SDG&E’s 50-Year Contract With San Diego Expires In January. So, What’s Next?
Monday, July 27, 2020
Photo by Mike Damron
The city of San Diego will soon negotiate a multi-billion dollar deal that will award a utility the rights to use city land for energy infrastructure for decades.
Community advocates say this potentially lucrative agreement could be a significant source of revenue for the city, but are concerned that city leaders may be giving away too much.
The incumbent utility, San Diego Gas & Electric, is also unhappy with the proposed terms of the new deal on the table right now. SDG&E executives say the minimum bid proposed is too high, and the city is overestimating the profits to be made.
Community Advocates: “The Stakes Are High”
The infrastructure that powers San Diego homes and businesses can be seen throughout the city of San Diego. At the intersection of West 31st and Cedar streets in South Park, trails of wires of and poles dot the skyline and descend into a green canyon.
Here, Matthew Vasilakis, an environmental advocate with the Climate Action Campaign points to the lines.
“Through the canyons are a number of SDG&E’s infrastructure on city land [like] the gas lines underneath, the power lines," he said. "The city leases the land for them to put that infrastructure here.”
In the 1970s the city of San Diego and SDG&E brokered a 50-year contract. For a $50,000 fee, San Diego gave SDG&E the right of way to erect poles and string wires to provide service. In return, SDG&E pays the city a yearly tax, known as a franchise fee.
But the contract expires next year, and Vasilakis said the city needs to make a better deal this time. Otherwise, the community potentially loses money that could pay for building parks, addressing pollution, and addressing racial inequality across the city.
That’s not only because the deal could impact residents' bills for a generation, but also because the stakes are higher this time, especially with the ongoing coronavirus pandemic, said Tyson Siegele, an energy analyst with the Protect Our Communities Foundation.
“The city is going through an economic crisis ... if the city of San Diego wants to provide all the services it has historically provided it cannot afford to give away a multibillion-dollar asset,” he said.
Right now, both Siegele and Vasilakis claim, that’s exactly what’s happening.
“This deal [which is] one of the most valuable assets for the city is a huge opportunity for us. Right now the mayor and the council are squandering that opportunity,” Vasilakis said.
San Diego City’s deputy chief operating officer Erik Caldwell, however, said the city is supporting a bidding process for the franchise that’s competitive and in the city’s best interests. Any agreement would include provisions, like regular audits, to make sure the utility’s actions align with the city’s needs, such as climate action goals, he said.
“Fifty years ago, we didn't have a competitive process," Caldwell said.
"So our goal is to maximize competition, thereby ensuring the city gets the best possible terms."
City leaders voted 3-1 in a July 16 environmental committee meeting to move forward with a recommendation on a new franchise agreement outlined in a report from consulting group JVJ Pacific Consulting, LLC.
The report suggests offering a 20-year franchise — estimated to be worth about $6.4 billion — at a minimum price tag of about $62 million. The utility that wins the bid for this deal will also pay an annual franchise tax to the city of 3% on its electricity revenue and 3.5% on gas revenue. That tax, already part of the current agreement, generated around $65 million for San Diego last year.
The city said this proposal would be a tremendous improvement over the contract 50 years ago. Vasilakis, however, is one of many critics who say $62 million for a right to be the city’s main service provider is simply not enough. And, community advocates want a five-year agreement to keep the city’s options open.
“This deal is one of the largest real estate transactions that the city is going to have in decades,” Vasilakis said. “We think it is a sweetheart deal for SDG&E.”
SDG&E, however, does not see the terms of this negotiation as being a “sweetheart” deal. While it likes the possibility of a 20-year franchise, in a July 15 letter to the environmental committee it wrote the $62 million price tag is “unjustified” and “an unprecedented demand.”
The consultant’s recommendation could soon go to the full city council for a vote in the coming weeks. Yet none of the interested parties can seem to agree on a decision that could impact San Diego ratepayers for the next two decades.
Some context: How should a good franchise deal be made?
There are a couple of ways to look at it. Franchise deals between utilities and cities are common across the state and across the country.
“Franchise agreements allow the utility to rip up city streets, putting equipment on city property," said Steven Weissman a lecturer at UC Berkeley and a former energy lawyer at the California Public Utilities Commission (CPUC). "In exchange, cities and counties can charge a fee, like a tax.”
There are state statutes that govern franchise fees that Weissman said are usually around 2%. And cities ask for “reasonable” minimum bid or upfront payment. Charter cities, such as San Diego, don’t have to follow statute laws. So he said the utility and city negotiate an amount.
“And it’s supposed to reflect the level that’s both acceptable to the city and an adequate form of compensation and that the utility is willing to agree with," he said. "There’s really no other rule of thumb that’s more precise than that.”
