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Rethinking San Diego is a series exploring new approaches to some of San Diego’s biggest policies, plans and dilemmas.
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A private power company answering to investors has kept the lights on in San Diego for over a century, but could a power company owned by the people do it better and cheaper?
A budding movement this year for publicly owned power thinks so. To pull it off, though, the city of San Diego would have to buy San Diego Gas and Electric’s massively expensive system of poles, wires, gas lines and other assets — among other hurdles. The city’s already paid two different consultants to estimate the value of SDG&E’s property and lay out the legal route to pursue public power, like a lengthy condemnation and takeover process in the courts.
That’s why public power activists cheered the decision a few weeks ago by then-Council President Georgette Gómez to try and delay a bidding war for the right to deliver San Diegans electricity in the coming decades.
So far though it seems city leaders would rather let another deep-pocketed energy company shoulder a future battle with SDG&E or haggle with them on their own. The newly elected Council president, Jen Campbell, and chair of the environment committee OK’d former Mayor Kevin Faulconer’s deal terms earlier this year. And newly elected Mayor Todd Gloria announced Tuesday he wants to open the bids kept secret under Gómez’ watch, but he doesn’t want to make any decision yet.
“The public deserves to know what bids have been submitted,” Gloria said in a press release. “We must ensure that we do not squander this once-in-a-generation opportunity to help meet the city’s climate goals and protect ratepayers.”
It appears the window to take steps toward municipalization first is closing.
Howard Golub, a consultant hired by the city (and a former attorney for Pacific Gas and Electric), estimated SDG&E earned at least $322 million for shareholders last year by providing energy to the city of San Diego last year. SDG&E doesn’t track or report income by individual cities or service territories, said Helen Gao, a spokeswoman for the utility. But Golub’s report assumed San Diego accounts for 42 percent of SDG&E’s whole service territory, which produced a net income of $767 million. Gao said SDG&E disagreed with the consultant’s conclusion but didn’t provide an explanation.
If the customers owned the utility, advocates think whatever money investors pocket as a result of their business with San Diego could come back to the community in the form of rate cuts or efficiency programs.
“The COVID-19 pandemic magnified the lack of affordability San Diego has. Any way we can reduce the cost of living, like an electricity bill, that’s something we should all get behind and I hope this new City Council does that,” said Sonja Robinson, who chairs the steering committee for advocacy group Public Power SD.
The San Diego City Council has a big decision ahead of it as the city’s contract with SDG&E expires Jan. 17. It will decide whether to extend a new decades-long power contract – called the franchise fee agreement – to a private utility, municipalize, which it has a right to do under the California Constitution, or pursue some other option that hasn’t yet come to light.
The city thought about forming a public power utility back in 1970 during its last power franchise negotiations but interest rates were too high to make such a bold move, according to a city report. NewGen Strategies and Solutions, the consultant recently hired to assess the value of SDG&E’s property, estimate it’s worth anywhere from $2 billion to $3 billion.
The consultants opined ratepayers would probably pay less eventually under a publicly owned utility over private, but that didn’t account for a lot of complicating factors.
Like, how much would SDG&E charge San Diego to part with its infrastructure?
“It’s nuclear war,” said Barry Moline, executive director of the California Municipal Utilities Association. “There’s nothing more an (investor-owned utility) will want to do than protect its investment in its infrastructure. (A city buying it) is effectively putting it out of business.”
Private utility representatives caution that going public means taking on the risk of providing reliable service – especially in the face of natural disasters like wildfires – and shouldering large amounts of debt to fund expensive infrastructure investments.
“The question become, is the juice worth the squeeze?” said Brad Viator, executive director of Edison Electric Institute, an investor-owned utility trade association. “Do you want to spend a couple billion acquiring these assets and stack that debt load just to get the rights to the divorce?”
Golub recommended San Diego only move forward with municipalizing if it can’t hash out a better deal with a private provider. Yet public power advocates don’t think the cost of going public is so high that it outweighs the future flush of potential benefits.
“The franchise is worth billions of dollars,” said Craig Rose, a member of another public power advocacy group called Citizens Franchise Alliance. “It’s a huge loss of wealth from the community that can only be captured through public power.”
There’s a chance the threat of public power could be leverage enough at the negotiation table with whoever becomes San Diego’s next franchisee. But it’s up to San Diego’s new mayor, five new Council members and new Council president who take the reins on this deal next year.
So other than spending billions to get billions, what are the benefits to going public and what are the drawbacks?
What Would a Public Power Agency Look Like?
