Delusions of Power

Is it smart to jump into the Bay Guardian's version of public power, without even studying whether it will save money?

MUD advocates have repeatedly claimed that once the electrical system is municipalized, Hetch Hetchy can generate 80 to 100 percent of San Francisco's electric needs. But Hetch Hetchy delivers just 120 megawatts of electricity to the city at any given time. (A megawatt is the amount of electricity consumed by approximately 1,000 homes.) During peak use, however, San Francisco consumes 950 megawatts of electricity. The peak load is expected to rise to 1,250 megawatts by 2009. Hetch Hetchy currently supplies about 13 percent of the city's load, and that electricity is reserved by the Raker Act for use by city agencies, including the Municipal Railway and San Francisco International Airport.

If it rained year-round, and if there were no Raker Act-mandated contracts with Modesto and Turlock, Hetch Hetchy, which is capable of generating 400 megawatts when water is available, could meet 32 percent of the city's projected peak load in 2009. Lacking miracles, though, Hetch Hetchy will only be able to meet about 10 percent of the 2009 peak load. And relatively little can be done to increase Hetch Hetchy's production. Studies have shown that due to watershed capacity, even a $100 million investment in Hetch Hetchy would produce only another 50 megawatts of capacity.

But Hetch Hetchy's lack of generating capacity does not appear to concern MUD proponents; they say a MUD could produce additional power by taking over two power plants located inside the city limits, near Potrero Hill and at Hunters Point. But such a takeover would be costly. PG&E's super-polluting Hunters Point plant is off line and due to be decommissioned. Right now, the owner of the Potrero plant, the Mirant Corp., plans to expand its production by 540 megawatts. But a spokesperson for Mirant said recently that the threat of seizure by a MUD would disincline his company to upgrade the Potrero plant, which has environmental problems and currently produces just 360 megawatts of power.

The upgrade planned by Mirant is estimated to cost $320 million. If the plant were seized by the MUD, that is $320 million the new district would have to raise, somehow.

Indeed, municipalizing the city's privately owned power system would carry an enormous price tag.

The centerpiece of the MUD supporters' plan involves using the power of eminent domain to seize the city's electrical distribution system from PG&E. Several studies, all done before 1996, valued this system of wires and poles at anywhere from $500 million to $1.4 billion. Such a seizure would almost certainly result in a lawsuit. The ultimate cost of purchasing the distribution system is difficult to estimate, but, with financing costs, it would certainly exceed a billion dollars.

Then again, some MUD proponents hope also to increase the public power system's capacity by condemning the Potrero and Hunters Point power plants and buying them at market value. Such a move would, according to studies by the California Energy Commission, probably end up costing the MUD $200 million for two plants that would immediately need a half-billion dollars in modernization improvements.

In other words, if voters created a MUD, and if the new public power entity sought to buy the power plants and the electric distribution system, the MUD would need to sell, at least, $1.2 billion, and perhaps well in excess of $2 billion, in revenue bonds that would need to be retired through charges to electric consumers.

And there are other capital costs awaiting a MUD-based public power system.

Last October, the California Independent System Operator, the state agency that operates the electrical grid, released a reliability study of San Francisco's power flow. "The study results indicate that without new transmission or generation facilities, system performance would be unacceptable [by 2009 and] subject to thermal overloads and multiple outages," wrote the ISO, which then suggested a range of remedies for the electrical system's deficiencies, each of which would cost in excess of $100 million.

The bottom-line feasibility problem for a San Francisco MUD is figuring out how to pay the operating and maintenance costs of serving the 334,000 residential and commercial electrical customers in San Francisco, who, in 1996, paid about $483 million to PG&E, while also covering the debt service associated with borrowing and then paying out at least $1 billion (and possibly far more) to purchase electric delivery and supply facilities from PG&E and other energy firms.

A real feasibility study would subtract total electric operating and maintenance costs for San Francisco (currently a PG&E trade secret) from the total revenue PG&E takes in from the city. The difference would be the amount of money available to service debt taken on to purchase the electric poles, lines, and plants. The amount of debt payments that could be made would set a definite ceiling on the amount of money a MUD could afford to borrow to purchase assets.

But nobody knows what that spending ceiling might be -- that is, no one knows whether a MUD would have a prayer of being able to acquire PG&E's assets in San Francisco -- because no feasibility study has been done.

Experience has shown that, given the right circumstances, a well-run municipal utility can provide electricity to consumers at lower rates than private utilities charge. That is to say, public utilities have inherent financial advantages over private electric providers, from a consumer's point of view. With public ownership, for example, profits are not distributed to shareholders, but passed along to consumers in the form of lower rates, or put back into the business. Municipal utilities do not pay income and property taxes. Some of their capital costs can be met via tax-free municipal bonds, which carry lower interest rates, and cost less to retire, than the debt instruments private firms must issue.

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