Cleaner and cheaper

Cleaner and cheaper

The Clean Energy Act could mean lower carbon emissions — and lower electric bills

By Amanda Witherell

>>Click here for our chart explaining how San Francisco can take over PG&E’s system — and wind up with $214 million a year in extra revenue. (PDF)

>>Click here for a comparison of public power and investor-owned utilities on rates and renewable energy. (PDF)

>>Click here for a comparison of Mark Leno’s Sacramento PG&E and SMUD (public) bills. (PDF)

Pacific Gas & Electric Co. has been saying that if the Clean Energy Act passes, it will cost the city $4 billion — and electricity bills will go up $400 a year per household to cover the costs.

But according to a Guardian analysis, a publicly owned utility could cover the costs of taking over PG&E’s system, finance enough renewable energy generation to make the local grid 50 percent green, and still generate $214 million a year in surplus income — without raising rates a dime.

In fact, the city could cut electricity rates by 15 percent — so that the average San Francisco home using 1,000 kWh a month would save $400 per year — and the system would still make $107 million profit annually.

Our analysis is based on conservative assumptions, and probably underestimates the city’s potential revenue. The figures all come from publicly available sources.

The bottom line: PG&E’s campaign materials are, at best, gross distortions of the truth.

WHAT PUBLIC POWER WOULD COST

The Clean Energy Act, which will appear as Proposition H on the November ballot, mandates that the city undertake a study to determine the most cost effective and expeditious way to achieve 100 percent renewable energy by 2040.

If the study determines that a publicly owned utility would provide the cheapest, cleanest energy, the first thing the city would need is a distribution system — the wires, poles, substations, breakers, and all the other physical infrastructure required to provide power. The legislation authorizes city officials to issue revenue bonds to build a distribution system or to buy PG&E’s, either through a negotiated sale price or eminent domain.

In 2001, the last time the city voted on a public power measure, PG&E said its system was worth $1.4 billion. Seven years later, although much of the system has deteriorated, the price has jumped to $4 billion. But utility officials freely admit they have no hard numbers: in a letter dated July 24, David Rubin, the director of service analysis, wrote, “PG&E has not done an inventory of its system, but it is readily apparent that the fair market value of PG&E’s electric system exceeds $4 billion … ”

There are, in fact, hard numbers on the value of the system — numbers that both PG&E and state tax officials have used and agreed on for years.

The state Board of Equalization is tasked with determining property values on utilities and levying taxes accordingly. In 2007 the board reports, PG&E paid taxes on property worth $1.2 billion in San Francisco. That’s what the state auditors say is the value of everything PG&E owns here, including both the electricity and gas distribution lines, the buildings on Market and Beale streets, the service center, vehicles, desks, computers — much of which the city would have no interest in acquiring.

According to documents acquired through a public records request, the city controller’s office assumed in its ballot analysis of the cost of Prop. H that 50 percent of the assessed value was utility related.

We’ll make the same assumption. If the San Francisco controller and Board of Equalization are right, the actual value of PG&E’s electricity distribution infrastructure is $595 million.

That could be a bit low or a bit high — real estate appraisal is an inexact science — but at least it’s derived from a solid number. Even if you assume that the board’s appraisers are off by a few tens of millions of dollars in either direction, the number PG&E has put forward is wrong by about 600 percent.

Rubin’s letter to the city controller outlined how PG&E determined $4.18 billion as the system’s worth — by using “replacement cost new less depreciation” (RCNLD) as a measure. “California law specifically approves RCNLD as a method for valuing improvements to land, such as the electric facilities at issue here,” Rubin wrote.

But appraisers disagree with Rubin. “The Code of Evidence section they are referring to mentions RCNLD as one of many pieces of evidence that can be considered in valuation cases,” a veteran appraiser with knowledge of PG&E’s system, who requested anonymity, told the Guardian.

Because PG&E is a regulated utility that passes all the capital costs of doing business onto customers, many valuators argue that the rates those customers pay (reflected in the BOE figures) indicate the true value of the system.

“The value is the value is the value,” the appraiser said. “Both PG&E and the BOE agree that fair market value is approximately equal to rate base.” That, in this case, would be about $600 million.

William Marcus, a lead economist on utility issues for JBS Energy with 29 years experience in the field, told us that the standard method employed by the BOE in valuing energy utilities is original cost less depreciation and deferred taxes. “I’m not going to tell you RCNLD is $4 billion because PG&E has been known to come up with very high values,” Marcus said. Even the RCNLD value is “almost certainly a serious matter of controversy.” Marcus, a Yolo County resident, witnessed the 2006 public power battle between the Sacramento Municipal Utility District and PG&E, and said, “There was almost a factor of four between what PG&E was saying and what SMUD was saying and they were both using RCNLD.”

“A reviewing court might look at RCNLD but would also look at original cost,” Marcus said. “So you’ve got a high end and a low end.”

