Proposition H - Municipalizing Electric Service

What it does

Proposition H is a proposed amendment to the San Francisco City Charter that has five key components:

The City Controller's Office has stated that the costs and benefits of this measure would vary widely, depending on how the SFPUC implements it. The controller estimated it would cost the city $875,000 to $1.75 million to develop a clean energy plan with a workforce development component as specified. The controller could not specify the costs for purchasing or constructing power facilities, but estimated they would be substantial — in the billions of dollars. PG&E has estimated that acquisition of its electric transmission and distribution system in San Francisco would cost at least $4 billion.

Background

The SFPUC supplies energy for San Francisco's municipal use from several large hydroelectric facilities in the vicinity of Hetch Hetchy reservoir in Yosemite National Park. The Raker Act of 1913 granted San Francisco the water and power rights of way necessary to build these facilities, along with a requirement to generate hydroelectric power, and to sell excess power at cost to the Modesto and Turlock irrigation districts. PG&E carries Hetch Hetchy power to San Francisco from its substation in Newark, where San Francisco's transmission facilities from the power facilities terminate. City agencies and departments, such as Muni, the San Francisco Unified School District and the airport consume slightly more than half of the 1.7 billion kilowatt-hours generated by these facilities each year. Approximately 2,150 electricity accounts in San Francisco are served under this arrangement. After City needs and obligations to Modesto and Turlock are met, the SFPUC may sell any extra power it generates to other public utilities. The SFPUC also manages the interconnection of City facilities to the electric distribution grid in San Francisco, which is operated under franchise by PG&E. PG&E pays the City about $3.5 million a year for this electric franchise. Finally, the SFPUC monitors PG&E's adherence to service contracts and tariffs for delivering Hetch Hetchy power to municipal facilities.

PG&E supplies electricity to approximately 5 million retail customers in Northern California, including 370,000 customers in San Francisco. PG&E is an investor owned utility regulated by the California Public Utilities Commission, which oversees rates and permits many of its transmission lines. Throughout its service territory, PG&E employs approximately 20,000 people, who build, maintain and operate its transmission and distribution facilities. PG&E owns fossil fuel, hydroelectric and nuclear plants, and of the total 79 billion kilowatt-hours its customers used in 2007, PG&E supplied roughly 32 percent from its own generation. To make up the difference, the utility buys power from other private electric generators, and from out of state. PG&E also delivers electricity under contract from sources it does not own, such as San Francisco's Hetch Hetchy power, and electricity supplied by the California Department of Water Resources.
 

PG&E has among the lowest greenhouse gas emission rates of any utility in the nation. This is due in part to its reliance on nuclear and large hydroelectric facilities that have negligible carbon emissions, but are not considered renewable resources for the purpose of meeting California's Renewable Portfolio Standard. In 2008, 14 percent of PG&E's portfolio is derived from qualifying renewable sources, including biomass/waste, geothermal, small hydroelectric projects of less than 30 megawatts, wind and solar. PG&E is bound by California's Renewable Portfolio Standard, which requires investor-owned utilities to derive 20 percent of their supplies from renewable sources by 2010. PG&E claims to have contractual commitments lined up to meet this goal. By Prop. H's definition, in 2008 PG&E is delivering approximately 31 percent of "clean resources" to its customers, not including efforts in energy efficiency and demand response.

Municipal utilities are not regulated by the California Public Utilities Commission, and are not required to meet these targets for renewable energy sources — or to meet increasing annual targets set by the CPUC, by which retail sellers are bound. Rather, municipal utilities implement and enforce their own standards. According to the state Legislative Analyst's Office, in 2007, municipal utilities in California such as L.A. Water and Power and the Sacramento Municipal Utilities District averaged 7 percent of their electric generation from eligible renewable resources. Municipal utilities also set their own terms of service, including electricity rates, which are not regulated by a third party. Thus, while PG&E is required to meet progressively higher renewable targets while being fair to ratepayers, City-owned utilities are exempt from these requirements.

Why it is on the ballot

Proposition H is a charter amendment put on the ballot by a vote of seven members of the Board of Supervisors.

