http://www.consultrci.com

************************************************************************
Get a complimentary premiere SourceBook Weekly Issue at:
http://www.consultrci.com/web/rciweb.nsf/Web+Pages/SBEntrance.html
Not just news; analysis.
************************************************************************
Miss last week? Catch up on the latest analyses of the energy industry
at:
http://www.consultrci.com/web/infostore.nsf/Products/IssuesWatch
************************************************************************

===============================================================
SCIENTECH IssueAlert, December 11, 2000
San Francisco Muni Attempt Poses Additional Challenge for PG&E
By: Will McNamara, Director, Electric Industry Analysis
===============================================================

Backers of a plan to create a publicly owned power system in San Francisco
and Brisbane, Calif., got a financial boost recently with a panel approving
$754,250 in taxpayer money to study public power and related issues. Most
of the money will be used to study how the proposed municipality district
would work and how it would be financed. The Board of Supervisors Finance
Committee approved the spending, but put $400,000 of the money on reserve,
pending the selection of contractors to perform the study and determine
the scope of the work.

ANALYSIS: This news item circulated about two weeks ago, but it still deserves
attention as this could have tremendous impact on PG&E. The announcement
of the municipalization study comes at arguably the worst possible time
for PG&E as the utility already faces a multitude of financial and public
relations problems. Yet, in fact, the issue has been developing for several
months. Back in July, supporters of municipalization in PG&E's service
territory turned in a petition with 23,500 signatures calling for the creation
of a municipal utility district (meaning that electric service would be
provided by a city rather than an investor-owned utility).

First, let me provide some brief context regarding PG&E's current condition.
The utility is in debt of over $3 billion due to uncollected fees related
to the price spikes of last summer. PG&E's objective is to bill its customers
for this debt, and toward that end has petitioned to raise its rates with
the California Public Utilities Commission (CPUC).  Under PG&E's plan,
average residential monthly bills reportedly would increase from about
$54.50 to $63.50 on Jan. 1. Naturally, consumer activist groups such as
TURN that carefully monitor PG&E's every move have contested the rate 
increase,
arguing that the utility alone is responsible for the debt it currently
faces. Since it is uncertain if the CPUC will grant PG&E's petition, 
speculation
that the utility will become financially insolvent has begun to grow.

Both San Francisco and the smaller city of Brisbane to the south are included
in the study because municipalization must include two separate cities
in order to take effect. If municipalization is ultimately approved, these
two cities would form a new district and elect directors who would then
attempt to purchase PG&E's power grid in the area.

Proponents of the muni bypass effort say that the cities can provide less
expensive power to customers than PG&E, as the utility must pay dividends
to stockholders and compensate well-paid executives. PG&E has already started
damage control in response to the study, arguing against the formation
of a municipal utilities district. First, the utility has said simply that
it is not for sale, but more importantly it is PG&E's contention that 
customers
would not necessarily save money if the cities in question were to 
municipalize
their electric districts. In addition, PG&E says the cost for the cities
to buy its assets*necessary power plants, utility lines and other 
infrastructure*would
run about $1 billion, which in fact would make the project more expensive
in the long run for customers.

Consumer activist Harvey Rosenfield is spearheading the municipalization
effort and is using the problems in San Diego as a means to support his
case. His name may sound familiar, as Rosenfield has been involved in many
seemingly anti-investor owned utility (IOU) measures in California. Back
in 1998, Rosenfield led the fight for Proposition 9, which would have 
essentially
put a screeching halt on deregulation in the state. Although Prop. 9 was
ultimately defeated at the ballot, had it passed the measure would have
stopped the three California IOUs from charging customers for the costs
associated with $6 billion in bonds they had sold to pay for the 10-percent
rate cut that customers began receiving in January 1998. Prop. 9 would
have blocked the utilities from recouping any of their stranded costs,
which of course SDG&E has now accomplished and reportedly the other IOUs
(SCE and PG&E) are close to doing so as well. Rosenfield was a key participant
in Californians Against Utility Taxes (CUT), which lobbied repeatedly for
electric rates to be reduced by 20 percent for small consumers (as opposed
to the 10 percent that was included in the state's restructuring bill).

Along with this study related to specific cities, there reportedly is a
simultaneous movement from Governor Gray Davis for a state takeover of
the power transmission grid, power plants and government-sponsored 
construction
of new generating plants. In early December, an internal memo was leaked
indicating that the governor was considering these measures as a response
to the tight supplies and high prices seen in San Diego last summer. Included
in the plan would be a restructuring of the state's power system wherein
the grid of transmission lines and power plants would be placed under state
control. Among several points on which PG&E and the governor disagree,
Davis has proposed an extended rate freeze for customers of all of the
three state's IOUs. While PG&E is pushing for a rate increase, California's
highest official reportedly would implement an indefinite rate freeze that
would further complicate PG&E's plan to pull itself out of debt.

