Power grab

PG&E and SMUD duke it out in an uneven fight for Yolo County’s 77,000 ratepayers

Photo By Larry Dalton

To people like Dan Berman, PG&E’s 137 miles of power lines represent a tremendous opportunity for Yolo County to determine its own future—to literally take power into its own hands. If the public-power movement in Yolo County has a founding father, Berman is arguably that guy. He got interested in taking over PG&E’s public-power system, and turning it into a not-for-profit municipal utility, 10 years ago while researching a book he published in 1996 called Who Owns the Sun?

“It was just the principle of local control and democracy,” Berman said. “This is the kind of thing that should be democratically controlled. You shouldn’t just be taking 11- or 12-percent profit off the top.”

From 1997 to 2000, Berman and other public-power advocates attempted to establish a Davis Municipal Utility District, but were successfully blocked by a well-organized and well-funded campaign by PG&E.

The campaign got the attention of elected officials not just in Davis, but also in Woodland and West Sacramento, who began to look longingly at SMUD and imagine what locally controlled public power could do for their citizens.

To get out from under PG&E’s high rates, and to keep that money in the local economy, the elected representatives of Yolo County last year asked SMUD to help them. In May of 2005, SMUD agreed to begin the process of annexing the communities of Davis, Woodland and West Sacramento into its service area.

For the expansion to go forward, the move has to be approved by voters on both sides of the Sacramento River. Yolo County voters will weigh in on Measures H and I. For Sacramento County, Measure L will decide PG&E’s fate.

If all three ballot measures are approved, SMUD will need to purchase PG&E’s electric system, 137 miles of electricity lines, poles and transformers. Less than 1 percent of PG&E’s territory is at stake in this proposed annexation, but the San Francisco-based for-profit utility is fighting as though its very existence is in danger.

Consider that in 2002, when San Franciscans in the heart of PG&E’s empire were voting on public power, the utility only had to spend $3 million to defeat the insurgency. In Yolo, PG&E already has spent more than $9 million to hold onto a mere 77,000 customers.

Berman said PG&E is scared that a major precedent will be set on November 7. “I really think this is a national bellwether. We’re trying to put the ‘movement’ back into the public-power movement.”

PG&E argues that the annexation is too costly and too risky—that it will cost SMUD as much as $500 million to purchase the power lines, transformers and other property that comprise PG&E’s electricity system in Yolo County. That’s about five times what SMUD estimates, and public-power advocates say that PG&E’s numbers are more or less made up and intended to scare voters off. “They are spreading a big lie with a $9 million megaphone,” Berman said.

SMUD’s appeal in Yolo
For Yolo County, the appeal of joining SMUD is not hard to understand. SMUD is locally controlled. Its meetings and books are open to the public. And since SMUD is not-for-profit, none of its customers’ money goes to paying hefty dividends to shareholders.

And since PG&E’s rates are currently about 30-percent higher than SMUD’s rates, it’s not surprising that residents and businesses alike look across the Sacramento River and ask, “Why can’t we have that?”

“People who come to West Sacramento, a lot of them from Sacramento, are getting sticker shock” said Oscar Villegas, a West Sacramento City Council member.

“This really impacts our businesses,” Villegas said. He noted that Nugget Markets has stores with identical floor plans in SMUD territory and in PG&E territory. The PG&E store pays $300,000 a year more for electricity. “There are other businesses that might not want to move to West Sacramento” because of the higher energy costs, Villegas added.

Local government feels the pinch, too. Jim Provenza, president of the board of directors of the Davis Joint Unified School District, said that if it could pay SMUD rates, the small school district could save $200,000 a year. “We could add a couple of teachers for that.”

PG&E is quick to point out that if Yolo ratepayers approve Measures H and I, they won’t immediately see 30-percent rate cuts. That’s because SMUD has structured the deal to cut rates in Yolo County by 2 percent in the first year after Yolo joins SMUD. The remaining 28-percent difference is the “surcharge” on Yolo customers, which SMUD will use to pay off the costs of purchasing PG&E’s electric system (those poles and wires, transformers and switches).

SMUD estimates that the surcharge will remain in place for about four years. After that, Yolo customers will begin paying the same rates as their neighbors in Sacramento County. PG&E argues that SMUD is so far off in calculating how much it will cost to buy PG&E out that SMUD will never be able to cut rates in Yolo County, and may even have to raise rates on all of its customers. More on that argument later.

But the annexation isn’t just intended to provide rate relief to Yolo customers. SMUD backers say it represents “the opportunity of a lifetime” to grow and strengthen the utility in the coming years. SMUD figures the expansion will provide nearly $150 million over 20 years to reinvest into the public utility—money that otherwise would have gone to PG&E shareholders.

