Point Loma Nazarene study says city takeover of gas and electric service isn’t worth it
Supporters of municipalization say the university analysis is flawed and raise questions about the study’s impartiality.
A study released by a business institute at Point Loma Nazarene University says a city of San Diego takeover of electric and gas services from San Diego Gas & Electric — a process called municipalization — would be too expensive and risky for the city to undertake.
But supporters of creating a publicly run utility say the study’s figures are off and raised questions about its impartiality.
The 28-page analysis, conducted by the university’s Fermanian Business & Economic Institute and released April 27, estimates it would cost the city $8.9 billion to acquire all of SDG&E’s assets and energy infrastructure and an additional $1.7 billion per year to operate a municipal utility.
“After careful consideration of the costs vs. benefits, one would conclude municipalization is not a path the city should follow,” Lynn Reaser, the institute’s chief economist and one of three co-authors of the report, said at a news conference outside an SDG&E substation in Kearny Mesa.
Reaser was joined by former San Diego Mayor Jerry Sanders and labor leaders and members opposed to the city establishing a publicly owned utility.
But Craig Rose of the Citizens Franchise Alliance said a municipal utility would save money in the long run. “There’s more than 40 public electric utilities in California and they’re all different,” Rose said. “But they all share one characteristic — they all have lower rates than SDG&E.”
Exploring the option of having the city sidestep SDG&E completely and create its own power company has become a subject of debate in the past year as city officials negotiate a new franchise agreement for the first time since 1970.
In a local government franchise agreement, a municipality grants a utility exclusive use of public rights of way for transmission and distribution, as well as the right to install and maintain wires, poles, power lines and underground gas and electric lines within the city limits.
The city has the right to form its own utility, such as the Los Angeles Department of Water and Power and the Sacramento Municipal Utility District. And some members of the City Council want a new deal with SDG&E to include a “right to purchase” clause that would make it easier for the city to buy out a privately owned power company.
But the PLNU study said comparisons with Los Angeles and Sacramento “have very limited relevance” because those municipal utilities were formed about 100 years ago, when the utility infrastructure of each city was just getting built out.
Establishing a city-owned power company would require purchasing SDG&E’s physical assets, such as poles, towers, transformers, gas lines, etc. Using data from a study commissioned by the city, the PLNU analysis estimated gas and electric infrastructure would come to $5.2 billion.
It would cost an additional $3.7 billion for things such as start-up costs and disconnecting and reconnecting points along the gas and electric system.
Then, assuming the infrastructure is purchased by 2024 and a city-owned utility begins operating in 2025, the study estimated annual operating costs of $1.7 billion, with the biggest chunks coming from paying off debt, along with operations and maintenance expenses.
Cutting out the profit motive of an investor-owned utility like SDG&E “theoretically could lower rates,” the study said. “However, it is likely to be offset by the large debt-servicing costs due to the purchase of the utility’s assets, establishment of a reserve fund and working capital.”
“As a former mayor, I see red flags all over the place,” said Sanders, who was San Diego mayor from 2005 to 2012 and is now chief executive of the San Diego Regional Chamber of Commerce.
The chamber co-funded the PLNU study, along with the San Diego & Imperial Counties Labor Council. SDG&E and its parent company, Sempra Energy, are members of the San Diego Regional Chamber of Commerce.
In 2020, Sempra paid $222,900 in dues as a member of the chamber and contributed $28,348 to the chamber’s political action committee.
The study “was put together by people who have a reason to try to undercut public power,” said Bill Powers, a board member of the Protect Our Communities Foundation, a local environmental group in favor of municipalization.
Reaser defended the fairness of the study. “We, as an academic institution, as professional economists, from a personal integrity point of view, we follow the data,” she said. “And our first statement to clients is, we’re going to deliver results and you may or may not like them.”
Members of IBEW Local 465, which represents SDG&E’s union employees, joined the San Diego & Imperial Counties Labor Council in opposition to municipalization and are worried that wages, benefits and retirement plans would be at risk.
“You always have to be concerned with that,” said Keith Maddox, executive secretary-treasurer of the labor council. “There’s no guarantees, as we know in the labor world. We have to fight for everything we get.”
Rose of the Citizens Franchise Alliance said workers’ rights and benefits would be protected if the city created a municipal utility.
“Anybody who advocates for public power recognizes that the overwhelming majority of the workforce, short of some executives, will be retained in any transition,” Rose said. “These are the people who know how to do their jobs. We want them to do their jobs, we want them to be well-paid, we want them to be represented by a union.”
Powers said the study’s estimated costs of creating a municipal utility are way too high. Citing a pair of city-funded studies, Powers extrapolated that the total cost of municipalization comes to about $3 billion.
The PLNU “report says most of the cost is in power supply,” Powers said. “They obviously have not been reading their electric bills, because two-thirds to three-quarters of the retail cost is transmission and distribution. The way to reduce rates is to have control of that transmission and distribution and own it and prevent the [investor-owned utility] from packing more and more costs on year after year.”
Mayor Todd Gloria recently laid out terms for a new franchise agreement that include the utility agreeing to pay the city $80 million ($70 million for electric services and $10 million for gas) and a “10-plus-10” term — that is, an agreement running for 10 years with an automatic 10-year renewal if the city deems the franchisee has complied with all terms and conditions.
At least three City Council members want tougher terms for SDG&E and, even though the utility has already submitted its bid, Gloria and the city have reserved the right to negotiate and make changes to a potential agreement. The mayor’s office said talks with SDG&E have begun.
The city’s current deal with the utility runs through June 1, and Gloria expects to send a proposal before the City Council in May.
Any new franchise agreement will require approval from a supermajority of at least six of the council’s nine members to pass.