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Gas & Electric Municipalization March 2021 Gas & Electric Municipalization: Cost and Benefits for the City of San Diego About the San Diego Regional Chamber of Commerce The San Diego Regional Chamber of Commerce is the leading political advocate for business and the nexus of connections and collaboration amongst businesses in the San Diego-Baja region. For 150 years, the Chamber has been critical in driving the region forward. Through political advocacy on the city, county, and state level, the Chamber has fought to make San Diego a place where businesses can succeed and grow while creating jobs, supporting infrastructure, and ensuring that neighborhoods thrive. About San Diego and Imperial Counties Labor Council The Labor Council makes sure workers have a voice on the job and at the negotiating table so they can fight for better wages, healthcare, retirement security, and fair treatment on the job. The organization is made up of nurses, teachers, firefighters, retail workers, truck drivers, construction tradespeople, grocery employees, domestic workers, janitors, stagehands, college professors, and more. The strong community of workers, delegates, e-board, and staff empowers workers every day in the fight to sign quality contracts, elect pro-worker leaders, and pass worker-friendly laws. About the Fermanian Business and Economic Institute (FBEI) The FBEI specializes in providing business and economic consulting services to for-profit and non-profit companies, individuals, organizations, government entities, and others throughout the San Diego region, as well as nationally and internationally. Consulting services include economic analysis, forecasting, economic impact studies, business plans, market research, and feasibility studies. FBEI Authors Lynn Reaser, Ph.D., CBE - Chief Economist Lauren Marshall, MBA - Assistant Director Brittany Augustine and Cara Liggins MBA Research Scholars Copyright © 2021 by San Diego and Imperial Counties Labor Council and the San Diego Regional Chamber of Commerce. All rights reserved. PLNU, the Fermanian Business & Economic Institute, the Labor Council, and the Chamber disclaim any and all liability from the use of this material. Publication or distribution of any portion of this document is prohibited without the express approval of the Labor Council and the Chamber. TABLE OF CONTENTS 1 EXECUTIVE SUMMARY 4 PURPOSE 4 MUNICIPALIZATION: WHAT WOULD IT MEAN FOR THE CITY OF SAN DIEGO? 5 LEGAL CONSIDERATION/ROADBLOCK 5 ENVIRONMENTAL EFFECTS 6 RATES FOR UTILITY CUSTOMERS 6 SOCIAL, ECONOMIC, AND ENVIRONMENTAL EQUITY 7 COSTS 12 UPGRADING AND MAINTAINING THE GRID 12 LOCAL CONTROL 12 BILLING AND CUSTOMER SERVICE 12 RELIABILITY 12 POWER SECURITY 13 PERSONAL SECURITY 13 GOVERNANCE 13 LIABILITY 13 FINANCIAL RISK 13 RISK SHARING 14 TIMEFRAME 14 IMPACT ON WORKERS 15 THE RECENT HISTORY OF MUNICIPALIZATION 17 ANALYSIS OF VARIOUS MUNICIPALIZATION EFFORTS 23 CONCLUSIONS 25 APPENDIXES A. ACQUISITION COST DETAILS B. INDEX OF EXHIBITS C. METHODOLOGY EXECUTIVE SUMMARY The City of San Diego’s consideration to take ownership of its power utility would put the City in control of purchasing natural gas or substitutes; distributing electricity and gas to customers and maintaining the distribution infrastructure; and billing and servicing all electricity and gas customers. San Diego Community Power (SDCP), the City’s new Community Choice Aggregation (CCA), will control the purchase of electricity. It should be noted that California law may prevent San Diego from creating a municipal utility since it has already established a CCA. This report is not and should not be read as a criticism of municipal utilities or a comparison between municipally- owned and investor-owned utilities. Instead, it is analysis of the issues faced when contemplating municipalization, particularly those for the City of San Diego. The analysis of this report concludes that municipalization would deliver little, if any, of the City’s goals, while exposing it to enormous logistical, legal, and financial burdens and risks. A cost-benefit analysis would reject it as a path the City should follow. Some of the key findings of the report include the following: » Municipalization itself implies no significant progress in reducing greenhouse gas emissions. SDCP holds the responsibility for securing greener sources of electricity. Greener sources of natural gas are now limited, expensive, and are likely to require major infrastructure investments. More importantly, environmentalists want to see a total shift away from gas to electricity. The City could mandate that transition without the costs of municipalization. Such a transition would leave a municipal utility stranded with ultimately worthless gas assets. » Municipalization would not imply lower utility rates. The