A debate is nearing a boiling point over whether the city of San Diego should form a government-run alternative to San Diego Gas & Electric — a move that could foreshadow a massive overhaul of electrical markets across California.
The city is facing several votes in the coming months that could either shelve the program indefinitely or put it on a path to form what could be the state’s largest such program, known as a community choice aggregation.
While backers of community choice in San Diego have been vigorously lobbying for the program around the county, a new group has emerged to raise questions about the program — asking city officials to freeze it, at least temporarily.
Dubbed the Clear the Air Coalition, it pairs lobbyists paid by the shareholders of SDG&E’s parent company Sempra Energy with some of the region’s most powerful groups — from the San Diego Regional Chamber of Commerce to the Downtown San Diego Partnership to the San Diego County Taxpayers Association.
“The city is going to have to make a very important decisions, and we’re seeing that they’re going to be making that on incomplete information,” said Jerry Sanders, head of the chamber and former mayor of San Diego. “All I think is they need to wait.”
What is community choice?
Under community choice, SDG&E would continue to operate and charge for the poles and wires that deliver power, but elected officials would assume control of the buying and selling of that electricity for city customers.
Ratepayers can opt out of the community choice program if they prefer the utility’s rates, potentially creating competition between the two entities.
Supporters of the publicly controlled alternative to SDG&E have also been pushing elected officials throughout the county to adopt Climate Action Plans to reduce greenhouse gases. Part of that campaign has included pressuring cities to commit to using of 100 percent renewable energy in coming decades — and then adopting community choice as a way to realize that goal.
The city of San Diego has pledged to use all renewable power by 2035 but has yet to decide how it will try to get there.
“There doesn’t exist another viable way for the city of San Diego to get to 100 percent other than to be in control, and community choice offers this proven model,” said Nicole Capretz with the Climate Action Campaign and the leading advocate for community choice in the region.
A feasibility study contracted by the city of San Diego completed this summer found that the program has the potential to deliver cheaper rates than SDG&E over time, while providing as much as 50 percent renewable energy by 2023 and 80 percent by 2027.
However, Sempra and its backers argue that those numbers are not reliable because state energy regulators are expected next year to overhaul a technical but key factor in the rates charged by community choice programs.
They argue that the city should not vote to move forward with the program until the hearings are complete. Those steps would include releasing a request for proposals for a third party to draft a business plan and eventually city officials adopting that implementation blueprint. The process would likely take more than two years before a community choice program could officially launch.
“What we want is cost-effective approaches to greenhouse-gas reduction,” said Haney Hong, president and CEO of the Taxpayers Association. “When you have so many different unknowns about what it might potentially cost … how can you make a decision without the information?”
The exit fee debate
The California Public Utilities Commission has announced that in 2018 it will overhaul the formula it uses to calculate an exit fee, which community choice programs pay to investor-owned utilities to ensure those companies are adequately compensated for the energy contracts they have signed on behalf of ratepayers who have subsequently left for the government-run alternative.
Those costs includes everything from long-term contracts for natural gas projects to renewable power deals that utilities entered into before the cost of solar and wind power dropped.
Neither side disputes the need for the fee, which is intended to protect ratepayers that remain with an investor-owned utility from seeing sharp increases in their electrical bills.
However, utility officials and community choice advocates vociferously dispute how it’s calculated.
If the commission’s new formula increases the fee, it could mean community choice programs have less revenue to compete with investor-owned utilities.
The fee, which could eventually be phased out in coming decades, has steadily increased in the past and could do so again.
“We believe it’s going to go up significantly more,” said Frank Urtasun, a former SDG&E official who is now the sole employee of Sempra’s shareholder marketing group, known as Sempra Services.
Urtasun is quick to explain that SDG&E doesn’t make a profit off buying and selling electricity, but losing a large percentage of its customers to a community choice program means the exit fee needs to be very carefully calculated.
“We can support community choice aggregation so long as it’s equitable for all customers, so that if a city leaves it doesn’t have upward pressure on rates to some other cities,” he said.
Sempra shareholders this year became the first in the state cleared by regulators to pay for lobbyists on the issue of community choice, after SDG&E requested approval for the marketing division at the California Public Utilities Commission. This arrangement has been required by the Legislature since lawmakers banned several years ago utilities from tapping ratepayer money to influence the local adoption of community choice programs.
Advocates of community choice have said they care deeply about the outcome of the commission’s decision on the exit fee, but they expect the results of the proceedings will bring consistency for ratepayers.
“Stability in the market place is in the state’s interest,” said Barbara Hale, who heads San Francisco’s community choice program, CleanPowerSF. “It’s in our interest. It’s in the utility’s interest — not a decision that destabilizes the market and the experience of customers.”
In San Diego, supporters of community choice have pointed out that the city’s program wouldn’t likely be operational until at least 2020, well after the commission rules on the fee. If community choice becomes financial nonviable, they argue, the city will have plenty of time to back out.
“All the city would be doing is moving from a feasibility study to a business plan,” Capretz said.
“There is no one statewide who is stopping their forward-moving progress” on community choice because of the proceedings on the exit fee, she added.
What’s at stake?
Matthew Freedman, staff attorney with The Utility Reform Network, who closely tracks community choice issues at the state Public Utilities Commission, said that it’s not clear whether the changes to the exit fee will benefit community choice programs or utilities.
“At this point, no one can predict what the outcome of that preceding would be,” he said. “You could guess, but nobody has an inside line on what’s really going to happen there.”
But, he added, it’s the investor-owned utilities that have the most to lose, not the local governments that launch community choice programs. Cities and counties insulate themselves from debt incurred under the alternative-energy program often using a joint powers authority or an enterprise fund.
Investor owned utilities, on the other hand, rely on the exit fee to be made whole for their investments.
The precise nature of the fee might not be significant for utilities if only a small percentage of their customers leave for a community choice program, but in the case of SDG&E, the city of San Diego represents 40 percent of all electrical sales in the utility’s service territory.
If the exit fee doesn’t accurately compensate SDG&E for its stranded costs, it could mean that ratepayers in other areas bear the burden through increased rates, further motivating the formation of more community choice programs, Freedman said.
“Their number one motivation is they don’t want to get stuck eating any of the costs associated with customer departures,” he said. “And at some point, we could all fight about ‘Well, shouldn’t the utility shareholders eat those costs?’ That’s their nightmare scenario.”
It’s not just SDG&E that could lose a huge percentage of its customers to community choice aggregation, raising major questions about who will pay for their expensive legacy contracts.
The state’s first community-choice program started in Marin County nearly a decade ago, and in recent years, adoption and interest in such programs have spread like wildfire.
Energy regulators said this summer that the state must prepare for community choice to expand from representing about 5 percent of all electrical sales today to nearly 70 percent by 2020.
In San Diego County, Solana Beach appears close to formally adopting community choice, while Encinitas, Del Mar, Oceanside and Carlsbad are weighing the option.
However, following lobbying efforts by Sempra, the county Board of Supervisors in February shelved a community-choice proposal.
Sempra, Chamber Lobbying Asks San Diego to Put Government-Run Electricity Program on Ice, by Joshua Emerson Smith, The San Diego Union-Tribune, October 7, 2017.