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Like first lady Melania Trump renegotiated her prenuptial agreement mid-marriage, the city of San Diego is working to get a better deal from its private electricity and natural gas provider after 50 years together.
But it appears some flashy new suitors have come a-courting.
Two other energy companies are interested in buying out San Diego Gas and Electric’s expansive system of electric poles, gas lines and wires, which could effectively end the utility’s century-long energy monopoly in the region.
Berkshire Hathaway — Warren Buffett’s behemoth multinational corporation, which owns companies like GEICO, Dairy Queen and Helzberg Diamonds — signaled its interest in taking over the city’s franchise agreement, which grants utilities permission to operate in city limits. The current deal, signed in 1970, expires on Jan. 17, 2021.
The CEO of the company’s energy division cut the foreplay in a two-sentence notice to Lee Friedman, San Diego’s strategic energy initiatives manager.
“I wanted to inform you that Berkshire Hathaway Energy is interested,” Bill Fehrman wrote in a Feb. 20 email.
Berkshire Hathaway Energy, with its reported nearly $100 billion in assets, serves 11.8 million electric and natural gas customers via energy subsidiaries across the globe, according to a business summary attached to the email. The business self-reported that while 43 percent of the energy its utilities generate is renewable, over a quarter of its power generation still comes from coal, the dirtiest energy source around.
Another smaller gas and electric company owned by a coalition of indigenous tribal nations also expressed interest. Indian Energy LLC noted it secured a U.S. Department of Defense contract for a renewable micro grid in the San Diego area that could provide much-needed renewable back-up power. It boasted that the company secured 16,000 acres of land “rich with wind and solar resource.”
SDG&E also responded to the city’s request, as expected since the franchise fee is the utility’s bread and butter. By law, SDG&E can’t make a profit on buying and selling energy, a business the utility has signaled it’d like to leave. Instead San Diego Community Power, the newly formed government-run utility in the region, will take that over for at least 40 percent of SDG&E’s customer base come 2021.
SDG&E and its investors make money from the sprawling system of power lines and cables it’s built over the last century to each home and business in the region. It also delivers natural gas.
Without the franchise agreement, it would be impossible for SDG&E to continue operating in San Diego.
The city’s draft deal isn’t yet public. It likely will be sometime in July, when the City Council gets a copy, said Erik Caldwell, the San Diego’s deputy chief operating officer.
Back in 1970, SDG&E had very little competition. In fact, it was the only company that responded to the city’s bid, Caldwell said.
“It goes without saying that the more competitive the process, hopefully, the better outcome you get,” Caldwell said.
The franchise fee acts like rent a utility pays to use public land, typically rights-of-way along streets and sidewalks, to place its electric poles and wires. Except, in San Diego, the utility and its shareholders aren’t actually paying that rent.
San Diego residents are — to the tune of about $50 to $60 million per year. San Diegans are subject to a 3 percent fee while other areas in SDG&E’s territory pay 1.1 percent.
Why? Because the California Public Utilities Commission, the state agency that regulates utilities said SDG&E could decades ago.
He said San Diego wants the utility to “pay its fair share” for using the public right of way.
The city already spent around $1 million on consulting teams to figure out how much SDG&E’s infrastructure is worth and then actually run the deal, the San Diego Union-Tribune reported.
The city has a few other tools in its belt.
San Diego will likely ask the utility that wins the bid to pay a larger upfront, one-time payment. Though, Caldwell wouldn’t say how much at this point. Back in 1970, SDG&E paid $50,000.
“It’s the only amount of money that came out of shareholders’ pockets,” Caldwell said.
The city also wants a shorter term limit on the agreement: somewhere between five and 30 years, Caldwell said. Plus, third-party audits and fines for violating terms of the agreement.
(Right now, the city’s main outlet is the courts, where SDG&E and San Diego recently tussled over charges to make room for a $1.4 billion water recycling plant.)
And, San Diego might ask the winning company to make some public commitments on expanding infrastructure that supports renewable energy.
Climate Action Campaign, an environmental advocacy group, believes there’s a lot more room to be innovative.
“It’s our best tool to hold our utility accountable,” said Matthew Vasilakis, the campaign’s co-director of policy. “It’s like saying: If you want to play with the city, these are the rules.”
Vasilakis agrees with the city that the current agreement term is too long in a rapidly changing renewable energy technology space. Salt Lake City switched from a 25-year term to a five-year term in 2016.
Vasilakis said the group would also like to see whichever entity wins enshrine the right to unionize for utility workers.
In the extreme – though unlikely – scenario, the city could buy the whole system, putting the city in charge not just of electrons but of all energy-related infrastructure, too.
SDG&E signaled it expects to win the city’s favor once again.
“We look forward to a competitive, open and transparent process to renew the franchise agreements between the city and SDG&E,” wrote Helen Gao, a spokesperson for the utility, in an email. “Our 4,000 highly trained local employees are in the best position to continue to run the local power grid, as demonstrated by our track record of renewable energy integration, energy storage investments and wildfire safety innovations,” Gao wrote.
The utility pointed to its energy portfolio, which boasts 45 percent renewable energy. The company’s most recent energy content disclosure in 2018 states its energy mix was 43 percent renewable and 29 percent natural gas. Another 27 percent comes from “unspecified sources of power,” meaning the electricity is not traceable to specific sources.
Disclosure: Mitch Mitchell, SDG&E’s vice president of state governmental affairs and external affairs, sits on Voice of San Diego’s board of directors.
Correction: Erik Caldwell’s quote, “It’s the only amount of money that came out of shareholders’ pockets,” referred to SDG&E’s one-time $50,000 payment in 1970. Due to an editing error, the original placement of the quote suggested it referred to the yearly cost of the franchise fee.