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November 6, 2001



Munipalization Vote in San Francisco May Set Precedent



By Will McNamara
Director, Electric Industry Analysis


[News item from Associated Press] In the wake of this year's California power woes, votes in the hometown of the state's largest utility will decide on Nov. 6 whether to initiate action to seize Pacific Gas & Electric Co.'s local electricity network and deliver power through a public agency. 

Analysis: There is a lot riding on today's vote, and its outcome will undoubtedly have significant ramifications for California and other cities across the country. Although the municipalization of an incumbent utility's electric system is not a new concept-either nationally or in this particular case-San Francisco is presently the largest city in which such efforts are being considered. Given the relative success of other municipalized electric systems in California (Los Angeles Department of Water and Power and Sacramento Municipal Utility District, for instance), along with the bad publicity that Pacific Gas & Electric Co. has encountered over the last year due to the state's energy crisis and its own bankruptcy proceedings, today's vote could very well be a victory for public power. The vote in and of itself will not create a municipalized electric system in San Francisco. Pacific Gas & Electric Co. has already vowed to fight the takeover, and if the vote is a win for public power it will only lead to further lengthy and costly court battles. However, the vote is significant because it illustrates what appears to be a growing trend among cities that believe they can provide cheaper electric service than incumbent, for-profit utilities. In addition, the measure is just one more strike against the already beleaguered Pacific Gas & Electric Co., which is still navigating through bankruptcy proceedings. 

There are two measures related to the public power movement that are up for vote in San Francisco today. First, Proposition I would create a San Francisco-Brisbane Municipal Utility District (MUD), an independent agency governed by a five-member board that would provide electric service to San Francisco and Brisbane, Calif., a smaller city located to the south of the Bay Area. California law requires that two separate cities be included in order for municipalization to take effect, and thus from the onset of the municipalization discussions in this area San Francisco and Brisbane were grouped together as one district. The second measure up for vote, known as Proposition F, would create a Water and Power Agency in San Francisco only and retain ties to City Hall. This measure would not create a MUD and therefore would not need to include Brisbane to take effect. The agency would be governed by an elected seven-member board of directors and would replace the current jurisdictional oversight by the California Public Utilities Commission. 

An affirmative vote in either or both of the measures would not necessarily mean an immediate effort to take over Pacific Gas & Electric's infrastructure. In addition to the court appeals that would undoubtedly take place, in the event of either measure being passed an elected board would have to subsequently vote whether or not to seize the utility's transmission and distribution lines. If such a vote were approved, the MUD could use eminent domain to take over the utility's assets. 

Ultimately at stake is a battle over Pacific Gas & Electric's 4.7 million customers and its transmission system, which has been appraised between $750 million and $1 billion (the utility claims that its system is worth $1.5 billion). Both sides have argued decidedly different platforms. The pro-muni effort in San Francisco / Brisbane has been led by Bruce Brugmann, the publisher of the Bay Guardian newspaper and City Supervisors Angela Alioto and Tom Ammiano. The proponents of the muni measure argue that a utility district operating as a nonprofit public entity would be more beneficial to city residents than a dividend-paying division of a major energy firm. It has been repeatedly noted by the pro-muni forces that Pacific Gas & Electric Co. charges the third-highest electric rates in the United States. In addition, the proponents point to already-established municipalized districts in California such as LADWP and SMUD, which they claim have protected customers from increasingly volatile prices for electricity. The other tenets of the pro-muni argument are that public power would lead to better accountability to customers and more emphasis on renewable energy. 

The movement against the muni effort is obviously led by Pacific Gas & Electric Co., but also includes officials from AT&T and Pacific Telesis Group, which together contributed about $250,000 to the opposition effort. Apparently, local communications companies fear that a successful municipalization effort of Pacific Gas & Electric Co. would lead to similar takeover measures in the phone industry. The basic argument against the public power movement is that the plan is unrealistic. Specifically, opponents say, the MUD formed by San Francisco and Brisbane would be ill-equipped to handle the complex electricity infrastructure that Pacific Gas & Electric has effectively managed for years, and that a city-run bureaucracy would not be able to compete with big league energy players. In addition, the new MUD would have to purchase Pacific Gas & Electric's transmission assets and also buy wholesale power without the benefit of long-term contracts, which represent two hefty investments that would end up costing consumers in the long run. It is true that the city of San Francisco owns the dam at Hetch Hetchy reservoir, which powers street lights and city offices with hydropower. However, the reservoir is reportedly in great need for maintenance and may require additional capital for upgrades. Thus, in order to serve Pacific Gas & Electric's 4.7 million customers, the MUD would have to buy most of its power on the wholesale market. 

