PG&E bankrolls Proposition 16

APRIL 27, 2010

By JOHN SEILER

For better or worse, California’s initiative and referendum laws allow initiatives that might or might not help the state, letting the people – sometimes not always well-informed – make the final choice on Election Day. And not only citizens, but special-interest groups and even businesses can push initiatives onto the ballot.

An example of the latter is Proposition 16 on the June 8 ballot. It essentially is an initiative advanced by Pacific Gas & Electric to save itself money fighting city takeovers of electricity. As of April 16, PG&E has put $34.5 million into the pro-16 campaign. The opposition, the Utility Reform Network, has raised $36,000, or 0.1 percent as much.

The official Title and Summary, provide by the attorney general, explains Prop. 16:

* Requires local governments to obtain the approval of two-thirds of the voters before providing electricity service to new customers or expanding such service to new territories using public funds or bonds.

* Requires same two-thirds vote to provide electricity service through a community choice program using public funds or bonds.

* Requires the vote to be in the jurisdiction of the local government and any new territory to be served.

The Legislative Analyst calculates that it will have “Unknown net impact on state and local government costs and revenues due to uncertainty as to the measure’s effects on public electricity providers and on electricity rates. These effects are unlikely to be significant in the short run.”

Currently, state law generally allows local governments to take over power production and supply, without a vote of local residents. Prop. 16 would mandate a two-thirds vote of the people for such a takeover.

Bohemian.com notes that PG&E has sponsored the initiative as “a response to an increasing number of local governments that are interested in procuring energy for their communities. Several cities in Marin County, for example, have created the Marin Energy Authority to run a public utility called Marin Clean Energy. MCE contracts with energy generators directly to sell power to Marin residents. The process by which municipalities form these coalitions is called Community Choice Aggregation, or CCA.”

Existing public electricity suppliers

In California, utilities for the most part are monopolies that are regulated so much, and are so tied to government, that they don’t work according to usual market parameters. That became obvious during the electricity crisis of a decade ago, when the botched 1996 “deregulation” was shown to be actually a faulty re-regulation that short-circuited under stress, cost ratepayers billions and led to PG&E’s bankruptcy.

Strangely, in some ways the government-run city utilities have a lot more leeway in the structure of existing state utility laws, Robert Michaels told me; he’s a professor of economics at Cal State Fullerton and co-editor of Contemporary Economic Policy, a peer-reviewed journal of the Western Economic Association.

For example, he said, Anaheim Public Utilities and the Los Angeles Department of Water & Power “have a lot of independence. And both are used by their cities to contribute to the city in lieu of taxes.”

He said these city-owned utilities have generally offered lower rates than the private utilities. “Anaheim will say it’s because the city has tax-exempt municipal financing,” he added. “But the city has done pretty well as far as choosing investments, such as in Intermountain coal in Utah.”

According to Reuters, the biggest owners of Intermountain include “the Los Angeles Department of Water and Power (44.6 percent), the California cities of Anaheim (13.2 percent), Riverside (7.6 percent) and Pasadena (4.4 percent), Murray City in Utah (4 percent) and PacifiCorp’s Rocky Mountain Power in Utah (4 percent).”

Public hazards

However, city ownership of power has its own hazards, mainly the potential whims of city councils. “All of the cities in California are being very strongly urged to put in place a  lot of renewable power plants,” Michaels said. And he warned that municipal power companies “all use figures that are grossly misleading” on the amount of renewable power they use. For example, LADWP has a 20 percent renewable goal, but includes in its “renewables” power from Hoover Dam, which is technically true, but which is an old source.

The problem, Michaels emphasized, is that the actual renewables – such as wind and solar energy – are very expensive. Currently, contracts are being signed with renewable companies, but not much energy is being produced. “It’s the electrical equivalent of vaporware” in computer software, he said. But if the current “goals” ever become a reality, ratepayers could get hit with large increases.

It’s also possible a city-run power system could mandate extreme use of high-cost renewables, leading to really high increases in electricity rates. Reported the San Francisco Bay Guardian on Feb. 22, 2010:

A key difference between San Francisco’s CCA and PG&E’s energy mix is that CCA would rely more heavily on green energy sources, with a goal of offering 51 percent of its energy from renewable resources by 2017 with the plan to transition eventually to 100 percent renewable power. Meanwhile, PG&E is making snail-like progress toward a 33 percent renewable-energy standard by 2020 that is mandated by state law.

Whatever the problems of highly regulated private power firms, they at least are insulated from the green fads of city councils. City-run power companies are not.

Michaels also said that there hasn’t been a major government takeover of a private power franchise since the 1940s, “when cheap federal hydro power was available” for use by cities. But a takeover now would involve incredible battles, including over the use of eminent domain to seize the private property of a power company, and where the tax money would come from to pay for a takeover.

Tapping the ratepayers

Of the $34.5 million cost to shareholders to promote Prop. 16, PG&E noted in a Feb. 19 press release that guidance

for 2010 earnings from operations excludes forecasted costs to support a state-wide ballot initiative requiring local governments to gain voter support before using taxpayer money to establish electric service. This one-time item reflects activities outside of PG&E’s regular utility operations and is expected to impact total GAAP earnings between $0.06 and $0.09 per share for the year.

Capitol Weekly reported that PG&E believes it is OK to spend its shareholders’ – and ratepayers’ — money in this way to prevent future expenditures fighting individual, city-level battles against takeovers of its assets. It quoted a transcript of a March 1 conference call with shareholders, in which PG&E’s CEO Peter Darbee and President Chris Johns said:

The idea was to diminish (it), rather than year after year different communities coming in and putting this up for vote and us having to spend millions and millions of shareholder dollars to defend it repeatedly. We thought this was a way we could diminish that level unless there was a very strong mandate from voters that this is what they wanted to do.

(A YouTube of the audio of the Darbee’s comments, somewhat different from that quoted, is here. Thanks to Katy Grimes for finding his.)

In sum, Michaels said, “PG&E is essentially trying to short-circuit” the local initiatives. “I don’t mind a two-thirds vote for any fiscal measure, but PG&E is spending a lot of its ratepayers’ money on this – it’s illegitimate,” Michaels said. “PG&E isn’t squeaky clean. But the people who want to form municipal utilities aren’t, either.”

The fate of Prop. 16 will be decided on June 8. After that, PF&E’s shareholders and ratepayers will have their say on whether the initiative was worth the cost to them.

John Seiler, an editorial writer with The Orange County Register for 19 years, is a reporter and analyst for CalWatchDog.com. His email: [email protected].