San Diego Gas & Electric’s long-running regional monopoly is quickly coming to an end.
That much was clear following back-to-back votes at Thursday’s meeting of the San Diego City Council’s environment committee.
First, the committee approved a plan to start a government-run “community choice” energy agency to buy and sell electricity. The full City Council is expected to vote on a final deal next week to enter the energy market with several other neighboring cities and sell power directly to nearly 2 million people.
Then the committee OK’d hiring a group of consultants to help renegotiate the 50-year-old agreement that allows SDG&E to operate its power and gas lines within city limits.
Together, the votes signal a once-in-a-generation change to how the region gets its energy. Both are aimed at preparing the region for climate change, but also represent an ideological shift in favor of elected officials, rather than regulated monopolies, calling the shots.
The first move, despite objections from union electrical workers, has been a foregone deal since last fall. That’s when Republican Mayor Kevin Faulconer decided the city should enter the energy business because SDG&E didn’t offer him a plan to meet the city’s goal to use 100 percent clean energy by 2035. The city’s environmental goals have become a legacy policy of the mayor.
The proposal amounted to a crack in SDG&E’s monopoly, but the company brushed it off because it doesn’t make its money from buying and selling power. The company instead makes money by operating the sprawling system of power lines and cables it’s built over the last century to each home and business in the region. It also delivers natural gas.
So, even if the city takes over the job of buying and selling power, SDG&E still collects money because those city-owned electrons still get to customers on company-owned power lines.
But now that profitable part of the company is coming under increased local scrutiny, too. Consultants hired by the city are meant to arm officials as they negotiate what’s known as a franchise agreement, without which it would be impossible for SDG&E to continue operating in San Diego. The current deal, signed in 1970, expires on Jan. 17, 2021.
At the least, the city is likely to ask for more money from SDG&E in exchange for that right.
In the most extreme – though unlikely – scenario, the city could buy that whole system, putting the city in charge not just of electrons but of all energy-related infrastructure, too. Right now, San Francisco is trying to do something similar with its own local power company, Pacific Gas & Electric. San Francisco just offered $2.5 billion to buy PG&E’s equipment within its limits.
SDG&E believes its days in the electricity market are numbered. It doesn’t want to be forced to buy power as it loses customers to a city-run alternative. That’s why last year it began floating an idea that would eventually require the state to buy out its long-term power contracts and possibly pay the company for several natural gas-fired power plants it owns.
Legislation to make that so didn’t move forward this year, in part because utilities were focused on wildfire-related bills, said Mitch Mitchell, SDG&E’s vice president of state governmental affairs and external affairs.
(Disclosure: Mitchell sits on Voice of San Diego’s board of directors.)
“We anticipate that there will be a bill that moves early next year,” he said. “Negotiations are ongoing. We’re talking to everybody that will be impacted.”
Any sort of city takeover of the company’s poles and lines is further off.
In San Francisco, the full-on takeover of PG&E is far more likely than a San Diego takeover of SDG&E. Generations of Bay Area politicians have battled with PG&E to a degree we haven’t seen in San Diego. Plus, PG&E is now bankrupt.
Councilman Scott Sherman said he’s not sure the city should get into the business of running the system of poles and lines that are known collectively as the grid.
“When it comes to buying a grid, I don’t know about that one,” Sherman said. “It takes 11 months to replace a lid on a water meter box. I’m not sure I want to be in charge of the grid.”
Still, the city taking these negotiations seriously is a sign of changing times and some disenchantment with SDG&E. The consultants will come up with a value for all of SDG&E’s assets in the city – a step that would be necessary if the city wanted to buy all that equipment – and also compare the city’s deal to deals between other cities and their local power companies.
Erik Caldwell, the city’s deputy chief operating officer, told the City Council committee the city was entering the negotiations with a few things rattling around.
For instance, the city believes the franchise agreement requires SDG&E to pay to move its lines when the city needs them moved; SDG&E disagrees. That set off a dispute that may increase the cost of a major city water project by tens of millions of dollars and possibly end up in court.
Caldwell also hinted that it would want to shift some costs to SDG&E in an attempt to reduce ratepayer bills.
When the franchise agreement was last updated, the city imposed what amounts to a backdoor fee on city residents by asking SDG&E to put a surcharge on its bills to pay for a city power line undergrounding program. Those fees now amount to about $8-10 a month, according to the company.
This all represents a new degree of uncertainty for a company that, not long ago, looked as certain of a monopoly as a monopoly could be. In the past, SDG&E successfully outmaneuvered other local politicians looking to disrupt the company’s power monopoly. But things like the rise of solar power and the threat of climate change have combined to upend the energy sector and put business-as-usual utility operations under the microscope.
SDG&E counters that it is among the greenest energy companies in the country. It’s shed coal power and only about half of its power still comes from burning natural gas – though the company separately sells natural gas directly to customers.
SDG&E is working to make sure the city and the public understand what its 4,100 employees do on a daily basis. Mitchell said the city, if it’s serious about taking over the grid, will also have to look at what it takes to maintain that system, including repairs and liability.
“If the city decided that they wanted to try and buy the system, they’ve got to come up with a value first and they have to figure out how they’re going to pay for that value, if indeed they decided to move forward,” Mitchell said. “That’s a longer runway. And in the end, there’s all kinds of scenarios. They might say, ‘We want to buy it, but we want to hire you guys to maintain it.’”
Nicole Capretz, head of the Climate Action Campaign, which supports community choice energy, said her group will also start campaigning for the city to get a better franchise deal or else find someone else to run the infrastructure.
“SDG&E might not be the best partner for that,” Capretz said. “It’s a competition.”
She said her focus is on how SDG&E is run at an executive level and not upending the work of its employees.
“I think they are going to be part of the solution, because this is not about the workers, this is about management,” she said.
For the first time in modern history, it’s an open question who the city’s energy utility will be.
Power Moves Put Pressure on SDG&E, by Ry Rivard, Voice of San Diego, September 12, 2019.