Over the past eight decades, San Francisco voters have been confronted with, and consistently rejected, ballot measures that proposed various methods of municipalizing the delivery of energy. Purchasing PG&E's distribution system in San Francisco appeared on the ballot in 1930, 1937, 1939 and 1941. A feasibility study on municipalization was on the ballot in 1982. In 1987 there was a vote on whether to renew the Hetch Hetchy Power contracts with two Central Valley irrigation districts. More recently, in 2001, voters rejected Proposition I, which would have created a Municipal Utility District to provide electric service to San Francisco and Brisbane. In that same election voters also rejected Proposition F, which would have replaced the SFPUC with a new water and power agency governed by an elected board of directors. In 2002 Proposition D would have made the SFPUC the primary provider of electricity in San Francisco. All of these measures failed.

Hetch Hetchy power already is committed to the Central Valley irrigation districts, in-city municipal loads and airport loads. Any additional power available would supply about 10 percent of San Francisco's retail electric demand. However, this energy supply is not plentiful year round because of seasonal variations in the generating capacity of hydroelectric facilities, and today San Francisco must purchase commercial power during certain portions of the year to meet municipal and contractual requirements. To meet remaining needs, then, a new municipal utility would need to acquire substantial generating capacity, or purchase electricity from private suppliers.

2001's Proposition B and 2002's Proposition E added to the list of exceptions for issuing revenue bonds without a vote of the people. These measures authorized the Board of Supervisors to issue revenue bonds to reconstruct or replace existing water and power facilities, and to acquire, construct or improve facilities for renewable energy and energy conservation. SPUR supported both of these measures.

San Francisco already has a nascent program called Community Choice Aggregation to provide PG&E customers in San Francisco a choice to continue their PG&E service, or to buy electricity from the City. California's 2002 law on community choice aggregation allows a city or county to aggregate the electrical demand of its residents, businesses and municipal users to contract with an alternative electric service provider. The Board of Supervisors passed several ordinances in 2007 to move the City's CCA program forward. The City has a source of funding for this program, Proposition H bonds, approved by voters in 2001. The CCA program also has a draft plan for implementation and financing. As of late 2007, the SFPUC had issued requests for qualification seeking companies interested in competing for a contract to implement the CCA program, and evaluate and advise on program improvements. This measure would not change anything regarding the implementation of CCA, but would require the study of options for how the city might meet CCA loads in addition to municipal loads, and how CCA might be a short-term complement to the long-term project of municipalization. In fact, many of Prop. H's clean energy goals already are described in the CCA draft implementation plan.

Pros

Arguments in favor of Prop. H:

• It is time for the City to study options for providing clean and cost effective energy to San Francisco. The City needs to revisit the assumptions and recommendations in San Francisco's 2002 Electricity Resource Plan, which was only slightly updated in 2004. The new study required by this measure would consider energy efficiency, demand response and renewable resources as ways to meet the San Francisco's needs. It would also help the City meet its aggressive climate change goals. The measure promotes transparency in this process by requiring the City to hold hearings on this study and to obtain independent peer review.
• The measure could result in lower rates for electricity users. Some other cities in California with municipally provided power have lower rates compared to PG&E. For example, the Sacramento Municipal Utilities District's rates are generally lower than PG&E's, depending on the quantity of electricity used. (PG&E customers pay more for higher levels of use.) Nationwide, publicly owned utilities' rates are 9 percent to 14 percent lower on average than investor-owned utilities' rates. Municipal utilities can offer lower rates because they are able to borrow money tax-free, thus allowing them to charge lower rates than investor-owned utilities such as PG&E. They also do not have obligations to return dividends to investors. At the same time, they tend to have pre-existing low-cost power supplies that are not available to new entrants.
• Proposition H could allow the City and ratepayers to capitalize on their ownership of existing power infrastructure within the Hetch Hetchy system. Currently, surplus Hetch Hetchy power is available to meet about 10 percent of San Francisco's retail load. The SFPUC could generate revenue for the City by selling this power directly to San Francisco customers — although this already can be done with CCA and does not require a charter amendment.
• Prop. H could provide incentives for better energy conservation, efficiency and demand response among municipal facilities than exists today. Because the City is supplied with inexpensive power from Hetch Hetchy, it has not been very aggressively implementing demand reduction measures in its own facilities. If the City were to invest in energy efficiency, existing resources could stretch further than they do today and help the City reduce its greenhouse gas emissions.