San Diego city COO, Erik Caldwell, says that’s what they are trying to do in this bidding process. Caldwell claims this proposal for the deal could save ratepayers over $80 million over 20 years.
“We set that number too high, it discourages competition," he said. "If we set it too low, it potentially sets the city to receive far less revenue in an upfront payment than we believe is reasonable," Caldwell said.
In fact, SDG&E is currently not the only utility bidding for the chance to service the city of San Diego. Berkshire Hathaway Energy has also said it’s interested, as well as another smaller group, Indian Energy of Orange County. KPBS reached out to Berkshire Hathaway but did not get a response.
But, there’s another take on these franchise agreements. Loretta Lynch, a former president of the CPUC, said cities shouldn’t lowball their worth. And, she said, these monopoly utility franchises are a relic from the last century.
“Utilities really gained more power over cities in the '60s and ‘70s. And many cities caved to that power for a variety of political reasons and a variety of contribution reasons.”
“That is not what happens in the 21st century anymore,” she added. “Cities not only have a right to charge a fair market value for this very valuable asset, they actually have a responsibility to do that.”
Lynch, who is now on the board of Protect our Communities Foundation and a long-time critic of SDG&E, said a charter city like San Diego has the right to set whatever terms it wants, simply because the city is offering a deal that yields an incredible profit.
In fact, while the JVJ consulting report estimates the franchise to be worth $6.4 billion, a footnote on page 28 of the report said “these numbers are without adjustments for inflation, changes in usage or increases in utility rates, nor are they adjusted for present value.”
Energy analyst Siegele estimates the value of the franchise over 20 years is probably much more like $15 billion in profits, considering that SDG&E has already been approved for future rate increases.
“We were shocked to see that the minimum bid was only in the millions instead of in the billions,” Siegele said.
But, even a low estimate of $6.4 billion, any utility will earn a significant amount from San Diego residents and businesses, Lynch said.
“And that profiting of San Diego, historically for SD&E has been incredibly lucrative,” she said.
Assessing the value of a franchise with San Diego
San Diegans currently pay the highest energy rates in the state, and those rates continue to rise. Despite state data showing that SDG&E has seen a steady decline in sales over the last decade, the utility’s profits have nearly doubled from $369 million in 2010 to $767 million last year, according to U.S. Securities and Exchange Commission filings.
The JVJ report says SDG&E earns around $300 million annually in profits from ratepayers in the city alone. SDG&E disagrees. In an email to KPBS, an SDG&E spokeswoman wrote:
“SDG&E’s profits are not calculated or reported by jurisdiction ... Therefore, we do not report profits made within the City of San Diego or any other city or county.”
But on a phone call, SDG&E ballparked that it earns around $180 million, which community advocates argue is still a sizable sum, and the utility should pay a higher minimum payment for the franchise deal.
“We are not opposed to paying a reasonable franchise bid," SDG&E executive Mitch Mitchell said. "We paid $50,000 in 1970. If you do the calculation of time value inflation and money, a reasonable fee is somewhere in the million-and-half to $2 million range. And we think that’s appropriate.”
The high rates can be explained by SDG&E being “smaller in terms of our size compared to Edison and PG&E and… higher usage charge," Mitchell said, adding one way to reduce ratepayer bills is for the city to ask for a smaller franchise fee.
SDG&E has a good track record in San Diego, he said. It’s helped with climate action goals, by bringing on more renewables, developing infrastructure for electric cars and investing heavily in wildfire mitigation, he said.
An SDG&E spokeswoman wrote in an email that the utility's decline in sales could be due in part to more energy efficiency as more residents take on solar.
The company says investment into solar infrastructure has driven the utility's maintenance costs up. And, those "costs don’t go down proportionally when sales decrease." That's why the company says, its revenue requirements, or amount the utility is allowed to earn, has gone up despite the decline in sales.
SDG&E says its been a good partner and plans to bid for the new franchise, but it wants better terms: an ability to pay the bid in cash, goods and services, and a smaller franchise fee. And SDG&E said it wants a long-term contract.
“In order for us to be a partner in this region and with the city in particular, we need to make long-term planning objectives and start to carry those out,” Mitchell said.
Demanding a new path forward
A number of cities across the country are reconsidering their franchise agreements, while also looking back at the track records of their incumbent utilities.
“The city of Chicago, they have been working on how to hold their utility to account for the last several years. The city council just decided the deal isn’t good enough yet,” Lynch said.
In fact, the City of Chicago signed a consulting contract with another group of consultants hired by San Diego to study an alternative to a franchise: utility municipalization in San Diego.
Municipalization would involve the city buying up the existing utility’s infrastructure and setting up its own public utility. The report, by NewGen Strategies and Solution, says on page 8 that in two out of three scenarios it would be cost-effective for San Diego to municipalize.
