After 50 years of waiting, San Diego is about to retake its seat as dealer in a high-stakes game with potential power providers.
The object is to win the city’s franchise fee agreement, a contract that allows a private company like San Diego Gas and Electric to build poles, wires and pipes on public land. The contract goes to the highest bidder under San Diego’s city charter, and everyone is scrambling to tack their desires onto the final bid.
The City Council is holding a special meeting Thursday, before the bid goes out, to review that wish list, which could include a $62 million price paid by shareholders of the winning company, or an annual fee to support energy projects in poorer areas of town.
The franchise agreement is considered San Diego’s most powerful leverage point against investor-owned utilities, and there’s really no standard for what the city can or can’t request. Increasingly, cities across the country are using these contracts to force fossil fuel-dominated power companies to secure more renewable energy or disclose previously secret energy data, which helps governments track planet-warming greenhouse gas emissions. Local renewable energy advocates don’t think the proposal from the city’s hired consultant is ambitious or innovative enough to meet the city’s policy goals.
San Diego declared a climate change emergency back in March. And its Climate Action Plan requires the city use 100 percent renewably sourced electricity by 2035. About half the city’s power comes from natural gas, which burns cleaner than coal but is still a fossil fuel.
One study by the federally backed National Renewable Energy Laboratory suggests the new trend of integrating renewable energy in franchise fee agreements could drive up to 911 terawatt hours of renewable energy generation nationwide by 2030 – that’s enough to power over three Californias in one year. The question is: Will San Diego’s final franchise agreement follow this trend?
The Fee Gets Passed on to Consumers
The agreement is like a rental agreement: The city (the landlord) signs with a private utility company (the renter) saying, sure, you can build your stuff on public land — typically along the public rights-of-way that border streets. But in exchange, you have to pay the government a fee (the rent) to do so.
Except that’s not really the way it works anywhere. That cost is usually passed on to customers. San Diegans actually pay the franchise fee on their utility bill.
It’s a reliable source of money for the city, generating anywhere from $50 million to $80 million for the general fund each year. It ranks fourth in city sources of revenue behind property taxes, sales tax and hotel taxes.
SDG&E frames the franchise fee as a ding on customers by the city.
“It’s important for people to understand that the franchise fees that SDG&E is required to pay to the city of San Diego is an important factor contributing to higher bills for those who live in the city,” said Helen Gao, a spokeswoman for SDG&E.
Gao pointed to utility data showing the franchise fee costs an average consumer around $10 per month.
San Diegans pay the highest fees of any SDG&E customer city. That’s because when the city wanted to raise the fee higher than its neighbors in 1972, SDG&E asked permission from the California Public Utilities Commission to pass that cost onto ratepayers as a surcharge.
Ratepayer advocates argued at the time that the franchise fee was being imposed as a tax and should be subject to a public vote. But the California State Supreme Court has so far ruled fees are different than taxes and don’t require voter approval.
“The system is not designed to protect ratepayers. It’s designed to balance the interest of private, for-profit companies who have a legitimate interest in profitable return on investment,” said Adam Hofmann, a public finance attorney who represented the California League of Cities in that Supreme Court battle.
In other words, utilities have always passed on fees to ratepayers, Hofmann said. “I feel like the sense of newness we have is that people are paying attention,” he said.
Why Franchise Fees Are Important for Renewables
The contract term could be key to achieving the city’s climate goals. That’s because a shorter contract means the city can be nimble enough to renegotiate as energy technology, global markets or local climate policies change.
Among a recommended slew of changes, the city’s hired consultant, Howard V. Golub (a former Pacific Gas and Electric attorney), suggested a 20-year term instead of the former 50, based on an average from the National Renewable Energy Lab study. Advocates want something more like five.
The study surveyed over 3,600 utilities and while the average contract term is 20, the study’s author said newer contracts are trending toward shorter terms limits.
“There are all these other options for new power, and cities don’t want to be in long term contracts,” said Jeff Cook, lead author of the study. “They want the utility to be more flexible and achieve goals they have. Fifty years ago cities didn’t have any of these goals except, ‘give me cheap electricity.’”
