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Public Takeover of PG&E? Sacramento's Past Provides Important Lessons

By J.D. Morris, San Francisco Chronicle

10 October 19

 

early a century ago, thousands of dissatisfied Pacific Gas and Electric Co. customers decided they wanted to divorce themselves from the company’s power service and form their own government-run utility.

What followed was a long and complicated process that stretched out over more than two decades, held up in part because of stiff resistance from PG&E and culminated in 1946, when the Sacramento Municipal Utility District began providing electricity.

Sacramento had voted to form the district in 1923. The essential motivation was simple: Local residents wanted to take control of their own power needs, and they felt San Francisco’s PG&E was not serving their interests.

At the time of the vote, there was “no love lost in Sacramento voters for PG&E,” said Nathan Hallam, a history lecturer at Cal State Sacramento.

“There’s all this antipathy for San Francisco-based big businesses that are sort of seen as taking advantage of the little guy in the Sacramento Valley, and PG&E is part of that,” Hallam said. “They thought PG&E is enriching people in San Francisco like everyone else and they’re providing a substandard service, and we want to provide our own power distribution.”

Now, PG&E, California’s largest investor-owned utility, is facing renewed calls to place some or all of its service area under government ownership after a series of catastrophic wildfires blamed on its power lines killed dozens of people, destroyed thousands of homes and propelled the company into its second bankruptcy since the turn of the century.

“We should own our energy” has been a refrain among the activists who have protested PG&E before its regulators and marched into the lobby of the utility’s downtown San Francisco headquarters.

The California Public Utilities Commission is already considering a variety of ways in which PG&E could be restructured, including whether some or all of its 70,000-square-mile service area should be served by a publicly owned power provider.

San Francisco leaders, meanwhile, are studying the possibility of buying PG&E’s electric distribution assets in the city — a step that has long been mulled in the city but gained renewed traction in light of the utility’s current woes.

The Sacramento utility, commonly referred to as SMUD, could serve as an example for San Francisco to follow, as could other municipal utilities such as the Los Angeles Department of Water and Power.

But as the district’s own history with PG&E shows, carving a new public power company within the territory of California’s largest utility could prove to be a lengthy and contested endeavor, whether it’s confined to San Francisco or not.

“If we go this route ... I think that it would be a multiyear, maybe decadelong process to actually get from here to a sort of breakup of PG&E into parts that can operate as some sort of government entity,” said UC Berkeley energy economist Severin Borenstein. “It would take a lot of planning and a lot of negotiation.”

One of the key questions any local jurisdiction would face if it moves to buy PG&E’s electric assets, Borenstein said, is how much to pay the investor-owned company for the power lines and any other infrastructure the municipal utility wants to buy.

That was a major sticking point when the Sacramento district was trying to get off the ground, according to Hallam. It decided to take over PG&E’s system rather than build a brand new one, but that meant the Sacramento utility district was required to “pay fair market value for it,” Hallam said. PG&E took the matter to court, which contributed to the delay in the start of district service, he said.

Before, in the district’s infancy, PG&E had also delayed the process by suing to block the Sacramento utility from issuing the bonds voter had authorized. The utility was “nervous” because it was “going to lose all these customers in Sacramento County,” Hallam said.

“Like any business, it wants to protect its monopoly,” he said.

The district prevailed in the courtroom, but by the time that and other challenges were overcome, it had been 23 years since voters first authorized the creation of the new municipal utility.

And PG&E’s opposition to municipal power in the area didn’t end in 1946.

In 2006, PG&E spent millions of dollars on a successful campaign against efforts to extend the district’s territory into Yolo County. One of the company’s arguments was that residents would pay more if they left, and after winning at the ballot box, the CEO at the time said PG&E would “continue to vigorously oppose any efforts to take our customers.”

San Francisco may be about to test whether that sentiment holds true for PG&E’s present-day leadership.

On Thursday, Mayor London Breed and City Attorney Dennis Herrera sent a letter to PG&E’s interim CEO and its chief financial officer regarding San Francisco’s efforts to study the cost and practicality of buying the company’s electric distribution assets serving the city.

San Francisco began to look more seriously at the public power option in January, after PG&E said it planned to file for bankruptcy protection. Breed and Herrera said they wanted to address company leaders directly to “underscore the seriousness of our purpose and facilitate lines of communication going forward.”

“If we determine the acquisition is feasible, we intend for the city to make a formal offer to PG&E within the coming months as part of the bankruptcy process,” Breed and Herrera said in the letter.

San Francisco already buys power on behalf of its residents through CleanPowerSF, a community choice aggregation program operated by the San Francisco Public Utilities Commission. The city also powers the Muni system and City Hall through power generated at the dam at Hetch Hetchy Reservoir in Yosemite National Park.

PG&E spokeswoman Lynsey Paulo told The Chronicle the company appreciates San Francisco’s “open and transparent dialogue.”

“PG&E has been part of San Francisco since the company’s founding more than a century ago, and we support our customers’ ability to make choices regarding their energy use,” Paulo said. “We remain committed to working with the city and communicating on this issue. PG&E regularly evaluates the way the company is structured strategically, operationally and financially so that we are best positioned to operate efficiently and provide safe and reliable service to our customers.”

In regulatory filings before the utilities commission, PG&E has voiced concerns about municipalization, saying a government-run power company may find it harder than an investor-owned utility to attract qualified rank-and-file staff as well as top executives.

The company has also argued that investor-owned utilities’ profit motive encourages them to invest in safety and quality-of-service upgrades. Because government utilities are not run for a profit, they have “no direct mechanism for ensuring operational excellence” and may therefore be less efficient, PG&E argued to its regulators.

Public power advocates have pushed back, with the California Municipal Utilities Association contending that “the high priorities of public safety, reliability and excellent service are principal motivators alone.”

Barry Moline, the association’s executive director, said that, generally speaking, line workers are paid about the same whether they work for a government- or investor-owned utility. Other employees are motivated by a “sense of purpose that the organization they’re working for is doing good things” and they are an important part of the utility’s mission, he said.

Municipal utilities also generally offer lower rates, and their governing bodies hold regular public meetings, so there are “more eyeballs on every decision” than at investor-owned utilities, Moline said.

SMUD customers have an additional layer of input through their ballots. The utility’s seven board members are elected by district, in contrast to the Los Angeles municipal utility, which is run by five commissioners appointed by the mayor and confirmed by the City Council.

“It’s direct control by the customers,” said district spokesman Christopher Capra. “They can show up and get input and get answers to their questions ... and the political process delivers for them a product that is close to, if not exactly, what they want.”

Still, energy experts have flagged other concerns about municipal utilities spreading in the territory now covered by PG&E. One is what would happen to rates and service in rural, fire-prone areas should an urban place like San Francisco — with its dense and valuable power system — take hundreds of thousands of customers out of PG&E’s electric service.

San Francisco Supervisor Sandra Lee Fewer, who supports exploring the city’s purchase of PG&E distribution assets, suggested that the state government could look at assisting customers in rural areas.

Overall, she said, PG&E’s current situation provides a window of opportunity that San Francisco can’t ignore.

“We know we are kind of at their mercy because they own the distribution system,” Fewer said of PG&E. “If we can own that ourselves, just think of what we can do — we can actually plan a future for clean energy in San Francisco that’s probably a better delivery service, a safer delivery service ... and also keep the costs minimal.”