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Date: Tue, 6 Nov 2001 09:36:59 -0800 (PST)
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Subject:      Munipalization Vote in San Francisco May Set Precedent
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November 6, 2001



Munipalization Vote in San Francisco May Set Precedent



By Will McNamara
Director, Electric Industry Analysis


[News item from Associated Press] In the wake of this year's California pow=
er woes, votes in the hometown of the state's largest utility will decide o=
n Nov. 6 whether to initiate action to seize Pacific Gas & Electric Co.'s l=
ocal electricity network and deliver power through a public agency.=20

Analysis: There is a lot riding on today's vote, and its outcome will undou=
btedly have significant ramifications for California and other cities acros=
s the country. Although the municipalization of an incumbent utility's elec=
tric system is not a new concept-either nationally or in this particular ca=
se-San Francisco is presently the largest city in which such efforts are be=
ing considered. Given the relative success of other municipalized electric =
systems in California (Los Angeles Department of Water and Power and Sacram=
ento Municipal Utility District, for instance), along with the bad publicit=
y that Pacific Gas & Electric Co. has encountered over the last year due to=
 the state's energy crisis and its own bankruptcy proceedings, today's vote=
 could very well be a victory for public power. The vote in and of itself w=
ill not create a municipalized electric system in San Francisco. Pacific Ga=
s & Electric Co. has already vowed to fight the takeover, and if the vote i=
s a win for public power it will only lead to further lengthy and costly co=
urt battles. However, the vote is significant because it illustrates what a=
ppears to be a growing trend among cities that believe they can provide che=
aper electric service than incumbent, for-profit utilities. In addition, th=
e measure is just one more strike against the already beleaguered Pacific G=
as & Electric Co., which is still navigating through bankruptcy proceedings=
.=20

There are two measures related to the public power movement that are up for=
 vote in San Francisco today. First, Proposition I would create a San Franc=
isco-Brisbane Municipal Utility District (MUD), an independent agency gover=
ned by a five-member board that would provide electric service to San Franc=
isco and Brisbane, Calif., a smaller city located to the south of the Bay A=
rea. California law requires that two separate cities be included in order =
for municipalization to take effect, and thus from the onset of the municip=
alization discussions in this area San Francisco and Brisbane were grouped =
together as one district. The second measure up for vote, known as Proposit=
ion F, would create a Water and Power Agency in San Francisco only and reta=
in ties to City Hall. This measure would not create a MUD and therefore wou=
ld not need to include Brisbane to take effect. The agency would be governe=
d by an elected seven-member board of directors and would replace the curre=
nt jurisdictional oversight by the California Public Utilities Commission.=
=20

An affirmative vote in either or both of the measures would not necessarily=
 mean an immediate effort to take over Pacific Gas & Electric's infrastruct=
ure. In addition to the court appeals that would undoubtedly take place, in=
 the event of either measure being passed an elected board would have to su=
bsequently vote whether or not to seize the utility's transmission and dist=
ribution lines. If such a vote were approved, the MUD could use eminent dom=
ain to take over the utility's assets.=20

Ultimately at stake is a battle over Pacific Gas & Electric's 4.7 million c=
ustomers and its transmission system, which has been appraised between $750=
 million and $1 billion (the utility claims that its system is worth $1.5 b=
illion). Both sides have argued decidedly different platforms. The pro-muni=
 effort in San Francisco / Brisbane has been led by Bruce Brugmann, the pub=
lisher of the Bay Guardian newspaper and City Supervisors Angela Alioto and=
 Tom Ammiano. The proponents of the muni measure argue that a utility distr=
ict operating as a nonprofit public entity would be more beneficial to city=
 residents than a dividend-paying division of a major energy firm. It has b=
een repeatedly noted by the pro-muni forces that Pacific Gas & Electric Co.=
 charges the third-highest electric rates in the United States. In addition=
, the proponents point to already-established municipalized districts in Ca=
lifornia such as LADWP and SMUD, which they claim have protected customers =
from increasingly volatile prices for electricity. The other tenets of the =
pro-muni argument are that public power would lead to better accountability=
 to customers and more emphasis on renewable energy.=20

The movement against the muni effort is obviously led by Pacific Gas & Elec=
tric Co., but also includes officials from AT&T and Pacific Telesis Group, =
which together contributed about $250,000 to the opposition effort. Apparen=
tly, local communications companies fear that a successful municipalization=
 effort of Pacific Gas & Electric Co. would lead to similar takeover measur=
es in the phone industry. The basic argument against the public power movem=
ent is that the plan is unrealistic. Specifically, opponents say, the MUD f=
ormed by San Francisco and Brisbane would be ill-equipped to handle the com=
plex electricity infrastructure that Pacific Gas & Electric has effectively=
 managed for years, and that a city-run bureaucracy would not be able to co=
mpete with big league energy players. In addition, the new MUD would have t=
o purchase Pacific Gas & Electric's transmission assets and also buy wholes=
ale power without the benefit of long-term contracts, which represent two h=
efty investments that would end up costing consumers in the long run. It is=
 true that the city of San Francisco owns the dam at Hetch Hetchy reservoir=
, which powers street lights and city offices with hydropower. However, the=
 reservoir is reportedly in great need for maintenance and may require addi=
tional capital for upgrades. Thus, in order to serve Pacific Gas & Electric=
's 4.7 million customers, the MUD would have to buy most of its power on th=
e wholesale market.=20

