San Diego wants its next power provider to pay at least $62 million for the right to build on its property, but traditionally private businesses find a way to pass that kind of cost onto its customers by raising rates.
City officials and advocates have argued over the total amount. Officials say that’s the floor not the ceiling when it comes to the unprecedented price it’s putting on the franchise fee agreement contract held for the last century by San Diego Gas and Electric.
Advocates decry the amount, saying it’s too low compared with the profit SDG&E makes off the vast expanse of electric poles, wires and natural gas lines each year. They say the fact that the utility is getting out of the power-buying business, and will be relying on the 10 percent return it gets to build things, heightens the importance of the charge.
The City Council couldn’t agree on terms it’d like to see in a final bid during a special meeting Thursday. The Council won’t get to see the final franchise agreement before it goes out to market anyway, Council President Georgette Gómez said during the meeting. That’s because Mayor Kevin Faulconer’s office has the final say.
Whatever the amount, there’s a fine line city leaders are walking in terms of how they require utilities to provide any of it.
If city leaders make a misstep, ratepayers could be on the hook in the future.
City Attorney: Make Them Pay in Cash
The city’s hired consultant, JVJ Consulting Inc. (run by Howard V. Golub, a former Pacific Gas and Electric attorney), suggested San Diego require the winning bidder to pay a minimum of $62 million. That’s the value of about one year’s worth of franchise fee payments, which in theory is the rent a utility should pay to the government to use public land. But instead, the franchise fee is tacked onto everyone’s energy bill.
There’s a wish list from San Diego Council members of what they’d like to get done with that $62 million.
Councilman Scott Sherman, for instance, said he wants to use it in neighborhoods for beautification of utility boxes or sidewalk repair. Councilwoman Vivian Moreno wants some cash siphoned off for a special climate equity fund to support projects in underserved areas of the city.
Local advocates are concerned the city will be lured in by power companies offering to provide services instead of paying cash. Services could be an offer to do work under some kind of program, like sidewalk repair in poorer neighborhoods, for instance.
“It’s something that a bidder who cannot compete or does not want to compete on an even footing with other bidders will ask for,” said Tyson Siegele, an energy analyst with the advocacy group Protect Our Communities. “Because they know it makes it impossible for the city to accurately select the best bid.”
What he means is: Cash is cash. It’s a number that’s comparable, dollar for dollar. Services are open to interpretation.
How does one determine the value of a program to rebuild sidewalks, for instance? There could be a wide range of prices from different concrete companies hired to do the work. Then different power companies might contract with different concrete companies, offering different prices or value of that work.
“It creates a multiyear or multidecade headache for the city of San Diego if the city agrees to cash and services,” Siegele said.
Siegele likened it to the argument San Diego is having right now with SDG&E over the growing cost of its joint program to bury electric wires underground. In that dispute, the city says it actually costs much less to bury a mile of wire than SDG&E charged.
City Attorney Mara Elliot recommended the city require a cash-only bid or it would otherwise violate the city’s charter.
“Cash is the only way for the city to remain objective,” said Jordan Moore, a fiscal policy analyst with the city’s Independent Budget Analyst Office, during a special City Council meeting Thursday.
Whether the city will accept cash or services, or both, is up to the mayor and Council to decide, Golub said in an email provided by Faulconer’s office.
Can the City Protect Ratepayers From Itself?
Whatever the payment, ensuring it doesn’t come out of ratepayers’ pockets is another animal.
San Diego’s consultant and Council members said they’re determined to make shareholders, not the public, pay for whatever the city gets from the winning bidder.
That was Gómez’s first question for the consultant Thursday.
Golub basically said the city would have to keep an eye fixed on the costs the future utility might try to slip into rates at the state Public Utilities Commission.
“You have to just watch and be somewhat vigilant,” Golub said.
How the city defines that upfront payment will be important.
Golub maintains his recommended price would come in the form of a minimum bid amount and not what’s called an acquisition cost.
The rules around the minimum bid have not yet been spelled out for the Council. But there is some growing case law, and therefore a chance for ratepayer protection, regarding acquisition.
Acquisition cost is basically the price companies or governments pay to buy another company.
Conflict over companies passing that onto customers is more common in California’s water utility space.
One example is the Bellflower Municipal Water System, a public utility that is being purchased by California-American Water Company, a private company. The city of Bellflower stands to gain $12 million in profit from the deal, a cost which the Water Company is supposedly planning to cover by increasing water rates on its customers all over the state.
The California Public Advocates Office (a division of the state’s utility regulators that acts as a kind of accountability watchdog) opposed the deal, saying it’s not legal to allow water companies to put their purchase price on the backs of the ratepayers.
The case is still in litigation. But Maya Chupkov, a spokeswoman for the office, said, “it’s our understanding that the extent of this type of private utility acquisition has not been tested in the energy space in recent California history.”
Disclosure: Mitch Mitchell, SDG&E’s vice president for government affairs, sits on Voice of San Diego’s board of directors.