The City Signed Up for a Lot of Watchdog Work Under New Power Deal

San Diego and its power provider, San Diego Gas and Electric, renewed their vows last week by signing up for another 20 years with each other after a century-long relationship.

This time around, San Diego placed new demands on the relationship, otherwise known as the franchise fee contract, which grants SDG&E a monopoly over the local energy grid. In doing so, San Diego also committed itself to doing a lot of watchdogging in the future, which is important for a city that hasn’t had the easiest time tracking utility costs and whose residents pay some of the highest energy rates in California.

San Diego committed to ensuring investors paid certain money to the city instead of ratepayers, assigning staff to oversee contract terms are being followed and that SDG&E appears before the public. But, what’s it going to take to keep tabs on a utility that conducts most of its business with state regulators at the California Public Utilities Commission in Sacramento?

“It requires vigilance,” said Mark Toney, who leads The Utility Reform Network, a statewide ratepayer advocacy group. That group has about 11 attorneys on staff who track about 100 different proceedings at the CPUC, Toney said.

“I have to believe that if the city of San Diego negotiated and signed off on it, they have it under control. I can’t imagine they would sign something they think they couldn’t handle,” Toney said.

Franchise fee contracts used to be pretty cut and dry; they guaranteed utilities decades of exclusive rights to provide power and build their equipment on public land – for a price. Utilities charged what they charged, and the state regulated their actions. But following a wave of cities using these contracts to secure new promises, San Diego placed new demands on the utility like requiring the company to explain energy rate changes before the City Council.

SDG&E customers pay the highest rates of the state’s investor-owned utilities. SDG&E’s baseline rates (the price of energy for an average residential customer) rose 106 percent between 2009 and 2019, the highest of any other investor-owned utility in California.

Utilities tell state regulators how much they plan on charging their customers every few years by filing what’s called a general rate case. But utilities can request permission to make changes to rates, and they do all the time.

San Diego’s City Council members also required the utility’s shareholders to pay $80 million for the contract. More importantly, the agreement mandates that the company cannot pay the fee by raising rates on ratepayers. It’s an “unprecedented” contribution – the highest the company says it’s heard of nationwide – that will come from the profits the shareholders of the company would have collected, said SDG&E spokeswoman Helen Gao.

So how will the city know whether a dollar comes from shareholders or from ratepayers?

Toney from the Utility Reform Network suggested the city would have to employ legal tools at the CPUC to track which SDG&E accounts the money is coming from. The city will want to ensure that if SDG&E pays the city something, it doesn’t find another way to get the money from ratepayers.

“It’s not just a question of where it’s coming from initially, but they’ve got to make sure they never request recovery of those funds in another proceeding,” Toney said.

Gao pointed to multiple layers of oversight built into the franchise agreements. The utility has to submit a year’s worth of its receipts to the city’s chief financial officer every year. The city’s also supposed to put together a so-called Franchise Compliance Review Committee every two years composed of residents appointed by the mayor and City Council. They’d work with an independent auditor to make sure everybody’s following the contract.

Bill Powers, a member of the pro-public power group Protect Our Communities Foundation, worries that doesn’t go far enough.

“If you want to have an influence on keeping rates moderate for your residents, you’d have to be a hardcore, fully engaged party in the general rate case (at the CPUC),” Power said. “The city shouldn’t have to birddog the utility to make sure it’s fulfilling its commitment.”

The city could use some of the franchise fee money to study how San Diego could take over the energy grid itself and run it publicly, either as a city department (called municipalization) or as a separate agency like a school board. To make their commitment to considering public power a future option clear, three Council members (Elo-Rivera, Monica Montgomery Steppe and Joe LaCava) also called on the mayor and Council to create an “energy independence fund” to do just that. The money could eventually be used to pay for a public power study or be used like a savings account the city could tap to pay its way out of the franchise fee contract if it needed to.

“These steps are critical and have never been taken by the city before. We’ll actually be putting money aside to give ourselves a foothold,” said Elo-Rivera, who proposed the fund along with Council members Monica Montgomery Steppe and Joe LaCava, in a May interview.

Multiple environmental groups and public power advocates pushed the city to study public power before signing another deal with SDG&E. In fact, a former Pacific Gas and Electric attorney hired by former Mayor Kevin Faulconer as a consultant recommended that the Council should pursue that avenue if SDG&E didn’t submit a viable bid for the contract the first time. Mayor Todd Gloria decided SDG&E’s first bid wasn’t good enough, and gave it a second try. But the Council didn’t pursue public power.

Instead, a majority of Council members were satisfied such a study could begin now and future members of the City Council can decide in five or 10 years whether they want to pursue it.

Under the new contract, SDG&E agreed to do a bunch of other things under a new Energy Cooperation Agreement. It’s a laundry list of commitments from SDG&E that includes planting thousands of additional trees in the city, building out infrastructure to support electric vehicles and committing up to $1 million in shareholder funds for 10 years toward a nonprofit that puts solar panels on low-income households. (To pay for all the other stuff, the agreement says SDG&E may raise rates.)

The agreement is actually a separate resolution of the Council, which are promises made in writing but not actual city law. The city retained the right to terminate the contract for any reason, but only after the first 10 years of the 20-year contract play out. (But the city would have to pay shareholders some of that upfront $80 million back if they walked.)

Though SDG&E won the contract for a third time in a row (no other companies bid) it’s still at the negotiation table with the city. The two sides have yet to hash out the details of a memorandum of understanding that lays out all the projects SDG&E wants to do over the next few years. And the two have to come to new terms over a slow, expensive and controversial program to bury San Diego’s powerlines underground.

 

The city is still in litigation with SDG&E over that program, a fact Elo-Rivera said should preclude a company from getting the franchise fee contract. But he eventually voted in favor of awarding it to SDG&E.

“What sat with me … was how little the city had done to hold SDG&E accountable over the course of the previous 50 years,” Elo-Rivera said. “If we’re doing our job … I think it’ll be in the business interest of SDG&E to be better than they’ve been.”