“This is a once in a lifetime opportunity for us,” said SMUD Board Member Susan Patterson. “It’s a business decision for SMUD, and it’s a huge opportunity for Sacramento ratepayers to strengthen the utility and reinvest all of the profits that will come from the 77,000 new customers back into our system for better reliability and lower rates,” Patterson explained. The ballot measure also specifies that the proceeds from the Yolo system go toward purchasing clean and renewable energy. (See sidebar, “The inconvenient spin,” on page 26.)

And SMUD argues that lower rates in Yolo will be a boon to the entire region. SMUD commissioned a study by CSUS business professor Sanjay Varshney, paid for with SMUD money, that claims the indirect economic benefits to the four-county region could be as high as $1 billion over the next 20 years. More money in people’s pockets has an economic multiplier effect over time, the reasoning goes. “It’s not very sexy, but it’s extremely important to the future of this region,” Villegas said.

More than once during interviews for this story, supporters of SMUD expansion compared its promised economic benefits to another important measure on this November’s local ballot: “This isn’t going to cost us anything, and it’s got more upside than the arena,” said SMUD Assistant General Manager John DiStasio.

Ratepayer revolt and PG&E’s counteroffensive
Faced with this ratepayer revolt, PG&E went on the offensive. It’s most inspired power play was getting the question of annexation on the ballot in Sacramento County. Recognizing that SMUD’s existing ratepayers didn’t have the same incentive—lower rates—as people in Yolo County to support annexation, PG&E appealed to Sacramento County voters.

Public-power advocate Dan Berman says PG&E is “spreading a big lie with a $9 million megaphone.”

Photo By Larry Dalton

Initially, SMUD’s board of directors didn’t want to put it to a vote in Sacramento County, but PG&E forced their hand.

“We were surprised by the intensity and the volume of the campaign,” said SMUD’s Patterson. She concedes that were it not for PG&E’s ad campaign—including full-page ads in several local newspapers condemning the annexation plan—Measure L wouldn’t have been on the ballot in Sacramento. That makes the road to public power in Yolo County that much steeper.

That’s because even if Measures H and I in Yolo County pass in landslides, Sacramento voters may be disinclined to mess with what they’ve got. SMUD board member and annexation opponent Larry Carr said there’s “little enthusiasm” for Measure L in Sacramento. “People are saying, ‘Why should we do this? I like things the way they are.’”

And he said that PG&E’s ad campaign is working. “I have heard people talk about the $500 million, sort of parroting PG&E,” Carr explained, referring to PG&E’s claim that it will cost SMUD that much to buy them out.

On the other side of the river, PG&E has been giving a lot more love, and cash, to Yolo County.

The Pop Warner football league got a $5,000 donation from PG&E for kids’ football uniforms. PG&E always has given to community groups, Villegas said, “but this is a really significant difference.”

PG&E spent $10,000 on Christmas lights and decorations for West Sacramento streets in 2005.

The company also gave $100,000 to the Davis school district to help build a new athletic field for Davis High School. The gift, while appreciated, made Provenza a little uncomfortable, since it came right before the school board was set to decide whether to endorse annexation by SMUD.

The way Provenza sees it, “We’d save more money than that by having reasonably priced electricity.” He’s asked other school-district officials not to participate in PG&E publicity regarding the donation.

But PG&E’s sudden burst of philanthropy in Yolo—what its opponents call “soft money”—is nothing compared to the hard money it has spent on its political campaign.

In its latest campaign-finance reports, PG&E said it has spent over $9 million fighting Measures H, I and L. It’s the most expensive local campaign in Sacramento County history. And many observers believe that it’s the most expensive public-power fight in U.S. history.

And the main message of PG&E’s political campaign is that public power is “too costly and too risky.” PG&E wants to convince voters that SMUD has low-balled the estimate of the costs of buying PG&E’s electric system in Yolo. PG&E says that the $500 million SMUD will have to pay for its “hostile takeover” will blow a giant hole in all of the benefits that are supposed to flow from annexation. There will be no lower rates, and existing SMUD customers will be saddled with a half-billion dollars in new debt.

Pick up any PG&E political mailer, look at any TV commercial, and the “too costly, too risky” message blares out at you. “There are just too many unknowns. It’s a real crapshoot,” PG&E political consultant Jeff Raimundo told SN&R.

