September 23, 2020

San Diego wants at least $80 million for its electric and gas franchise agreement

San Diego wants at least $80 million for its electric and gas franchise agreement


After months of debate about the city of San Diego’s franchise agreement that is set to expire in four months, outgoing Mayor Kevin Faulconer on Wednesday morning released the requirements a utility must meet to win the right to provide electric and gas services within the city limits.

Faulconer’s formal “Invitation to Bid” calls for a new agreement lasting 20 years and stipulates the prospective winner to pay at least $80 million upfront — $70 million for the electric franchise and $10 million for the gas franchise.

“San Diego has the largest, most valuable electric franchise and second-largest gas franchise in the state, and we have a once-in-a-generation opportunity to get the most bang for our buck with this agreement,” Faulconer said in a statement.

The current franchise agreement, held by San Diego Gas & Electric, has been in place since 1970 but expires Jan. 17. Faulconer’s office has looked to create a competitive process among other energy companies in the hopes of driving a better bargain for the city.

Thus far, three companies have expressed interest in winning the exclusive use of public right-of-ways for transmission and distribution in San Diego, as well as the right to install and maintain wires, poles, power lines, and underground gas and electric lines — SDG&E, Orange County-based Indian Energy and Berkshire Hathaway Energy, a subsidiary of billionaire Warren Buffett’s Berkshire Hathaway, Inc.

Faulconer’s invitation to bid comes after the mayor’s office asked for input from the San Diego City Council in August. Council members debated but could not come up with a consensus on what particulars a new agreement should include.

The $80 million minimum bid is $18 million more than what the city’s hired consultant, JVJ Pacific, had originally recommended. Under the terms of the invitation, the amount of the winning bid would come from the utility’s shareholders’ funds and not from ratepayers.

“We heard loud and clear from council and I think one of the items there was definitely support for in the room was increasing the minimum bid,” said Erik Caldwell, the city’s deputy chief operating officer.

“I think it’s important to note that (the $80 million minimum bid) is the floor, not the ceiling. That’s where bidders start. We’re hopeful that with the efforts that we’ve taken to preserve competition in this process that hopefully, they can get more than that.”

Prospective bidders have until Oct. 23 at 5 p.m. to submit their offers. Competition is open to any company — not only to SDG&E, Indian Energy and Berkshire Hathaway — but bidders have to prove they are qualified to take on the responsibilities of delivering electric and gas services and pay the upfront costs.

A live bid will be held before the City Council, similar to an auction, said Lee Friedman, Faulconer’s strategic energy initiatives manager.

However, the company emerging from the bidding as the top choice must then receive approval from a two-thirds vote of the City Council.

What happens if the city doesn’t receive any bids that meet the requirements set by the invitation? After all, SDG&E earlier this summer called JVJ’s recommended $62 million upfront minimum bid “astronomical.”

Faulconer’s plan then calls for the city to pursue forming its own gas and electric utility — a process known as municipalization.

While most power companies across the country and in California are investor-owned utilities like SDG&E, there are exceptions, such as the Los Angeles Department of Water and Power and the Sacramento Municipal Utility District. Supporters of municipalization point out that the utilities in publicly-owned utilities in Los Angels and Sacramento offer lower rates than SDG&E.

A new agreement lasting 20 years mirrors the recommendation made by JVJ Pacific. SDG&E has said it prefers a longer deal while some critics have called for a shorter term, saying it will give the city more flexibility in a fast-changing energy landscape.

“A 20-year term was sort of that Goldilocks-zone number,” Friedman said, trying to encourage potential bidders attracted to a lengthier agreement. “But also, not too long as to end up in the same situation where you’ve got a 50-year agreement and the industry has changed so much that you’re wondering how come you’re stuck in the past when you want to move into the future.”

Faulconer’s invitation to bid also calls for:

  • the elimination of a 0.35 percent surcharge San Diego residents pay on the electricity portion of their monthly bills, which the city said will translate to $110 million in decreased rates
  • performance audits of the winning utility every two years to make sure they are doing a good job and
  • ensuring that utility workers keep their jobs, negotiated salaries and increases should a company other than SDG&E win the franchise agreement.

The final terms of the agreement set the franchise fees for electric and gas at 3 percent. Faulconer’s team predicted the 20-year deal will equal about $1.4 billion in revenue. JVJ Pacific has estimated the combined electric and gas franchises are worth roughly $6.4 billion in profit over the course of 20 years.

The city does not have to necessarily reach a new deal by January.

City attorney Mara Elliott sent a note to city council members last month reminding them the city can try to work out an extension with SDG&E if time runs short on negotiating the particulars of an agreement or if a losing bidder files a protest.

Faulconer’s term expires in December. In November, elections will be held for new members of the City Council, as well as a new mayor, with Barbara Bry and Todd Gloria facing each other.





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