Municipalization attempts in cities across the United States have increased
over the last two decades. Just last week, the city of Hermiston, Ore.,
was granted the right to acquire, by condemnation, the distribution facilities
that Pacific Power uses to serve parts of the municipality. The Umatilla
County Circuit Court has upheld the city of Hermiston's right to acquire,
by condemnation, the distribution facilities Pacific Power uses to serve
parts of the municipality. The city has been trying to acquire those 
facilities
since 1998, with the intent of forming its own utility to serve the 4,000
commercial and residential customers now served by Pacific Power. Of course,
even though this is a significant ruling, it will remain embroiled in court
for some time. A jury trial to set the dollar amount of compensation for
Pacific Power's facilities won't start until March 12, 2001. Other 
well-publicized
municipalization attempts have taken place in Lakewood, N.Y. (failed) and
a number of cities across Florida.

However, despite the rise in muni bypass efforts, the fact remains that
no contested municipalization effort of any significant size has been 
successful
since the one that occurred in Massena, N.Y. back in 1982. At that time,
the city of Massena offered low-cost hydropower and tax-free financing,
which made the municipalization attempt beneficial to citizens. Today,
cities rarely can offer such advantages, which had made it difficult for
muni bypass efforts to succeed. Statistics show that, when given the option
to develop a city-run electric system by dissolving the incumbent utility's
authority, citizens across the country have chosen to retain the IOU model.
Of course, arguments could be made that in such cases the IOU lobbying
force has been a formidable component, wielding the capital necessary to
wage a successful campaign to protect its business. Yet, at the same time,
a case can be made that the benefits of municipalization just have not
been proven and that explains why citizens generally have opted to retain
the IOU model.

There is both good and bad news for PG&E related to this particular study.
The bad news is that studies such as these most often recommend 
municipalization,
which makes it very difficult for local politicians to resist a takeover.
In other words, because the wheels have started turning toward 
municipalization
in the area, it is more than likely that PG&E will have to engage in a
battle to preserve its business. Even though past history shows the attempt
probably would not be successful if PG&E contests it, the bypass effort
would result in PG&E spending a lot of money and time to fight the effort.

The good news is that time is on the utility's side. Municipalization is
usually a long and involved process. The fact that the Finance Committee
gave the green light to proceed with the study is only the first in many
regulatory checkpoints. The next steps are the full board's consideration
of the funding request for the study, and subsequently a decision whether
or not to put municipalization on the local ballot. Then the hard campaigning
would begin to sway public opinion one way or the other. Thus, even if
muncipalization of the two cities were to occur, PG&E still has some time
to potentially resolve its debt situation and construct a strong opposition
to the muni attempt.

However, from a public relations standpoint, this is just the last thing
that PG&E needs at this point. The utility continues to spin media coverage
to convey that it is only trying to recoup a debt that it accrued on behalf
of its obligation to serve customers. Adversaries such as TURN and Harvey
Rosenfield, however, are just as aggressively working to convince the public
that PG&E is trying to unfairly stick customers with a $3 billion tab.
To now have discussions emerge about whether or not city government could
more effectively provide electric service is another fire that PG&E will
have to extinguish if it wants to remain operational.
===============================================================
SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let
us know if we can help you with in-depth analyses or any other SCIENTECH
information products. If you would like to refer a colleague to receive
our free, daily IssueAlerts, please reply to this email and include their
full name and email address or register directly at:
http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert
===============================================================
Feedback regarding SCIENTECH's IssueAlert and SourceBook Weekly should
be sent to wmcnamara@scientech.com
===============================================================

*********************************************************************
Reach thousands of utility analysts and decision makers every day. Your
company can schedule a sponsorship of IssueAlert by contacting Nancy Spring
at nspring@scientech.com or (505)244-7613. Advertising opportunities are
also available on our website.
*********************************************************************

SCIENTECH's IssueAlerts are compiled based on independent analysis by 
SCIENTECH
consultants.  The opinions expressed in SCIENTECH's IssueAlerts are not
intended to predict financial performance of companies discussed or to
be the basis for investment decisions of any kind.  SCIENTECH's sole purpose
in publishing its IssueAlerts is to offer an independent perspective regarding
the key events occurring in the energy industry, based on its long-standing
reputation as an expert on energy and telecommunications issues.

Copyright 2000.  SCIENTECH, Inc.


If you do not wish to receive any further IssueAlerts from SCIENTECH, please
reply to this message and type "delete" in the subject line.