Deconstructing the arguments
SMUD estimates it will cost about $110 million to purchase the system, and is confident that the cost will fall somewhere between $86 and $133 million. The rule of thumb, according to SMUD staff, is that the surcharge to Yolo ratepayers will be in effect for one year for each $20 million that it costs SMUD to purchase PG&E’s assets. So, in the worst-case scenario, SMUD argues it could take 10 to 15 years to buy PG&E out, but Yolo ratepayers still would be paying less and Sacramento customers wouldn’t be affected.

Though PG&E simply could negotiate a price for its system—following some fairly straightforward methods for valuing electric systems—the company has promised that SMUD won’t get its hands on its assets without starting an eminent-domain and condemnation lawsuit. The company also says there’s no way to know what the final cost of annexation will be until SMUD and PG&E fight it out in court.

That’s true enough. One can never be certain what a court will decide. But there is some history and some legal precedent to draw upon. So evaluating each side’s numbers need not be an entirely faith-based proposition.

That’s exactly what the Sacramento Local Agency Formation Commission did this summer when it gave its blessing for SMUD to go ahead with annexation. LAFCo is an independent agency—established by state law—that regulates the growth and formation of new cities, special districts and municipal utilities like SMUD.

One way to measure the value of PG&E’s system in Yolo County is to look at what it pays in property taxes. Based on its tax bills, LAFCo determined that PG&E’s electric facilities in Woodland, West Sacramento and Davis were worth about $65 million.

That’s the very low end of what a court would award PG&E. On the high-end, courts are likely to use a method called “replacement cost new less depreciation.” In other words, they’d consider what it would cost a company to replace the equipment and subtract a certain amount based on how old and worn out that equipment is.

For several months before the question of annexation went to the Sacramento LAFCo, PG&E wouldn’t let SMUD look at the books or give SMUD the maps to its utility poles and transformers. By “looking over the fence,” SMUD estimated that PG&E’s electrical equipment in Yolo County was worth about $133 million at the most.

PG&E, when it finally had to submit its maps to LAFCo, estimated its system was worth $362 million.

Right off the bat, PG&E’s numbers are nearly triple SMUD’s estimate. But those numbers don’t add up, according to SMUD’s Manager of Customer Strategy Paul Lau.

Lau argues that PG&E has inflated its inventory of poles and power lines and overestimated what it would cost to replace the equipment in its Yolo territory. “It’s really a pretty straightforward process. You know, we’re engineers, we build this stuff all the time. You can have differences of about 5 percent, that’s not unusual,” Lau said. “But these numbers were way off.”

SMUD board member Larry Carr (left) says Sacramento voters don’t want to mess with what they have. But colleague Susan Patterson calls SMUD expansion a “once in a lifetime opportunity” for the public utility.

Photo By Larry Dalton

Indeed, Lau said that SMUD could build the equivalent of PG&E’s Yolo system today from scratch for about $250 million.

In its testimony to LAFCo, PG&E also tacked on $125 million to its estimated value, arguing that PG&E is a “going concern,” the same kind of argument a small business would make if the city decided to take its building for redevelopment.

SMUD argues that the “going concern” value is made up because the local government isn’t taking PG&E’s business away from it. “To be honest with you, I think they just picked a high value and made up the other numbers to fit,” DiStasio said.

To get to the bottom of the dispute, LAFCo hired an independent consultant that specializes in assessing electric utilities, GES Engineering. The consultant largely agreed with SMUD’s inventory of poles, power lines and transformers. Furthermore, GES determined that the system was old and in much need of repair. In the end, GES came up with a range of $79 to $154 million.

Not satisfied, LAFCo hired a law firm, Davis Wright Tremaine, to report on how electric systems are valued by courts. The firm found “no cognizable basis” to justify the $125 million that PG&E tacked on for the costs of taking a “going concern.”

“In all of these situations where a municipality is exploring public power, the investor-owned utility values its facilities at much more than the local government does,” said Madalyn Cafruny, spokesperson for the American Public Power Association. It’s rare for such disputes to end up in court, she said, because local governments rarely have the resources or the political will to fight the big investor-owned utilities.

Notes from the PG&E playbook
In Folsom in 1982, PG&E said that annexation would cost $40 million, about four times SMUD’s estimate. After voters passed the public-power measure there, PG&E settled with SMUD for $13 million, plus $3 million interest.

“So this is just history repeating itself,” said SMUD’s Patterson. “This is just PG&E’s strategy unfolding again.”

