Utilities' market strategies reflected in Prop 16's political debate

The parent corporation of investor-owned utility PG&E has spent major money to support Proposition 16. On Tuesday, California voters will weigh in on the measure that would limit how local governments can expand publicly-owned utilities. KPCC's Molly Peterson has more about what's at stake for PG&E, and for supporters of public power in California.

For the PG&E corporation, $46 million has bought a lot of ads, including this one, that says: "... at a time when police and firefighters are being laid off, some local governments want to get into the electricity business. It could cost nearly $3 billion in public funds and we don't even have the right to vote on it."

A spokeswoman for the Yes on 16 campaign, Robin Swanson, points out that PG&E's not the only financial backer. The statewide chamber of commerce has contributed almost $100,000. But Swanson says the Northern California utility’s executives are acting to protect PG&E customers and investors.

"They are continually dealing with local governments that want to go into the retail electricity business," Swanson says. "And the fact is, if our opponents have such great plans, if they can provide leaner, cleaner, cheaper energy, then they shouldn't be afraid to put it for a vote."

The initiative would change the state Constitution. If voters approve Prop 16, public power authorities would need a two-thirds vote of the electorate to expand offerings to new territory. That includes municipal utilities, like the Los Angeles Department of Water and Power. As public agencies, such utilities can't take sides on the measure, although cities including L.A. and Burbank oppose it.

Prop 16 would also slow if not stop a newer public power model known as a community choice aggregation – a type of competitor PG&E's faced often in its customer area.

"No local government's going to be able to overcome PG&E's unlimited attacks on these type of programs," David Orth says. He heads the Kings River Conservation District and the San Joaquin Public Power Authority – the latter organized for community choice after California's energy crisis 10 years ago to seek more stable electricity pricing.

"The greater Fresno area is deficient in generation capacity. PG&E has invested their resources in other areas of the state," Orth says. "And we felt that local governments could step up and play a key role in developing resources in the region."

Municipal utilities serve about one in four Californians. Some deliver power more cheaply than investor-owned utilities in the same region. Some don't.

A community choice aggregation sets policy for buying or generating power, while using the existing utility's poles and lines at a cost. With years of planning, San Joaquin was to be the state's first – instead, Orth says, it's the first to suspend operations. For a bunch of reasons: "The uncertainty in the credit markets created uncertainties with respect to contracts, credit terms that were inconsistent with our objectives," he lists on his fingers. "We needed to provide our customers with rate certainty – the energy market wasn't capable of that certainty in '09. And lastly, frankly, we ran out of money."

PG&E fought tooth and nail – it appeared at every public hearing to challenge San Joaquin's project and campaigned direct to the public about the risks of the plan. That's what's cost money, Orth says – San Joaquin spent about $3.5 million before it took a pause, plenty on advocacy work.

A month ago, Marin Clean Energy became the first community choice aggregation to get up and running. That project's director, Dawn Weisz, says Marin County wasn't prepared for PG&E's opposition. "It's unfortunate. Providing misinformation to decision makers at key times, providing offers to key decision makers at inopportune times, and legal and regulatory barriers that have been put out," she says. "That's been the hardest part."

These public power activists and opponents of Prop 16 like the Utility Reform Network's Mindy Spratt say these tactics are evidence that PG&E's trying to shut out customers and voters. "The CEO of PG&E, Peter Darby, basically said as much in a call to investors, saying that if Prop 16 passes there will be fewer votes, not more votes," Spratt says.

Whether or not there are more votes may not actually address the problems in the energy markets identified by both supporters and opponents of Proposition 16.

Economists who focus on demand, like Stanford University's Frank Wolak, say community choice won't stabilize energy pricing. Wolak argues that what matters most is getting better information about decisions into the hands of consumers – especially if consumers are more directly exposed to the volatility of energy pricing.

He says that's happening with so-called smart meters that record electricity consumption. "They have the opportunity to be charged prices that do vary with hourly system conditions and therefore purchase more when it's cheap, and less when it's expensive," Wolak says. "That's the sort of thing that will make the wholesale market work better."

Some public power activists believe that projects like Marin's will transform California's energy market. But the state's two other investor-owned utilities, Southern California Edison and San Diego Gas & Electric, are betting against that – even as they sit out the fight over Proposition 16.

UC Berkeley economics professor Severin Borenstein, who co-runs the Haas School of Business Energy Institute, says this political decision reflects market strategy too. "Edison is more of the attitude, the political cost to fighting everyone is too high and we'd rather be seen as a good guy. PG&E has decided to take a harder line on this, thinking, 'we want to just put this aside forever.'"

Community choice advocates in San Joaquin say they hope to try and break away from PG&E again in the coming year or two. But what happens next depends in large part on Tuesday's vote.

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