This is actually one of several important points that may not have been tak=
en into full consideration by the pro-muni forces. Already-established MUDs=
 in California such as LADWP and SMUD, and those in other states, have alre=
ady established lucrative contracts to obtain federal power at cheap rates =
through 2004. There is a good chance that a San Francisco / Brisbane MUD wo=
uld not have the same opportunity to secure the same rates at this juncture=
. Thus, without the benefit of long-term contracts, the San Francisco / Bri=
sbane MUD could be exposed to the volatile wholesale market or be forced to=
 invest in the construction of expensive power plants. Often, such costs ge=
t overlooked when a city is planning to municipalize. In fact, it has been =
reported that the pro-muni side in this particular case did not conduct any=
 feasibility study in advance of its campaign, and thus could very well be =
unaware of these associated costs. However, S. David Freeman, who previousl=
y managed LADWP and was recently appointed chairman of the new California C=
onsumer Power and Conservation Financing Authority, went on record stating =
that his organization could assist a public power agency in San Francisco b=
y selling it low-cost electricity produced by plants financed by the author=
ity.=20

As noted, Pacific Gas & Electric Co. intends to fight the municipalization =
effort, and in fact has fought in City Hall and in court for decades to der=
ail such efforts in San Francisco. However, in contrast with past battles, =
the issue has become more intensely politicized over the last year as San F=
ranciscans faced rolling blackouts and Pacific Gas & Electric Co. went bank=
rupt. The utility recently received cash support from its parent PG&E Corp.=
, which reportedly spent about $1 million in an advertising campaign urging=
 citizens to vote against the public power initiative. This financial suppo=
rt has been helpful, considering that Pacific Gas & Electric Co. is current=
ly in bankruptcy proceedings and has little capital to front its own defens=
e against the muni effort. Consequently, if voters pass the measures on Nov=
. 6, PG&E Corp. will undoubtedly launch a lengthy court battle that will ke=
ep the issue in litigation for years. In addition to the court appeals, it =
would most likely take the newly formed MUD years to gather the capital nee=
ded to front a purchase of Pacific Gas & Electric's T&D assets.=20

Nevertheless, an affirmative vote on the muni issue could set a precedent f=
or future votes and perhaps mark the dawn of a new era for public power. Ot=
her California cities such as San Diego, San Jose and Davis are closely fol=
lowing the outcome in San Francisco as they have also debated the issue of =
municipalization. In addition, the Coachella Valley Association of Governme=
nts, which includes the city of Palm Springs, Calif., began looking at the =
feasibility of taking over Southern California Edison's distribution system=
 and forming a municipal utility last September. In fact, the municipalizat=
ion effort has gained some momentum across the country over the last few ye=
ars, along with the opening of competitive markets through deregulation. Cu=
rrent reports indicate that there are about 2,000 public electric districts=
, providing electric power to 40 million customers and accounting for 15 pe=
rcent of the demand in the United States. It is important to note that the =
majority of these public power districts were formed in the early 1900s.=20

The turnout for the vote in San Francisco could be a deciding factor. Altho=
ugh the issue had been gaining momentum in the city earlier this year, the =
events of Sept. 11 have turned the focus to more national events and made p=
eople wary of change. Typically, voter turnout in the area is around 35 per=
cent. A recent survey conducted by the opponents of the measure found that =
35 percent of those surveyed favored passage, 30 percent oppose it, and 35 =
percent were undecided.=20

It is important to note that municipalization is not an issue that is only =
facing California. After several years of discussions, lawsuits and negotia=
tions, the city of Hermiston, Ore., voted to spend $8 million to purchase t=
he facilities PacifiCorp has been using to serve 4,000 commercial and resid=
ential customers. The city of Hermiston began serving customers on Oct. 1, =
when a new contract with Bonneville Power Administration (BPA) took effect.=
 The federal power-marketing agency has already set aside 12 MW for the cit=
y, after determining that Hermiston qualified as a new small public utility=
 eligible for preference power.=20

Hermiston, Ore., is the first city to complete a contested municipalization=
 of an incumbent utility's electric business in two decades (the last signi=
ficant contested municipalization was completed in Massena, N.Y., in 1981).=
 Despite the fact that a growing number of U.S. cities have expressed inter=
est in municipalizing their electric systems, for the most part such effort=
s remain overwhelmingly unsuccessful when taken to court or a public ballot=
. Despite the success of Hermiston, some 50 other municipalization efforts =
have been terminated during the 30 years between 1970 and 2000. For instanc=
e, the city of Wichita, Kansas, spent more than $300,000 in the past two ye=
ars studying municipal power options. However, after the Kansas Corporation=
 Commission turned down Western Resources' proposed rate hike this summer, =
the city put municipalization plans on hold. Thus, the eyes of the industry=
 will remain on the vote today in San Francisco for any indication that mun=
icipalization efforts are gaining momentum and proving successful.=20

TOMORROW'S ISSUEALERT WILL INCLUDE THE OUTCOME OF THE MUNICIPALIZATION VOTE=
 IN SAN FRANCISCO.=20


An archive list of previous IssueAlert articles is available at
www.scientech.com <http://secure.scientech.com/issuealert/>=20


  _____ =20

We encourage our readers to contact us with their comments. We look forward=
 to hearing from you. Nancy Spring  <mailto:nspring@scientech.com>

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