But as with Chicago Mayor Lori Lightfoot, San Diego leaders don’t appear to be buying municipalization now. Councilmember Barbara Bry has said, “Quite frankly, the city hasn’t proved it can run the public utilities department, the water department.”
Still, Lightfoot told WBEZ that she at least wants its utility, ComEd, to “answer a lot of questions” before contract renewal happens. She told the NPR station in February, “we are not going to do business with someone that we don’t have total comfort with.”
In June, eight Chicago aldermen introduced a measure calling for a one-year extension of the city’s 29-year-old franchise agreement to give officials more time.
Lynch offered another example of cities renegotiating their franchise agreements: “Salt Lake city has a 5-year agreement. Why? Because they want to keep their utility on their toes. And if you don’t perform in the short-term, then you don’t get the long-term benefit.”
Franchise deals often happened once in a generation, Lynch said. With city government changing so quickly, she explained, new leaders don’t know what to ask for, or leadership gets bought out by utility interests. That’s how utilities have been able to get such great deals in the past. But these days, cities don’t have to follow the past, she said.
In fact, SDG&E's sister company Southern California Gas Company signed a five-year franchise deal with the county of Los Angeles in 2018.
“If you got a penny for your golden goose two years ago, getting 2 pennies is not a good deal if your goose is worth $2 billion,” she said.
Time and transparency
As in Chicago, a significant point of tension in San Diego now is a rush to decision.
At an environmental committee meeting mid-July, the consultant’s report was open for public comment. Discord over the agreement and how to move forward was palpable.
There were comments from people in the union International Brotherhood of Electrical Workers, connected to SDG&E:
“Please don’t gamble with my union job ... renew a franchise agreement with SDGE for at least 30 years,” one worker called in. “I’m calling in to urge the city to sign a 20- to 25-year agreement with SDG&E to protect local utility jobs,” another said.
And a number of environmental and community advocates called in as well, calling for the city to consider the need for more money right now.
“We need those millions of dollars diverted into the community not into rich shareholders pockets,” a community member said, followed later by another caller who said, “I support municipalization ... it is highly likely to save ratepayers money.”
After hours of public comment, the environmental committee voted to move forward with the consultant’s recommendations.
Community advocates said that vote calls into question the transparency of this negotiation process and the public comment period. They said the lengthy consultant’s report came to the environmental committee with little time for the public to review it.
“The office of the independent budget analysis has not provided a report on the franchise agreement … we have not seen a peer review of any of the documents that were released before the environment committee,” Siegele said.
In fact, another utility expert, Carl Pechman, director of the National Regulatory Research Institute, said he feels like the report could benefit from a review. There are some costs to separating from SDG&E that haven’t been considered in the report, he said.
“It’s important to recognize that if you’re looking for an alternative to SDG&E you want to find a utility or provider that’s not only lower cost, but you also need to be concerned about the quality of service, like fire service, and technical development,” he said, adding that it’s important to fully analyze all the costs and benefits to working with the city.
“One doesn’t want to put up barriers that will inhibit the process … you discourage good bidders,” he said. Those barriers, he says, are a lack of analysis on the costs of doing business.
Another issue of transparency, Siegele noted, is that many of the groups who called into the meeting in favor of SDG&E had received charitable donations or contributions from SDG&E.
On that topic, SDG&E executive Mitchell told KPBS “charitable operations and the community relations component of our company is part of our civic conduct and we are a big company.”
Councilmember Bry told KPBS she thought the swift vote was “another example of a backroom deal at city hall. Special interests controlling the agenda.”
She brought up many of the same concerns community advocates raised at the meeting, specifically that she wanted more time to form a balanced opinion on the report. She was the only member who voted no.
“We only got the report a week before. This is a very rushed process on what is one of the most important decisions facing the city,” Bry said, adding if the contract expires and the city doesn’t have a deal, “can SDGE just stop providing gas and electric service to us? And no, of course, they can't.”
City Councilmember Jen Campbell, the environmental committee chair, said they’ve been reviewing the report for weeks.
“Let's move forward. You know, you could speculate all day, but why?" she said. "The good thing is to get it moving. Get the bids in. See what they offer and see what happens.”
On the notion of whether this is a backroom deal, Campbell said, “there are no backroom deals.”
“We try to build coalitions of people with varying views, get them together and have them come out with something that they all can live with, at least, or that they all like," she said. "That's how politics in a democracy is done. In California, we do not do backroom deals.”
As the report potentially comes up for a vote in the coming weeks, Lynch said it’s important for city council members to consider the ratepayers.
"San Diego officials have a duty to its residents and a duty to its economy to make sure that this incredibly valuable asset owned by the residents of San Diego is valued at a fair price."
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