San Francisco wants PG&E’s grid but its options are few

The city of San Francisco wants to buy its local power grid from Pacific Gas & Electric in a bid to create an independent municipal utility. But the path to "municipalizing" the city's power faces many obstacles that could complicate the process, legal experts said.

San Francisco could only gain control of PG&E's access to the grid in one of two ways, according to George M. Soneff, a partner in the real estate litigation practice at Manatt, Phelps and Phillips LLP not involved in the matter. The city can either negotiate a sale with the utility or claim the grid though eminent domain.

Soneff said negotiation was unlikely, despite PG&E filing for bankruptcy in January, ahead of reports claiming the utility was responsible for the 2018 Camp Fire that killed 85 people and burned more than 153,000 acres.

A final report from the California Department of Forestry and Fire Protection released last week certified those findings. Pacific Gas transmission lines near the ignition point in Pulga malfunctioned less than 20 minutes before the massive wildfire broke out Nov. 8, according to the department report and news reports.

Even so, Soneff said, the San Francisco-based utility is leery t of selling one of its largest assets.

"Based on my experience, [Pacific Gas] is not for sale," Soneff said, "So the likelihood is high that they would reject the offer."

That leaves eminent domain, a path that would cost the city several years of litigation, said Paul Fenn, founder and president of Local Power LLC, a Massachusetts-based consultancy that has been involved in drafting municipal utilities legislation for decades. Fenn wrote AB 117, a 2002 law that allows local governments to buy electricity for customers within their jurisdictions using an investor-owned infrastructure.

"If they go into litigation, it's another 20 years [in court] and that has no benefit," Fenn said. "There is a significant opportunity to change the architecture of energy supply. But that's in the five-to-10-year period. In 20 years, it's not meaningful."

And with eminent domain, the burden is on the municipality to show it's in the public's interest to take over, Soneff said. If San Francisco failed to do so, the court would likely dismiss the case.

Soneff speaks from experience. For the last 12 years, he has represented Pacific Gas against the Manteca-based South San Joaquin Irrigation District, a public agency that wanted to take over the utility's 112-square-mile infrastructure covering Manteca and neighboring cities Ripon and Escalon through eminent domain, claiming it could provide lower electricity prices.

But in January 2018, San Joaquin County Superior Court Judge Carter P. Holly dismissed the case, ruling the district did not have the right to seize the property. An appeal is pending. South San Joaquin Irrigation District v. Pacific Gas and Electricity Company, STKUED20166638 (S.J. Super. Ct., filed July 7. 2016).

"It takes a few years to get through a 'right to take' case," Soneff said. "Even if a judge rules it's in the public's interest, you go to a second stage where it's about compensation of PG&E, and that would be a contentious case."

Either way, San Francisco must contend with the California Public Utilities Commission, which would evaluate both the grid's fair market value ahead of any compensation and the sale's impact on Pacific Gas' remaining customers.

A report released last week by the state agency concedes San Francisco has the opportunity to increase its power independence, considering "PG&E's filing for bankruptcy protection and ongoing concerns with [the utility's] operation safety and reliability." But it also estimated the assets' value at "a few billion dollars." Other news reports pushed the value to between "$3 billion and $5 billion."

"I don't know if it's worth that much," Fenn said. "If they're looking at an acquisition all the way down to Silicon Valley, then I could see it. But 7 miles by 7 miles? That's not worth $3 billion. It's not worth a billion. It's not worth half a billion."

If it did purchase the grid, San Francisco would most likely increase rates to offset the purchase, said Frank Wolak, a professor of economics at Stanford University and director of the school's Program on Energy and Sustainable Development. And any compensation, either through negotiation or litigation, would include additional costs levied by the commission to relieve any price hikes Pacific Gas customers would face statewide.

"It's going to be more difficult for PG&E and the rest of the state to be financially viable," Wolak said. "And it's not clear that it's really going to be any cheaper for citizens. The only guarantee is that you're kicking the investor-owned utility out."

Fenn believes switching San Francisco to a municipal utility is in the city's best interest, given its population density as well as recent advances in energy technology. San Francisco has set a 2050 mandate to run completely on renewable energy, according to news reports.

"There's a technological revolution on the distribution level -- wind, solar, micro grids," he said, "and [Pacific Gas] has been a major barrier."

But the logistics of actually acquiring the infrastructure will be costly and time-consuming, Soneff said.

"If this goes to trial, and even if the city were to prove that it's in the public's interest, the price of PG&E's electrical system would be staggering," Soneff said. "Even if they won, they might not be able to do it."