment of interests of the investors in the electric car firm since
they are getting a number of subsidies that are visible now with more to
come if they deliver on building an assembly plant for its electric
cars in north L.A. County.

It is clear the city through the DWP
and possibly other agencies plans to buy as many of BYD’s vehicles as it
can so that the firm can use LA to sell to other municipal and
government agencies — the basis of its strategy to invade the U.S.
market.

We know of Buffett’s stake because of its size and the
importance of his credibility and influence. But who else has a stake in
BYD’s venture, are there people who have known details and the
direction of the negotiations with the city during the last six months
or so?

Faced with massive budget deficits and the mayor’s high
priority goal of attracting green technology businesses and jobs, the
city’s interests from the point of view of the leadership are also in
alignment. They also have control of the governance to implement all
aspects of this deal, including the circumvention of bidding rules and
the writing of specifications for bids that would effectively eliminate
any chance for competitors. Transparency of the deal is entirely within
their control

Whether the public’s interest, the interest of
ratepayers and taxpayers, is in alignment is far from clear.

Is
buying electric cars and solar panels from BYD that are made in China
really in the interests of the people of LA or America when there are
domestic competitors whose expansion would provide jobs locally and
nationally?

What we are getting is 150 BYD America headquarters
jobs, that might someday become as many as 2,000 jobs and maybe 1,000
electric car assembly jobs in the Antelope Valley, assembly accounting
for only a tiny fraction of the cost of vehicle manufacture.

Is
it worth it for the city to use DWP and other monies to buy these
electric cars when it means raising rates even higher at a time when
many people are struggling financially and the city is cutting basic
services and eliminating by its own count nearly 4,000 jobs?

Given
the economic climate, shouldn’t the city be deferring vehicle
purchases, especially of foreign-made vehicles, until times are better
and need is greater?

We don’t know the answers to these or many
other questions. because the transparency that Beutner is giving to
those whose interests are aligned has not been given to the owners and
investors in the city’s business, the people of L.A.

Transparency
is the issue and like any investor in any enterprise Beutner has an
obligation to come totally clean about all aspects of this deal and of
the DWP in all its dealings.

He is appearing before the City
Council on Tuesday so its members will have the opportunity to broach
all these matters with him.

They have the power to refuse to
approve any deals until true transparency has been achieved, until the
governance structure is changed to provide oversight and protection for
the public interest, until the public interest is in full alignment with
what Beutner is doing and proposing to do.

Surely, it is the
duty and responsibility of the Council, as the elected members of the
governance team, to make sure the public has all the information it
needs to determine that their interests are being served.

Just as
certainly, Beutner knows from his long years of experience and great
success in the private equity world what investors expect and have the
right to know.

The question is does he, the Council, the mayor,
the commissioners regard the public as the owners and investors with the
rights that status entails?

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22 Responses to Can Austin Beutner Save L.A.?

  1. Sandy Sand says:

    Of course, it’s not in our interest to have electric cars built in China for the city to purchase, no more than it was in our interest for the solar panals to be purchased by the city, which was part of the DWP E-CAP ballot measure we defeated.
    As to the question of does Beutner, the Council, the mayor, the commissioners regard the public as the owners and investors with the rights that status entails?
    The answer is NO. We have no status except to keep feeding the kitty. We’re just the insignificant schmos who keep the utility going with the rates we pay. Anything we say falls on deaf ears; we might as well be mumbling to our reflections in the mirror. We’re here to support the afore mentioned Big Four and the DWP’s union boss Brian D’Arcy.

  2. Anonymous says:

    Crooks and liars. Recall Antonio. He has abdicated his duties and responsibilities to a Wall Street figure, who has made his money with leveraged buyouts and shady deals. Antonio better realize, he is a disgrace, a sell out.

  3. anonymously says:

    Conflict of interest. How many shares of BYD does Mayor Tony and Austin Buetner own?

  4. Walter Moore says:

    One can summarize the BYD deal in two words: Potemkin Village.
    Or two other words: taxpayer rip-off.
    Here’s my take on it:
    http://web.mac.com/waltermoore/WalterMooreSays.com/Blog/Entries/2010/4/29_Villaraigosa_Using_Your_Money_To_Pay_Chinese_Car_Company_To_Come_Here.html

  5. Anonymous says:

    The more I read, the more none of you make sense. First the mayor isn’t pro-business enough so he hires Buetner. Then that’s just not good enough so you have to shred Buetner. You are no longer a force to be reckoned with.

  6. Walter Moore says:

    Robbing Peter to pay Paul is not being “pro business.”
    Handing valuable public land to Eli Broad, a politically connected billionaire, is not “pro business.”
    Imposing an onerous tax burden on thousands of mom and pop businesses, and then using their tax money essentially to bribe a Chinese company to move 150 employees here is not “pro business.”
    We need to get REAL jobs for the 250,000+ unemployed people in this City. That means we need to get REAL employers to stay here, and to move here. The best way to do that is to make L.A. a profitable, simple, fair place to open a business and hire people.
    Repeal the business income tax, and stop giving subsidies, sweetheart deals and other special favors to politically connected businesses.
    Get it?

  7. Anonymous says:

    10:35PM. Pro-business for whom? Antonio`s cronies? Wake up!

  8. Anonymous says:

    You know if BYD is coming through Antonio it will most likely turn out to be no BFD as everything else he touches does.

  9. anonymous says:

    This “green scene” must be an economic surge for someone. I’m curious who and if any of them hold an elected office. Are their economic interests submittals public record?