If Bill Powers had his way, San Diego’s public utility would operate more like the San Diego Unified School District (which is not without its own set of unsavory problems). It’d have its own budget and an independent board elected by the public that’s not beholden to the City Council or the mayor’s will. While the city could choose to make it a department, that might be a harder sell to a public familiar with disappointments like the recent overbilling scandal at the San Diego Public Utilities Department, Powers said.
“It’s been in vogue to be dismissive of public agencies in this country for decade. People think you need private business to really do it right,” Powers said.
There are more publicly owned power companies in the United States than private ones, 66 percent in fact, according to a 2017 analysis by the U.S. Energy Information Administration. A lot of those are small rural electric cooperatives started around the Great Depression when the federal government sought to subsidize the electrification of the country.
Investor-owned utilities dominate in heavily populated urban areas, so they serve the majority of Americans – three out of four utility customers nationwide.
Still, it’s not unheard of for metropolises to provide their own power. Sacramento, for example, has had a community-owned nonprofit electric company since 1923.
Such public utilities aren’t regulated by the California Public Utilities Commission. Every time an investor-owned utility wants to raise rates to pay for a project, it has to make its case before the commission. They usually prevail.
The way investor-owned utilities make money is building stuff, and every time they do, they earn about a 10 percent rate of return. That means for every dollar the utilities spend building gas or electric infrastructure, they can charge customers an additional 10 cents or so in profit for shareholders.
Public power agencies can’t do that. Instead, their benefit is that they don’t have to pay income taxes to the state or federal government like corporations do. The public utility would be accountable to its board and ratepayers locally (as well as complying with other state and federal regulations).
In effect, you have a utility that operates without the pressure of profit and heavy taxes, so that’s a savings that could be reflected in lower rates.
“Municipal utilities are essentially incentivized to make sure they zero out in the black. They’re not incentivized to be in the green,” said Shalanda Baker, co-founder of the Initiative for Energy Justice.
Viator, of the Edison Electric Institute, said while profit is a priority for investor-owned utilities, so is keeping costs low. These companies have to negotiate a rate of return on every project. If the project ends up being more expensive than planned, they can’t turn around and issue a change order like a government agency when they underestimate costs or run into a construction hiccup.
“You don’t get to go back to the customers and ask for more money,” Viator said.
Downsides
The public model isn’t perfect.
At least one 2015 paper suggested public utilities are worse at complying with important regulations and maintaining infrastructure because they operate at the pleasure of the voter. Rate hikes are “so politically sticky,” it’s harder for public utilities to generate the revenue required for crucial infrastructure or even simple maintenance, the paper’s authors argued.
Moline, the California Municipal Utilities Association director, called that “hogwash.”
“Rate hikes do become political in a sense that they are transparent and done in public by elected officials,” Moline said. “We work hard in our industry to make sure there are standards for operations and investment.”
Investor-owned utilities tout that they’re not as constrained by politics of an ever-changing city council or election cycle as a plus.
“The benefit is that we are in the investment game all day, every day. … As a result, our balance sheet is available to just deploy capital and ensure the system can be built to meet the needs of the community it serves,” Viator said.
The Equity Question
On the other hand, that same paper points out private utilities are less incentivized to create rate structures that benefit low-income households because it’s typically not a moneymaking priority in the eye of the investor.
San Diego’s trying something new with its franchise fee deal and asking companies pay the city just to get the contract, which is really the only negotiating point for the city after the terms of the bid are released. Faulconer suggested the price be at least $80 million, and that’s where Council members could get creative.
Councilwoman Vivian Moreno suggested a portion be put toward an equity fund to support projects in underserved areas of the city. Faulconer’s terms ask the new provider to “cooperate in good faith” with the city’s Climate Action Plan, which lays out some equity-based goals, but didn’t specifically apportion anything from the contract price for the purpose.
Baker, from the Initiative for Energy Justice, believes public power provides a better pathway toward more affordable energy simply because it should be the government’s responsibility to “stop perpetuating inequality and inequities.”
She suggested the city of San Diego bake rate limits into it franchise agreement even if it decides to turn away from the road toward municipalization.
“No one should pay more than 6 percent of their overall income on energy,” Baker said. “Right now, in this country, we have folks spending 25 to 40 percent.”
On the eve of a historic year for San Diego’s energy future, the city appears ready to discuss a radical reorganization of its system and may take over the job completely. Whether the city can do the job more efficiently and cheaper than SDG&E would depend on how hard it wants to try.