The city of Minneapolis signed a five-year contract with its private energy providers in 2015 despite a movement to municipalize, meaning the city would buy out the utility and run the show. Instead the shorter contract is rolling, and parties can signal with a year’s notice that they want to renegotiate.
“I feel bad for any (city) signing anything longer than five years in the world that we live in because, then, you’ve got nothing to negotiate,” Kim Havey, Minneapolis’ sustainability director, said.
The parties also forged a “clean energy partnership,” a policy and planning document showing the utility agrees to produce annual reports disclosing outage data, information on its investments and metrics for tracking greenhouse gas emissions by businesses, homes and industry.
San Diego’s consultant recommends similar audits every four years and crafting a collaborative policy to target climate goals.
But Erik Caldwell, the city deputy chief operation officer, said he doesn’t believe the city can regulate renewable energy with its franchise agreement.
“The (California Public Utilities Commission) has sole jurisdiction over investor-owned utilities as it relates to their energy mix,” Caldwell said.
Havey said that’s why securing energy commitments via Minneapolis’ partnership is so important. Any violation of that understanding could be held up at a public meeting.
“That’s an extremely powerful forum to be in and it’s hard for utilities to say, ‘We’re not interested,’ like they could in a closed room of an office,” Havey said.
SDG&E Is Pissed
San Diego’s incumbent utility didn’t really like anything the city’s consultant suggested.
“The unprecedented take-it or leave-it tone of the (proposed contract) by the (consultant) will not help achieve any of the city’s energy or financial goals and will substantially stifle competition in this process, which would be a violation of the city charter,” Mitch Mitchell, vice president of state governmental and external affairs for SDG&E, wrote in a July 15 letter to the San Diego City Council environment committee. (Disclosure: Mitchell sits on Voice of San Diego’s board of directors.)
In that letter, SDG&E indicated it strongly prefers a 25- to 30-year term.
Cook, author of the utility study, said utilities typically manage contracts in dozens of jurisdictions at one time, so it’s desirable to have a “boiler plate” contract that’s the same across any boundary. SDG&E has at least 12 franchise agreements to manage, according to Cook’s data, three of which had contract term limits.
SDG&E also blasted the notion of paying an up-front multimillion-dollar cost of winning the bid, claiming the request is unprecedented.
But when asked to provide evidence, SDG&E spokespeople pointed to Cook’s study. Cook said that question wasn’t asked.
It’s unclear how the city could obligate any private utility’s shareholders to pay that price (or any price) without passing it onto customer bills later.
Mitchell said there’s no legal instrument to require that.
Lee Freidman, the city’s strategic energy initiatives manager, said it could be written into the final contract as a franchise violation leading to revocation or forfeiture of the agreement.
It’s that pot of money Council members are hopeful could be used to pay for things like electric vehicle charging stations, utility box beautification, sidewalk repair and tree trimming.
Right now, 25 percent of the franchise fee goes toward an environmental growth fund that’s supposed to help pay for park maintenance. The rest goes into what Councilman Scott Sherman called “the black hole” of the general fund.
“My concern is the city will get one big giant cash upfront payment and the next thing you know, the money disappears into the general fund and we never reap the benefits in neighborhoods,” Sherman said.
Councilwoman Vivian Moreno proposed siphoning a portion into a special climate equity fund. Her deputy chief of staff, Lisa Schmidt, said the money would be used to finance projects (like parks, open spaces, sidewalks) in areas identified as underserved by the city’s Climate Action Plan.
Are We Rushing Against a Deadline?
Caldwell said he expects the bid to go out soon and the responses to come back in autumn. The current agreement expires on Jan. 17. It’s unclear what will happen if a new one isn’t in place before then.
Caldwell said the city hopes to avoid that situation, but very likely the two would have to negotiate an interim extension of the current agreement.
If the city doesn’t like what it gets in response, it could issue another bid. Per the city charter, the city is required to take the highest bidder. It could even come down to an old-fashioned standoff bidding war on the floor of the City Council chambers.
Regardless, SDG&E promised it won’t shut the power off.
“SDG&E has an obligation to provide electricity and gas to every customer requesting service in every community in our service territory, and we will continue to meet that obligation, regardless,” Gao, the SDG&E spokeswoman, wrote in an email.