Cons

Arguments against Prop. H:

• Prop. H uses the excitement of clean energy as a hook toward an ultimate goal of municipalization. However, there is no evidence that the City and County of San Francisco would be more effective at securing renewable energy than PG&E already is. The reality of market conditions is that meeting them will be very difficult and expensive, and may be impossible. It is difficult to find locations for the generation of renewable energy, and it requires the permitting and building of additional transmission lines. Global demand for renewable energy is producing a shortage of equipment such as wind turbines. In addition to not being required to meet the state's Renewable Portfolio Standard, municipal utilities are also not making as much progress as regulated utilities toward meeting higher renewable energy targets, suggesting that public ownership does not necessarily result in cleaner electricity.
• Most of the provisions in Prop. H do not need voter approval and have no place in the City's charter. Approving a study, setting renewable energy goals and making statements about intent to maintain employee benefits all could be done by ordinance. The only aspect of the measure that requires a charter amendment is the change to give the Board of Supervisors the authority to issue revenue bonds to acquire utility systems without voter approval.
• Prop. H removes further voter approval from a significant decision about using revenue bonds to acquire the PG&E electric system or other utility facilities or systems. This authority would be added to the charter regardless of the outcome of the SFPUC's study.
• Prop. H either inadvertently or intentionally gives the Board of Supervisors the authority to issue revenue bonds to acquire utilities that are not related to clean energy. This could include gas, cable, telephone or wireless systems. There has been recent interest in pursuing a system of municipal ownership of a broadband system. Prop. H would provide the Board of Supervisors with the authority to issue revenue bonds to acquire any utility facilities, without additional voter approval.
• A San Francisco municipal utility representing only 370,000 customers would not likely be competitive as a buyer for new renewable power that is coming online. Renewables are still expensive compared to conventional fossil fuel sources, and utilities with millions of customers have more resources to bid on these marginal supplies. Furthermore, since San Francisco essentially would be starting from scratch, even its conventional supply costs would be more expensive than those of PG&E. Thus, city ratepayers would bear the extra costs.
• In the event that San Francisco were to municipalize its energy system, there is no guarantee that rates charged by a public utility would be fair or less expensive than PG&E's. Because municipal utilities' rates are not regulated by the state, there is no enforcement mechanism, such as penalties, to ensure that rates are equitable. Ratepayers might not benefit from a shift from one monopoly provider to another, and likely would end up paying more than they would have paid PG&E for electric service.
• Prop. H includes billions in hidden costs to the City if the City were to municipalize. In addition to the cost of purchasing the PG&E electrical system, San Francisco also could purchase PG&E's gas system (for an untold amount). Further, if PG&E were to move its headquarters from San Francisco as a result of this measure, the City would lose more than 5,000 jobs and the millions in local expenditures by these employees, as well as more than $20 million in annual tax revenues, fees and contributions provided by PG&E. A municipal utility would not pay property, payroll or sales taxes.
• Although proponents of Prop. H claim that the City is overcharged by PG&E to "wheel" Hetch Hetchy power about 30 miles from Newark to San Francisco, at a cost of about $4 million a year, building a new transmission line is not an economical alternative to this arrangement. The rate that San Francisco pays PG&E in "rent" for this transmission is negotiated lower than rates set by the Federal Energy Regulatory Commission that apply to transmission in California. The state's electric-grid operator, the California Independent System Operator, likely would not deem a new transmission line into the city as necessary to serve other customers. The City therefore would not be eligible to recover its costs through broader statewide charges, and its costs — estimated at $400 million — would be the sole responsibility of San Francisco's customers.

SPUR’s analysis

While Prop. H holds up clean energy and cost-effectiveness as its most noble goals, it creates a path to achieve these goals that does not make sense. It sets in motion a cascade of events ultimately allowing the Board of Supervisors to issue revenue bonds to acquire PG&E's electric facilities, or any other utility's facilities, without going back to the voters. Buying out PG&E's electric-distribution network would be a very expensive proposition for the City, potentially several billion dollars. It would displace worker, and could result in lost City revenue in franchise fees, payroll taxes and property taxes, should PG&E choose to move its headquarters elsewhere.

We are not convinced that there is a problem with private, regulated utilities, nor are we convinced that the City would do a better job running an electric utility than PG&E.

SPUR recommends a "No" vote on Prop. H.