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Thursday, May 17, 2012
Regional Focus: June 2008
Playing with Power
Stockton considers electricity market takeover
Story by Howard Lachtman
Mayor Ed Chavez and the city of Stockton are considering pulling the plug on Pacific Gas & Electric Co. At his State of the City address in February, Chavez announced the city has been quietly studying the feasibility of acquiring electrical facilities from PG&E and operating as a municipal utility.
PG&E has announced its opposition and promised resistance. “We are not a willing seller and will vigorously contest it,” says PG&E spokeswoman Nicole Tam, citing the city’s inexperience in energy management and operation. “We consider this a hostile takeover and one not in the best interests of our customers. We believe this is not a sound business plan for the citizens of Stockton.”
But Stockton is legally entitled to the takeover, Chavez says. The city’s 1954 franchise agreement with the company stipulates that it may “purchase the public utility facilities of the company within the city at a reasonable price at any time that the city shall see fit.”
The takeover idea was submitted for review to the City Council along with a request for an in-depth study, whose cost might exceed $1 million. A three-member ad hoc subcommittee of the council, including Chavez, met in private session April 15. Chavez says the committee “helped get the council members up to speed on the issues and educate them about what’s going on,” but didn’t make specific recommendations.
The city is weighing whether a takeover is a prudent investment. Chavez’s concern about a sound legal basis for any such action led the council to a 5-1 decision in favor of filing suit in San Joaquin County Superior Court. That action took place on April 29.
“We are not suing for damages or penalties,” says Ren Nosky, the city attorney for Stockton. “We’re asking for judgment confirming that our right to purchase is valid. We’re very confident that the right will be vindicated.”
Estimates of a PG&E buyout run as high as $368 million — a conservative figure according to some analysts — but a study commissioned by the city from consulting firm R.W. Beck suggests that the city’s best interests could be served by creating a municipal electric system. The buyout expenditure could be recouped, and the city could save $8 million annually, according to the Beck study.
Tam alleges the study “grossly underestimates” the financial costs and energy market volatility risk for the city and its customers.
But Chavez made it clear in his address that he sees “tremendous potential” in a municipal utility. Such an operation can assess rates best suited to local needs, he says, and acquire electricity from sources it deems best. This could result in lower prices to consumers and rate incentives to attract new businesses. The city’s general fund could gain an estimated $85 million to $200 million over 10 years, Chavez says, boosting city services and civic projects.
PG&E serves 103,000 customers in Stockton’s residential, commercial and industrial sectors. Stockton currently receives $1.1 million from the utility under a franchise agreement that stipulates an annual payment by the power provider to operate within the city. By contrast, the neighboring city of Lodi, which has owned and operated its electric utility since 1910, serves 25,500 customers. Lodi’s total revenue at the end of the current fiscal year would be $75 million, of which $6.8 million would funnel into the city’s general fund.
“PG&E sets uniform rates and policies for the communities it serves, and its corporate stockholders seek returns on its investments,” says George Morrow, electric utility director for Lodi. “The advantage of our local control is the community can make decisions that best suit its needs and desires. Lodi has a well-maintained electric infrastructure, its distribution system is very reliable and I believe our service is perceived as being excellent by the public overall.”
Morrow cautions that operation of a public utility is complex, with unanticipated hurdles. “Things that happen in the power systems of Canada and Mexico can impact you. The electric grid is so interconnected that remote events can affect the quality of service and power supply here in Northern California. The physics of electric operation requires that supply and demand of power have to be perfectly balanced every single instant.”
One of the largest municipal electric systems in Northern California is the Sacramento Municipal Utilities District. In 2006, PG&E defeated a bid by SMUD to expand its operations into Yolo County — a move requested by the city councils of Davis, West Sacramento and Woodland and endorsed by the Yolo County Board of Supervisors — citing potential costs and risks to consumers. But a study of operations in Folsom, which SMUD began serving in 1983, shows the substantive benefits of a community-owned utility, according to John DiStasio, SMUD’s assistant general manager of energy delivery and customer service.
“Local governance means more accountability to the community in which the utility operates,” DiStasio says. “Since we don’t have shareholders, anything in the form of a dividend goes back to the community in the form of infrastructure or lower rates. It’s a better long-term benefit to the consumer.”
DiStasio estimates consumers in the Folsom annexation saved $240 million in energy costs over the first 20 years of operation. “We grew with the community, and the operation — from a reliability standpoint — has been very good. Our limiting the number and duration of outages compares very favorably with PG&E.”
Stockton’s hopes of reaping some of those same benefits begin with the probability of a legal contest that could prove long and costly. Despite the Beck estimate, the true cost of acquiring PG&E property — as determined by the state Public Utilities Commission — is unknown. Some local consumers are skeptical of the energy proposal, pointing to the city’s largely clandestine and ultimately ill-fated deal with OMI/Thames to privatize municipal water operations.
Some have also wondered whether the City Council’s ad hoc committee on electricity was an end run around public scrutiny. The three-member committee met in a private session and referred the matter to council.
“You can look at that as a restriction of public involvement or as preparing alternatives for future public discussion,” says University of the Pacific political scientist Bob Benedetti. “It’s appropriate to balance the committee procedures of representative democracy with the open meetings of direct democracy.”
Although PG&E questions Stockton’s competency to function as a municipal utility, the city’s intent to form a joint powers agreement with the Port of Stockton would give it an experienced and supportive partner. The port has managed its own utility since 2003, serving businesses on the former Navy property at Rough & Ready Island. It has expressed willingness to share its expertise and energy-purchasing strategies with the city. Port Director Rick Aschieris says the electrical operation has stimulated customer interest, economic development and job creation — exactly what Stockton hopes it can do by operating a municipal utility.
“We are pleased to work with the city in furthering those goals it shares with the Port,” Aschieris says.
The City Charter of Stockton forbids the city from issuing bonds to acquire a public utility without approval of the electorate. A joint agency — governed by a board independent of city or port officials — is a separate entity that doesn’t need approval. PG&E’s spokeswoman Tam calls that unfair.
“Customers should absolutely have a say in such a major undertaking,” she says. “We want them to understand the financial impact and have an opportunity to provide input.”
The only other California city granted a contractual right to purchase was Long Beach. The city attempted a municipal takeover, entered into a protracted legal battle and settled for a greater share of revenues from Southern California Edison. Chavez says Stockton isn’t interested in that route.
“There are good reasons for us to become a public utility, and the potential is very intriguing, but we have to take a thorough look and make a very thorough analysis, identifying issues and strategies,” Chavez says. “I expect a battle from PG&E, but I also expect them to fulfill their commitment.”