Consider the case of the South San Joaquin Irrigation District, which tried this summer to take over electric services for Manteca, Rippon and Escalon. There, district officials estimated that purchasing PG&E’s facilities would cost about $80 million. PG&E said it would cost as much as $300 million and mounted a full-fledged public-relations attack. The message? Public power for south San Joaquin was like writing a blank check and fraught with uncertainty. In that case, the message worked. The San Joaquin County LAFCo rejected SSJID’s application.

“It’s right out of their playbook: Just gin up a number and that’ll make people think it’s really somewhere in the middle,” DiStasio said. In other words, people may not take PG&E at face value, but they might be inclined to assume that the truth lies somewhere between the two radically different numbers.

In fact, in August PG&E retained the law firm of Manatt, Phelps & Phillips to prepare a study showing that eminent-domain cases usually favor the party whose property is being taken. “An average result for PG&E would produce a verdict of $422.7 million for PG&E,” the attorneys concluded, adding, “We believe we are better than the average lawyer.”

SMUD’s Lau notes that the Manatt, Phelps & Phillips’ report examined eminent-domain cases where the government was taking real estate—people’s ranches and other land. “It’s apples and oranges. This isn’t a house we’re talking about. It’s more like a used car.”

“We have no reason to inflate or deflate the numbers,” DiStasio said, explaining that SMUD knows what it is getting itself into. “The court is going to drill down and do the same exercise that we did and that LAFCo did,” DiStasio continued. “And you just can’t get to PG&E’s numbers by any rational method.”

Carr, the only SMUD official to vote against annexation, isn’t convinced. He said cost overruns are not unusual. He noted that the Cosumnes Power Plant cost significantly more to build than SMUD staff estimated. And the Rancho Seco Nuclear Power Plant, he noted, was a notoriously expensive mistake.

“Look, I think there’s a good chance that it will be a good deal for Sacramento ratepayers,” Carr explained. “But do I want someone in Meadowview to take that risk so that somebody in Davis can have cheaper electricity? No, I don’t.”

A faith-based decision?
By PG&E’s account, in every case where a local government tried to provide public power to its citizens by unplugging PG&E, the government agency has been wrong about the costs by a factor of three or four or five, or more. If PG&E is to be believed, then only PG&E—out of concern for its customers—has been willing to tell the truth about these persistent attempts to mount a “hostile takeover.”

“And since when has PG&E ever cared about SMUD customers?” SMUD’s Patterson asked sarcastically. Supporters of annexation say it’s not hard to figure out PG&E’s incentive to bend the truth.

But what about SMUD? “I think it’s this ideological fervor, this passionate belief in public power,” countered Raimundo. “They are just so far into it that they just can’t step back and look at the reality of this thing.”

One thing is certain: PG&E has an enormous advantage. It has more money to promote its position, and its task is much easier than SMUD’s: It’s just easier to get a confused voter to vote no than to vote yes.

The Yes! Campaign is just beginning to spend its campaign money. In the most recent campaign filings, supporters of Measure L in Sacramento recorded just under $500,000. Those coffers since have increased, thanks to late contributions totaling $250,000 from Eleni Tsakopoulos, of the influential family of developers.

PG&E has done its own polling on Measures H, I and L. But Raimundo wouldn’t share results of those polls with SN&R. “The hint is, it’s going to be very close.”

West Sacramento’s Villegas concedes that “it’s been tough” to answer PG&E’s campaign. “People are confused,” Villegas explained. “The idea that this is a hostile takeover, that people are going to get stuck with this $500 million bill and all that craziness. When you see it every day, over and over again, it starts to penetrate the skull.” But he added, “A little bit of truth goes a long way. If you spend a moment with people, they start to get it.”

The only way to spend a moment with most voters is to talk to them through their TV sets, however. Most people don’t have the time or inclination to pore over the relevant studies and other documentation. In fact, average citizens might not even have the time to read a lengthy analysis written by a local newspaper. That’s what PG&E is counting on. The local media haven’t been terribly helpful in sorting out these competing claims. The science of valuing utilities is so complex and arcane for most people that even journalists rely, time and time again, on a sort of “he said, she said” equation.

Even newspaper editorials have a way of copping out. “Do you trust the publicly elected leaders of SMUD … or do you trust PG&E?” read a recent editorial in the Sacramento Bee that endorsed Measures H and I in Yolo County and Measure L in Sacramento.

Voters are left with what amounts to a faith-based decision. The question of whether SMUD should start serving customers in Woodland, West Sacramento and Davis is more of a gut check than a rational conclusion arrived at by weighing the available evidence. That works enormously in favor of PG&E, which needs only to manufacture enough doubt to shake voters’ faith. Even more than its $10 million campaign war chest, fear is the most powerful weapon PG&E has.