  10. Anonymous says:

    What happen to Robert Hertzberg’s green dreams for L.A.?

  11. anonymous says:

    Great post Ron. ‘Interesting observation on Beutner as “the appointing authority of the commission as well as the DWP general manager reporting to the commission.” Incredible!!
    Speaking of electric cars, I thought electric wasn’t green. Is that a moot point when a few solar panels are thrown into the deal? Can we get a list of all the investors involved in this deal?
    From an “Alignment of Interest, effective Governance, and absolute Transparency” viewpoint, I wonder if those in the private sector, who share these qualities amongst themselves (not like this always happens in the public or private sector), were aware that the Los Angeles residents would be “legislated” into supporting their investment.
    If those values do not exist at any point of this process (in both private and public), what is the likelihood this venture will bomb and we (not Buffett, Chuanfu, the Mayor or Council) will be stuck paying off the debt?
    My questions aside, in answer to yours (“does he, the Council, the mayor, the commissioners regard the public as the owners and investors with the rights that status entails?”), my guess is the answer is “no.”

  12. Sean B says:

    The BYD deal makes perfect sense.
    DWP will adjust rates to cover costs. Consider that a given. If their costs go up, your rates will shortly follow. If your rates don’t increase before the higher costs come along.
    Each dollar in DWP charges yields a dime from the ten percent Utility Tax. And from each dollar you pay in rates, the city gets eight cents in the transfer of “surplus” revenue to the general fund. So, for every dollar you spend with the DWP, the city receives ~20 percent for the general fund.
    So, if the DWP swells headcount or benefits tremendously, then the general fund will receive 20 percent of these increased persionnel costs via the utility tax / general fund transfer payments.
    And, if the DWP purchases a jillion solar panels and expensive, inefficient electrical cars, the ratepayers will cough up 20 percent of those costs as well to the city.
    So, it is in the city’s financial interest to make the DWP expenses as large as possible, and raise rates as much as possible, to generate maximum transfers to the general fund. That the taxpayers have to foot the bill isn’t a concern. The Mayor, council, et al just need a diversion to cover their actions.
    “Green power” is just a fig leaf, and is as substantive as a magician’s practiced misdirection.

  13. anonymous says:

    So, how will the electric cars be charged; what will be their source?
    I wonder how Galpin feels about this.

  14. 3,300 words. You need an editor!

  15. Anonymous says:

    Austin Beutner – former investment banker getting reamed here solely because he used to be an investment banker
    Humphreville – former investment banker elevated to the hero status on this blog with his former career happily ignored
    damn hypocrites

  16. Anonymous says:

    10:15, I will restrain myself from calling you what you deserve. Jack Humpreville, is a private citizen fighting for the unrepresented populace in this city, and Beutner, is an annointed head of DWP, there for one reason only, he is a billionare, like that makes him the moral voice for LA. Maybe, he is doing his community credits or looking for ways to enrich himself or his corporate buddies. Only time will tell. Don’t ever equate wealth with morality.

  17. Anonymous says:

    4:22, call me whatever you want I don’t know you and I don’t care. To me they’re both rich guys with former banking careers now going about their ways trying to make an impact on DWP. Interim DWP GM? Beutner. Guy who everyone wants as ratepayer advocate? Humphreville. Both have no utilities experience or engineering background yet are now considered utility experts in their own little circles. Yet I find it strange that one gets disqualified on the basis of his former career and the other who had the same former career gets a free pass. In Humpreville’s case I also find it funny that a former investment banker is now running around trying to tell people they’re overpaid.
    And while you spit platitudes like don’t equate wealth with morality, I have to let you know that in Beutner’s case, you’re actually doing the opposite – equating wealth with immorality.

  18. Anonymous says:

    So, how will the electric cars be charged; what will be their source?
    I wonder how Galpin feels about this.

    Ummm… electricity?
    And Galpin is free to sell whatever vehicle they want, electric or otherwise, so they probably don’t feel anything.

  19. anonymous says:

    10:27-Ummm…..that wasn’t an answer. What will be the source of that electricity; how will the cars be charged (coal, solar, wind)?

  20. anonymous says:

    10:27-Ummm…..that wasn’t an answer. What will be the source of that electricity; how will the cars be charged (coal, solar, wind)?
    Regarding Galpin, yes he can. He also has the right to competively bid for the contract. I’m curious if he has legal recourse if that fair bidding policy is by-passed as the case seems to be.

  21. Anonymous says:

    10:24, noone has claimed that Beutner is an utility expert, but Humpreville has shown he is. The general consensus is that DWP employees are overpaid. Don’t need any expertise for that. You can read it in braille.

  22. Anonymous says:

    10:27-Ummm…..that wasn’t an answer. What will be the source of that electricity; how will the cars be charged (coal, solar, wind)
    Well obviously the cars will be charged by the same types of generation that bring electricity to your home. Electricity is electricity. Maybe I don’t get what you’re asking.
    10:24, noone has claimed that Beutner is an utility expert, but Humpreville has shown he is. The general consensus is that DWP employees are overpaid. Don’t need any expertise for that. You can read it in braille.
    Humpreville understands the politics, not the industry. It would be nice if they actually consulted the engineers for once, instead of these lawyers and bankers that have no clue what they’re talking about.
    And DWP employees are considered overpaid only if you compare them to workers with the same job class in the council-run departments. To make your argument stronger you’d have to pretend DWP does not belong to the utilities industry so then you don’t have to mention the industry’s payscales. Then you keep repeating the word overpaid for half a decade until all the people who are too lazy to do research just take your word for it.

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