Council rejects terms for franchise agreement for energy provider

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SAN DIEGO (CNS) – The San Diego City Council twice Thursday rejected terms for a franchise agreement for the city’s electric and natural gas provider, leaving the city’s future utilities unsettled.

The council was asked Thursday to agree on the terms it was looking for in the franchise agreement — a contract between the city and an energy provider — one of the city’s most valuable assets, valued at more than $6.2 billion.

Because of the city’s strong mayor-council form of government, Mayor Kevin Faulconer’s office did not need the council to approve all recommendations during Thursday’s meeting, according to a city spokeswoman. Council will, however, require a two-thirds vote to approve the awarded utility.

A bid is expected to be announced in the coming weeks. Final terms will be put into the bid document and utilities then will come back to the city with offers.

Howard Golub, a consultant for JVJ Pacific Consulting the city hired to analyze its needs, recommended the minimum bid in the terms should be $62 million — low enough to encourage bids but not so low the city and its residents are suffocated by high rates and later surcharges with no money back to show for it, he said.

“This is the floor, not the ceiling,” Golub said.

Golub also recommended franchise fees of 3.5% for natural gas and 3% for electric and a 20-year term with the bidder the city chooses.

San Diego Gas & Electric has been the sole provider of natural gas and electric utility services for San Diego since 1920. The current franchise agreement, finalized in 1970, is set to expire Jan. 17, 2021.

Berkshire Hathaway expressed interest as a potential bidder to compete with SDG&E. San Diego is California’s largest city to have franchise agreements with its utilities.

An initial proposal by Council President Georgette Gomez was rejected 6-3. It included a provision similar to that of Chula Vista, with a 10-year deal with an automatic renewal if the franchisee had been a “good partner.”

An amendment by Councilwoman Monica Montgomery raised the minimum bid from the 1% of total value of $62 million to 5%, or $310 million. It also included a climate equity fund and the provision to make the highest bidder subject to collective bargaining from employees who were working for SDG&E — in case that company does not win the bid.

“We can’t be working toward a just climate future if our partner undermines that,” Gomez said.

Councilwoman Jennifer Campbell then proposed terms to accept all of JVJ’s recommendations with the option to “explore” the climate equity fund. This failed 5-4, with multiple council members switching votes during discussion as amendments were added and removed.

Councilman Chris Cate asked for a provision to see and consider all bids for the franchise agreement regardless of the bid offered — dependent on how closely each bidder met the city’s terms.

Councilwoman Vivian Moreno said the lack of concrete plan to establish and fund the climate equity fund — which she said would be funded by the minimum bid and would add “green” elements to portions of the city often underserved — was automatically unacceptable for her.

The council’s lack of consensus creates the possibility of municipalizing the city’s gas and electric services.

“I recommend a franchise agreement first,” Golub said. “And if that’s not feasible, move to a publicly owned utility.”

High interest rates in 1970 prevented the city from seriously examining that route, but much lower interest rates now make a public-owned utility more feasible, Golub said.

According to valuations by business process management company NewGen, the city could buy out SDG&E’s infrastructure at a fair market rate of just over $3 billion.

According to Golub’s recommendations, the city should not do what it did in 1970 — accept a franchise agreement it wasn’t happy with because SDG&E was the sole bidder.

SDG&E is owned by Sempra Energy, an international corporation based in San Diego. Warren Buffett-owned Berkshire Hathaway has expressed interest in the bidding process.

More than 80 members of the public called in to the meeting to express support for a franchise renewal of SDG&E or for municipalization of the city’s electric and gas needs.

The callers were fairly evenly split, with many of the calls in support of extending the existing franchise agreement with SDG&E coming from employees with the company or those representing the International Brotherhood of Electrical Workers local representing SDG&E workers.

They claimed maintaining jobs, 100 years of history with the city and “keeping it local” as reasons to renew the franchise as soon as possible for 20 years or more.

Opponents to moving any franchise agreement forward claimed SDG&E’s perceived lack of reliability, its high utility costs and its parent company’s involvement in fracking are all reasons to avoid franchising with SDG&E.

Some of them made impassioned pleas to municipalize the city’s gas and electric, essentially making the city take on the burden of providing the utilities.

One man urged the council to vote no and do further study on the potential of municipalization and the ramifications of not doing so.

“When this goes sideways, and it will, you can’t say you didn’t know,” he said.

If and when the bidding period is closed, the highest responsible bidder would then have to be recommended by the mayor and approved by two- thirds of the council.

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