The city would pay an interest rate of between 4.5 to 5.5 percent on revenue bonds, according to Ken Bruce in the Board of Supervisors Budget Analyst’s office. He pointed out that revenue bonds are repaid by dedicated revenue streams that are identified prior to the bond issuance, which can affect the interest rate. “It would be subject to a lot of scrutiny by rating agencies,” he said. With this in mind, we used the high end in our analysis, and assumed annual payments at 5.5 percent. If the city buys the system at the price the Board of Equalization and Controller’s Office estimates, and the bonds are repaid over 20 years, the annual cost would be $49.8 million.

CLEANER THAN PG&E

Prop. H sets ambitious standards for renewable energy — but our analysis shows that a city agency could easily afford to increase dramatically its alternative energy portfolio.

Some public power utilities (like private utilities) still rely on dirty coal and large hydropower — but this isn’t true of public power in California. Of the five major public power utilities we surveyed, all except the Los Angeles Department of Water and Power are doing a better job at developing renewables than PG&E.

Just across the Bay, Alameda has enacted a very aggressive renewable-energy plan. “As we go forward, there’s a chance we might be 100 percent renewable if the price is reasonable,” Alan Hangar of Alameda Power and Telecom told us. In November, the Alameda city utility will ink two new deals for energy produced at landfills and boost the agency’s percentage of renewables from 55 percent to almost 70. A deal for more hydropower is also in the works.

Hangar said the utility was able to purchase more renewables without raising rates “because we’re tight-fisted. We don’t have a lot of solar because it’s so expensive. But if the price came down we’d look at it.”

Even though public power agencies aren’t under the same state mandate of 20 percent renewable by 2010 that investor-owned utilities like PG&E are required to meet, the Sacramento Municipal Utility District set its own renewable power goal — and has already surpassed it. “Being a utility with a board of directors elected by the public, there’s more pressure there to get renewable energy in the mix,” said SMUD spokesperson Chris Capra. “The voters here told us they want more solar and green energy.” SMUD recently started offering customers solar power from a 1 MW array owned by a private company that sells the power to SMUD. Because the sun is an infinite resource, unlike natural gas, oil, and coal, the utility was able to lock in a long-term affordable rate for the power. “Now we can get solar power to customers who can’t do solar on their own,” Capra said.

For calculating the cost of renewables, we used figures from the city’s Community Choice Aggregation plan. If Prop. H passes, the CCA plan would be implemented as the first step toward the overall goal of 100 percent renewables by 2040.

According to the plan, over the first three years the city would phase in 360 MW of renewable energy, greening 50 percent of our grid. The Board of Supervisors already authorized the use of revenue bonds to finance 150 MW of new wind generation, 31 MW of photovoltaic cells, 72 MW of distributed generation, and 107 MW of enhanced conservation measures. The CCA plan calls for a three-year investment of $129 million for solar and $170 million for wind.

The supervisors have already passed the CCA plan, and it’s been signed by Mayor Gavin Newsom. That legislation authorized $1.2 billion in bonds to finance the plan — more than enough to get the renewable energy ball rolling.

Other financing possibilities exist. For example, PG&E’s energy efficiencies are paid for by a public goods charge levied by the California Public Utilities Commission, which for San Franciscan ratepayers totals $7 million per year. The city-owned system would manage that money instead — and that surcharge is already included in the average rate we calculated.

Furthermore, there are state and federal subsidies that can be applied to renewable energy purchases — these would be given to customers to purchase rooftop solar panels, wind turbines, and other distributed generation that could contribute up to 72 MW of the initial 50 percent in the first phase of the CCA plan. The city already gives $3 million in solar incentives to residents, and this program could be expanded with additional revenue generated from the power business.

We assumed the city could generate a substantial portion of the power it needs from renewables. For the first few years, power would still need to be bought on the spot market; we included those figures in the expense column.

The total costs for operating the system — including operations and maintenance, power purchases, and replacing the taxes that PG&E currently pays to the city: $524.45 million.

THE REVENUE SIDE

But after all the expenses are added up, selling electricity is still a lucrative business. If the city kept power rates at the same level PG&E currently charges — that is, if nobody’s electric bill went up or down at all — the city would clear $214 million a year in surplus revenue from the system. That’s almost as much as the current budget deficit.

Of course, a public power agency — run by accountable public officials — might decide to cut rates instead of banking cash. So we ran a scenario in which the city would cut rates by 15 percent. The bottom line: San Francisco still comes out $107 million ahead.

How can a city agency sell power so much cheaper and still make money?

For starters, PG&E has a guaranteed profit margin of 11.7 percent, approved by the state. A city-owned system doesn’t have to please shareholders with its profit — any surplus here could be folded into the general fund, remain in the San Francisco PUC piggy bank for future infrastructure needs, or be refunded to taxpayers. This is the basic difference between public and private ownership of a utility — and it translates into lower, more stable rates over time.

“For a number of years, we had no rate increases at all,” said SMUD’s Chris Capra, who explained that the agency was able to stave off rising natural gas prices because of bulk purchases locked in at low rates. Last year the elected SMUD Board voted for a 7 percent rate increase to cover rising power costs and replace equipment.

The agency’s rates are still far lower than what San Franciscans pay to PG&E — and the private utility has announced it will seek a 6.5 percent rate increase in January.

Originally published September 10, 2008 in the San Francisco Bay Guardian

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