California lawmaker wants to ease the path to public power

Bloomeberg News

A bill in the California legislature would reduce the roadblocks that have kept San Diego and San Francisco from buying out investor-owned utilities to create public electricity providers.

San Francisco launched its most recent effort to buy its local Pacific Gas & Electric lines after the utility filed for Chapter 11 bankruptcy in 2019 under the weight of liability for wildfires sparked by its equipment.

The city's representative in the state Senate, Scott Wiener, said the effort has run into years of delays at the California Public Utilities Commission from what he describes as a "broken process" that favors PG&E and other investor-owned utilities.

A similar effort in San Diego stalled amid furious lobbying by the IOU that serves it, San Diego Gas & Electric.

Senate Bill 875, a bill Wiener introduced in February, aims to change the system that leads to what he says are exaggerated utility valuations that drive up the cost of buying them out. It could help both cities' efforts to acquire the transmission systems, said Dan Aschenbach, who formed AGVP Advisory in 2019 after 36 years at Moody's Ratings leading the agency's public power ratings team.

Wiener, a Democrat, introduced the bill with the aim of ending "PG&E's delays in the process of local governments breaking up with private utilities to form publicly-owned utilities."

Aschenbach said the analyses commissioned by the IOUs overestimate the value of their companies' assets to discourage governments from taking them over.

Case in point: a study SDG&E commissioned in San Diego.
 
"In the Concentric study of the electricity municipalization of San Diego, almost one half of the cost of a city takeover was misleading and wrong," Aschenbach said. "Concentric reported that almost $4 billion of added cost for a city takeover was due to lost revenues, which included that SDG&E would after municipalization no longer be paying property taxes, franchise fees and other revenues to the city."

The estimates don't take into account that U.S. municipalities pay on average 8% of their revenues as a general fund transfer to their city government, he said, adding that Los Angeles Department of Water and Power, a municipal utility, transfers a similar percentage to the city.

The investor-owned utilities also have logged a higher percentage of outages than municipalities, Aschenbach said.

PG&E charges 39 cents a kilowatt hour and SDG&E charges 41 cents a kilowatt hour, which is more than double the 15 cent national average; and it's twice as much as what LADWP customers are paying, he said.

The estimates in Concentric's 2024 report, which it described as preliminary, estimated the value of SDG&E's assets between $3.95 billion and $4.37 billion. It also said the city would forego $3.9 billion in lost revenues from property taxes and fees over 50 years on a present value basis after a takeover. The estimates don't include the cost of stranded assets, wildfire mitigation cross-subsidies, debt refinancing and transaction costs, according to the report.

A 2023 city-commissioned analysis by NewGen Strategies & Solutions; Bell, Burnett & Associates and Siemens Power Technologies International put the base purchase costs between $2.58 billion and $6.2 billion for the grid, but said financing costs could add up to $1.5 billion to that price. The preliminary Phase 1 report said even if San Diego paid $6 billion to purchase the power transmission system from SDG&E, the savings to ratepayers could eventually top $180 million over 30 years.

SDG&E opposed city efforts to take over its assets through municipalization, labeling the proposals as financially reckless, risky, and a threat to service reliability. SDG&E argued that a takeover would cost billions in debt, increase rates and cause the city to lose over $100 million in tax and fee revenue, pointing to its Concentric study. They also argued that ratepayers would have to shoulder the burden of paying the cost to acquire the system.

SDG&E formed a political action committee called Responsible Energy San Diego to oppose Public Power San Diego's 2024 ballot initiative to place the concept of purchasing the power grid before voters. The City Council ultimately rejected the ballot initiative in an 8-0 vote.

Wiener's legislation, which remains in committee, would reform the process at CPUC to allow cities that wish to exit PG&E to establish public utilities and provide more affordable and reliable energy to residents.

San Francisco filed documents to ascertain the value of PG&E's utility infrastructure, and how much it would cost for the city to purchase it, in 2021. The process is supposed to take 18 months, but PG&E has drawn the process out to four-and-half years, according to Wiener.

"For decades, utilities like PG&E run by big investors have rigged our regulatory system to block cities' attempts to break up with them and form public utilities," Wiener said in a statement. "They are afraid that cities and municipalities can do what they do cheaper and better."

He said they are right, because municipal utilities like those that serve Sacramento pay around 50% less for electricity and receive better service than PG&E offers, and they don't deal with the same blackouts from poor maintenance.

The bill would reverse changes made to the process to acquire a transmission system in 1992 that have made the process onerous, Wiener said. The bill would also establish enforceable timelines.

PG&E Chief Executive Officer Patricia Poppe said during the company's fourth quarter earnings call in February that the company had gone three consecutive years with no major fires caused by its equipment.

The company's record of being deemed liable for igniting fires speaks to why this milestone is significant. The company's equipment was found responsible for igniting wildfires in the San Francisco's North Bay in 2017 in a spate of blazes that killed 44 people; the 2018 Camp Fire in Butte County that virtually destroyed the town of Paradise and killed 85; the 2019 Kincade Fire in Sonoma County; the 2020 Zogg Fire in Shasta County, which killed four people; and the 2021 Dixie Fire, which burned nearly 1 million acres of forest land in the Sierra Nevada mountains.

Poppe also tried to take on the negative narratives about PG&E's outage record and pricing, saying reliability had improved by 19% year-over-year.

"We lowered our bundled residential rates for the fourth time in two years, and our average bills for those customers are now 11% lower than in January 2021," she said. "We hear a lot of discussion of affordability in absolute terms, but what gets less attention is that our bills, as measured by share of wallet, are below the U.S. average."

The company has reduced rates for the fourth time in two years and bundled residential electric rates are now 11% lower than in January 2024, with typical monthly bills down about $20, she said.

The company has a $73 billion, five-year capital program that includes work on a 10-year plan to bury underground 5,000 miles of power lines that are currently overhead lines. It is already working on burying 1,900 miles of line, which it expects to complete in 2027, she said.

Public utilities like LADWP and the Sacramento Municipal Utility District, use surpluses to invest in infrastructure and keep rates low, while IOUs distribute surpluses to shareholders through dividends, Aschenbach said. Public utilities' also have higher ratings and the ability to issue cheaper tax-exempt debt, which makes it less costly to improve infrastructure, resulting in savings that can keep rates lower, he said.

PG&E, which filed for bankruptcy twice within 20 years, has a BBB-minus issuer rating from Fitch Ratings, a Baa3 rating from Moody's and a BB issuer rating from S&P Global Ratings. Fitch assigns a stable outlook while the other two rating agencies assign a positive outlook.

Even after reduced ratings stemming from potential liability for a 2025 Los Angeles wildfire, LADWP holds mostly double-A level ratings. It has Aa3 ratings from Moody's, AA ratings from KBRA and AA-minus from Fitch on both its water and power revenue bonds. All have stable outlooks. S&P assigns an A rating on the power bonds and AA-minus for the water bonds and a negative outlook on both systems.