This is actually one of several important points that may not have been taken into full consideration by the pro-muni forces. Already-established MUDs in California such as LADWP and SMUD, and those in other states, have already established lucrative contracts to obtain federal power at cheap rates through 2004. There is a good chance that a San Francisco / Brisbane MUD would not have the same opportunity to secure the same rates at this juncture. Thus, without the benefit of long-term contracts, the San Francisco / Brisbane MUD could be exposed to the volatile wholesale market or be forced to invest in the construction of expensive power plants. Often, such costs get overlooked when a city is planning to municipalize. In fact, it has been reported that the pro-muni side in this particular case did not conduct any feasibility study in advance of its campaign, and thus could very well be unaware of these associated costs. However, S. David Freeman, who previously managed LADWP and was recently appointed chairman of the new California Consumer Power and Conservation Financing Authority, went on record stating that his organization could assist a public power agency in San Francisco by selling it low-cost electricity produced by plants financed by the authority. 

As noted, Pacific Gas & Electric Co. intends to fight the municipalization effort, and in fact has fought in City Hall and in court for decades to derail such efforts in San Francisco. However, in contrast with past battles, the issue has become more intensely politicized over the last year as San Franciscans faced rolling blackouts and Pacific Gas & Electric Co. went bankrupt. The utility recently received cash support from its parent PG&E Corp., which reportedly spent about $1 million in an advertising campaign urging citizens to vote against the public power initiative. This financial support has been helpful, considering that Pacific Gas & Electric Co. is currently in bankruptcy proceedings and has little capital to front its own defense against the muni effort. Consequently, if voters pass the measures on Nov. 6, PG&E Corp. will undoubtedly launch a lengthy court battle that will keep the issue in litigation for years. In addition to the court appeals, it would most likely take the newly formed MUD years to gather the capital needed to front a purchase of Pacific Gas & Electric's T&D assets. 

Nevertheless, an affirmative vote on the muni issue could set a precedent for future votes and perhaps mark the dawn of a new era for public power. Other California cities such as San Diego, San Jose and Davis are closely following the outcome in San Francisco as they have also debated the issue of municipalization. In addition, the Coachella Valley Association of Governments, which includes the city of Palm Springs, Calif., began looking at the feasibility of taking over Southern California Edison's distribution system and forming a municipal utility last September. In fact, the municipalization effort has gained some momentum across the country over the last few years, along with the opening of competitive markets through deregulation. Current reports indicate that there are about 2,000 public electric districts, providing electric power to 40 million customers and accounting for 15 percent of the demand in the United States. It is important to note that the majority of these public power districts were formed in the early 1900s. 

The turnout for the vote in San Francisco could be a deciding factor. Although the issue had been gaining momentum in the city earlier this year, the events of Sept. 11 have turned the focus to more national events and made people wary of change. Typically, voter turnout in the area is around 35 percent. A recent survey conducted by the opponents of the measure found that 35 percent of those surveyed favored passage, 30 percent oppose it, and 35 percent were undecided. 

It is important to note that municipalization is not an issue that is only facing California. After several years of discussions, lawsuits and negotiations, the city of Hermiston, Ore., voted to spend $8 million to purchase the facilities PacifiCorp has been using to serve 4,000 commercial and residential customers. The city of Hermiston began serving customers on Oct. 1, when a new contract with Bonneville Power Administration (BPA) took effect. The federal power-marketing agency has already set aside 12 MW for the city, after determining that Hermiston qualified as a new small public utility eligible for preference power. 

Hermiston, Ore., is the first city to complete a contested municipalization of an incumbent utility's electric business in two decades (the last significant contested municipalization was completed in Massena, N.Y., in 1981). Despite the fact that a growing number of U.S. cities have expressed interest in municipalizing their electric systems, for the most part such efforts remain overwhelmingly unsuccessful when taken to court or a public ballot. Despite the success of Hermiston, some 50 other municipalization efforts have been terminated during the 30 years between 1970 and 2000. For instance, the city of Wichita, Kansas, spent more than $300,000 in the past two years studying municipal power options. However, after the Kansas Corporation Commission turned down Western Resources' proposed rate hike this summer, the city put municipalization plans on hold. Thus, the eyes of the industry will remain on the vote today in San Francisco for any indication that municipalization efforts are gaining momentum and proving successful. 

TOMORROW'S ISSUEALERT WILL INCLUDE THE OUTCOME OF THE MUNICIPALIZATION VOTE IN SAN FRANCISCO. 


An archive list of previous IssueAlert articles is available at
www.scientech.com <http://secure.scientech.com/issuealert/> 


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