cost of power largely will dictate customer rates. SDCP will determine the cost of electric power, while technology and markets will determine the cost of natural gas or substitutes. Although rates will no longer include a state-regulated profit margin, a municipal utility could have higher debt servicing costs, major startup expenses, and lower economies of scale. » Municipalization would have little impact on achieving the City’s goals of greater social, economic, and environmental equity. Other tools, such as raising targeted benefits, would be more effective on the social and economic side. SDCP already is committed to providing cleaner energy for all San Diegans and could direct funds to assist low-income households, install solar panels, or make their homes more energy efficient. 1 | Gas & Electric Municipalization » The total acquisition costs, or the total expenditures required before the utility could launch service, would total an estimated $8.9 billion. This includes $5.2 billion as the amount estimated to purchase all of the gas and electric distribution assets from the investor-owned utility, San Diego Gas & Electric (SDG&E). Acquisition costs would include separation costs from parts of the system shared with other cities continuing with SDG&E. They would also encompass transaction expenses, the creation of various reserve funds, and other startup or fixed costs. » Annual operating costs would equal a projected $1.7 billion in 2025 dollars, representing the year that the municipal utility would be up and running. These ongoing expenses would encompass operations and maintenance, the cost of gas purchases, debt service, reimbursement to the City to make up for lost taxes and franchise fees, and various customer programs. » Municipalization would provide the benefit of local control, transferring it from the private utility and the state regulator, the California Public Utilities Commission (CPUC). That local control would also mean major responsibilities, including maintaining the distribution network, investing in upgrading the network with newer technologies, pricing, billing, and many other complexities. » Many of these major responsibilities could also pose significant risk: • Billing and customer service. Customers will demand immediate attention to service disruptions. Major billing errors could damage the City’s reputation. • Reliability. Households and businesses place a high priority on the continuous flow of gas and electricity. Problems in the early stages of running the distribution system could disrupt service. The new utility would be responsible for determining how to curtail service during periods of weather extremes or major fire danger. • Power security. The City would be responsible for maintaining its gas and electric system from cyber or physical attacks. • Person security. The City would be accountable for safeguarding the personal financial and other customer information. • Governance. The City would need to set up an oversight board, with checks and balances. The board would oversee major decisions, ranging from pricing to investment. Preventing fraudulent activity and conflicts of interest would be key. • Liability. The city could be held liable for fires, prolonged power loss, or property damage, injuries, or deaths. • Financial risk. The City could face costly litigation and settlement costs from liability issues. It may have to backstop the utility with financing, while cost overruns could raise default risk, lowering credit ratings. 2 | Gas & Electric Municipalization » With an investor-owned utility, shareholders bear any costs not allowed to be passed on to ratepayers by the CPUC. Municipalization would mean that the City and its utility customers would bear any and all costs. » Utility workers would face uncertainty about their future. They would lose their jobs, unvested benefits, and apprenticeship program and could see lower wages in the public sector. Any financial problems of the utility could jeopardize future raises and staffing levels for all City employees. » The time required to establish a municipal utility could be long. A 4-6 year or longer period is common. This study assumes that operations could start in 2025, which is optimistic. A franchise agreement to continue service would be necessary in the interim. However, it is uncertain what incentive there is for an investor owned utility to enter into a short-term franchise with a City seeking to acquire its assets. » A review of recent attempts at municipalization, especially those of the size contemplated by the City of San Diego, have mostly failed due to cost, time, and other factors. On balance, the one possible benefit of local city control appears to be overwhelmed by a large number of costs and risks. Particularly
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