Franchise Agreement Proposal is a Monumental Theft

San Diego Gas and Electric power lines traverse Carroll Canyon.

By Cody Petterson

Early next month, San Diego City Council will decide our city's energy future for decades to come. The franchise agreement proposal the Environment Committee sent to council on July 16th, a mere three weeks after the release of the final report from JVJ Pacific Consultings (JVJ), is a gargantuan, obscene giveaway to San Diego Gas and Electric (SDG&E), or any investor-owned utility that might outbid them. It commits the residents and ratepayers of San Diego to handing the shareholders of SDG&E one million dollars in profit every single day for 20 years.

Spend enough time in politics and you start to lose the sense of disgust with how corrupt and contrary to the common good it habitually is, but a heist this big has the virtue of shocking one back into indignation, of defibrillating the conscience. For the next 20 years, every time one of our residents asks for affordable housing, or transit, or parks, or social services, or solar rebates, or municipal composting, or job training, or subsidized childcare, we will have to tell them, "Sorry, Scott Sherman gave that money to SDG&E's shareholders, Jen Campbell gave that money to SDG&E's shareholders," etc.

The only way to stop this monumental theft — and the only financially, environmentally, and socially responsible path forward for San Diegans — is the municipalization of San Diego's gas and electric distribution. Don't take my word for it. I am ideologically predisposed to advocate for public ownership of utilities. Take the word of the consultants whom the city paid to study the alternatives: all four consultancies concluded that a community-owned utility was achievable and financially advantageous under most cost scenarios.

The current franchise agreement, which expires in January, saddles San Diegans with the most expensive electricity in the state, by far. Customers of Sacramento's public utility pay nearly half what we do. Because the California Public Utility Commission (CPUC) — long ago captured by the very utilities it purports to regulate — guarantees SDGE a 10.2 percent return on equity (in 2019 it actually returned 12 percent), it doesn't matter how inefficient or uneconomical their investments are, they'll still get their guaranteed profit.

The JVJ report, commissioned by the city, pegs the value of the franchise at $6.4 billion, by taking 2019's net income of $322 million and multiplying it by 20, the proposed duration in years of the franchise. This is a pretty crude way of estimating the value of an asset, and there are a number of reasons to believe it dramatically undervalues the franchise, but even this low estimate gives an idea of just how usurious the SDG&E franchise is for San Diegans.

During last Thursday's Environment Committee hearing, a number of SDG&E supporters attempted to distract from the theft by extolling the $65 million in franchise fees SDG&E pays each year to the city of San Diego. Only, SDG&E doesn't pay those fees, WE do. We, as ratepayers, pay ourselves, as citizens, $65 million a year. Literally. And lest you think I mean merely that our rates cover the fees, think again. Look at your bill. Check out the 5.78 percent "San Diego Franchise Fee Differential," which covers the difference between the 1.1 percent base fee included in our rates, and San Diego's higher, negotiated fee of three percent. We literally pay a surcharge to ourselves to cover SDG&E's franchise fees. SDG&E just passes that money from our left hand to our right. We pay exorbitant rates for electricity and, on top of that, we pay ourselves for SDG&E's privilege of charging us exorbitant rates for electricity, and then, on top of that, we pay SDG&E shareholders one million dollars A DAY in profit.

As a result, it doesn't matter what franchise fee we charge SDG&E — three percent, four percent, 25 percent — they'll just turn around and petition the California Public Utilities Commission to allow them to slap a corresponding surcharge on San Diego ratepayers. And the CPUC will oblige because, again, it is substantially captured by the investor-owned utility industry.

Is there a financially viable path that frees us from our abusive marriage to SDG&E? Or are they right when they tell us that we’re stuck with them, forever, that no one will ever love us like they do, that we could never make it on our own? The answer is that not only is municipalization a viable path for the city, but that in the majority of cost scenarios, it is the financially superior path, offering significant savings for ratepayers.

The Newgen/Advisian/MRW franchise report commissioned by the city found that "the City can, under many (but not all) circumstances, purchase the SDG&E electric and gas assets located within the City limits at the values provided by NewGen while still offering lower rates than SDG&E." JVJ Pacific's draft franchise proposal makes clear not only that municipalization is viable, but that if "the new proposed franchises are not accepted without material changes by a responsible bidder, then we recommend that the City proceed to form community-owned electric and gas distribution utilities." These are not Marxist/Leninist agitators calling for capitalist expropriation, but rather top-tier consultants with decades in the energy industry, hired by a Republican administration to coldly assess and compare the financial benefits of franchising and municipalization.

Without a doubt, SDG&E and its parent company Sempra would make the process of eminent domain and condemnation maximally difficult and painful, since the loss of their San Diego cash cow would be a devastating blow to their stock value and even solvency. They would bog our city down with lengthy litigation, aided by a CPUC congenitally hostile to ratepayers. But the law is on our side and we would ultimately prevail. With interest rates at historic lows, our city has never been better positioned to successfully municipalize, while achieving significant reductions in gas and electric rates, and gaining full, democratic control of our transition to a renewable energy future.

Divorce is hard. But there is no way that any councilmember with any love for this city and its residents can responsibly drag us back into the abusive, extortionate relationship we are on the verge of escaping. This is our moment to give San Diego back to its residents. Seize this opportunity to take the $320 million in profits we give every year to SDG&E's shareholders and instead invest them in our communities, provide relief to ratepayers, and build a visionary, sustainable, democratic, unionized, financially sound community-owned public utility.

Photo by Tommy Hough