Stockton could reap millions in takeover: PG&E vows to keep grip on lucrative power market

By David Siders
Record Staff Writer
March 09, 2008 6:00 AM

STOCKTON - It could cost the city $368 million to oust Pacific Gas and Electric Co. and take over Stockton's electricity market - an industry so lucrative the city could recover that cost and save $8 million more annually, according to a city consultant's preliminary report.

The report, by the engineering firm R.W. Beck Inc., was the basis for Mayor Ed Chavez's announcement in his State of the City address 10 days ago that a takeover could reduce rates and generate revenue for public services.

PG&E, the city's century-old power provider, called the bid "hostile" and promised to fight it.

"We are not just going to turn over our millions of dollars of assets," PG&E spokeswoman Nicole Tam said Friday. PG&E has spent as much defending its turf elsewhere.

In its report, Beck cautioned not only that the electric market "can be volatile," but also that "PG&E can be expected to vigorously oppose municipalization."

City Attorney Ren Nosky said, "We know what we're in for. If this was a marginal deal, we would not subject ourselves (to it)."

He said, "We would not be pursuing this if the numbers weren't good."

The Beck report, a draft first published in June, was released to The Record in response to a California Public Records Act request.

Its analysis is broad and its findings conservative, city officials said. Beck offered a similar disclaimer, saying its analysis is meant only to help the city decide whether to do a more in-depth review.

Such a review could cost more than $1 million, according to the report.

Beck's estimates of a takeover's potential cost vary widely: from $282 million to $454 million. At the lowest estimate, the city could profit from the start and save an average of $18 million annually over 20 years. At the high end, it could lose an annual average of $2 million.

In Beck's midrange estimate, with an acquisition cost of $368 million, Stockton could earn enough from the utility to cover the cost of acquisition and to save an additional $8 million annually, on average, over 20 years, according to the report.

Chavez intends to propose to the City Council that the city and the Port of Stockton form a joint powers authority - an entity separate from each agency, with a separate governing board - to address electricity.

If a takeover was executed, it would be that entity, not the city, that would issue bonds to fund the acquisition of PG&E's assets, Nosky said.

The bonds, likely to be repaid in 30 or 40 years, would be secured by the operating revenue of the utility, by the utility's assets or both, he said. Bonds would not be backed by the city's General Fund.

The estimates included in the Beck report consider not only the cost of acquiring the utility, but also of operating it. The city could run the utility itself or hire a company to do so.

The estimates also include a range of costs the city could incur in its separation from PG&E, including the severing of old lines and the construction of new lines and substations. It is possible the city would not be required to pay for that severance, estimated by Beck to cost $59 million to $117 million, Nosky said.

Chavez said in his State of the City address that it is Stockton's right to buy PG&E's assets, citing language in the city's franchise agreement with the company - signed in 1954 and having no expiration date - that afforded the city the right to purchase PG&E assets at a price set by the state's Public Utilities Commission or by a panel of appraisers.

PG&E has disputed the city's claim that a takeover is its right.

The city and PG&E are also likely to dispute the value of PG&E's assets.

"The amount can be expected to be contested throughout the process," Beck reported.

The local electric market is worth millions of dollars to PG&E. It listed its gross receipts from electricity sales in Stockton last budget year at $218.8 million, according to a document filed by the company with the city and provided by the city in response to a records request.

PG&E is required by its franchise agreement to pay the city a portion of its annual receipts; the company paid Stockton $1.1 million in 2006-07.

The city's own electric bill for government facilities - the cost of lighting City Hall and streetlights, for example - exceeds that amount. In the 2005-06 budget year, the city paid PG&E $3.4 million for electricity.

Since Chavez announced the city's interest in electricity, PG&E representatives have requested a meeting with city officials - the two sides are likely to meet this month - and have formally requested a number of public records from both the city and the port, including the Beck report.

The City Council has yet to meet formally on the matter. It is scheduled to hold a study session Tuesday.

Council members so far have largely said they are interested in but unsure of the prospect of a takeover, saying a more detailed consideration is required.

Local activists and business people have reacted similarly. At the State of the City event, Dick McClure, owner of Union Planing Mill, said he is a satisfied customer of PG&E but that, "I take my hat off to the mayor if (a takeover) saves the citizens money."

If Stockton tries a takeover and succeeds, it likely would be one of the largest takeovers in the nation in years, industry observers said.

It would affect about 105,000 customers.

Stockton officials first talked quietly about the electric market in 2006 and have spent $254,791 studying it, officials said. The city as of Thursday had paid Beck $73,797 and the law firm of Nixon Peabody LLP $180,994.

In 2006, PG&E spent millions of dollars fighting a smaller bid by the Sacramento Municipal Utility District to expand into Yolo County. PG&E claimed the expansion was fraught with risk, and voters rejected the takeover.

Dozens of public agencies across the state operate public utilities.

The average retail price of electricity per kilowatt-hour in California in 2005, the last year for which data were available, was 11.74 cents, according to the California Energy Commission. PG&E's average price was 12.68 cents. In Lodi, which operates its own utility and where rates were once among the highest in the nation, the rate was 11.8 cents, according to a commission report.

Tam said the electric market is "incredibly volatile" and that "the city of Stockton does not have the experience, nor the know-how," to operate within it.

City Economic Development Director Steve Carrigan said the market is lucrative and that the city's profits - unlike PG&E's - would be passed to residents in the form of reduced rates or funding for services, or both.

Though Chavez and senior city officials appear to prefer a takeover, the Beck report outlined two other ways the city could enter the electric market. The city could buy power itself and run it through PG&E lines, offering residents a choice between the city and PG&E, or it could provide electric service only to new development as it is built.

Both options could be less appealing than a takeover in part because the city in either case would likely be unable to buy electricity in such great bulk, according to the report.

The city is considering all options, officials said.

Contact reporter David Siders at (209) 943-8580 or dsiders @recordnet.com.

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