San Francisco Offers to Buy PG&E Electric Grid in the City for $2.5 Billion

San Francisco city officials are offering to purchase PG&E's electrical grid in the city for $2.5 billion, according to a letter sent to the utility on Friday by Mayor London Breed and City Attorney Dennis Herrera.

The city has been considering a purchase since the utility filed for Chapter 11 bankruptcy in January as it faced mounting liability for wildfires sparked by its equipment. City officials are arguing that San Francisco could provide power that is more affordable, more reliable and safer than PG&E does in the city.

"There has been a lack of investment in infrastructure over the course of the last decade by PG&E," Herrera said. "And that is, and was, motivated  primarily by pursuit of profit. That's not something that San Francisco is going to be pursuing. We're not interested in profit. We're interested in providing safe affordable power to ratepayers rather than trying to make sure that stockholders are getting some great rate of return on their investment."

The money for the PG&E equipment would come from bonds approved by voters in June 2018, and would be paid off by customers through their electric bill. Customer rates would be the same or lower than current PG&E rates, according to San Francisco Public Utilities Commission's Assistant General Manager for Power Barbara Hale.

"The transparency and the accountability that residents see because their local government is operating the system is much stronger," Hale explained. "You're able to stand at City Hall and give comment in a way that's much more effective than going to a PG&E shareholder meeting or going to a California Public Utilities Commission meeting."

San Francisco's $2.5 billion offering for the infrastructure is "the result of detailed financial analysis conducted by industry experts and encompassing an extensive examination into the company’s assets in San Francisco," Breed and Herrera said in a joint statement. "The offer we are putting forth is competitive, fair and equitable."

The city is also hoping the company's bankruptcy proceedings will provide additional incentive to accept the offer, by providing "significant cash infusion" to debtors.

But PG&E doesn't seem very interested.

"We all agree on the importance of continuing to serve the citizens of San Francisco with safe, clean, affordable and reliable energy," PG&E said in a statement. "PG&E has been a part of San Francisco since the company’s founding more than a century ago, and while we don’t believe municipalization is in the best interests of our customers and stakeholders, we are committed to working with the City and will remain open to communication on this issue."

Another potential barrier is pushback from the union representing PG&E workers, IBEW Local 1245. The city has offered to hire people who worked for PG&E in San Francisco if the deal goes through, which the union said would hurt their pensions.

"There are significant penalties for not making age 55 with 30 years of service," said Tom Dalzell, the union's Business Manager. He said the pension plan "is compromised  because they did not make it to retirement age and then they start all over with a city where you have to work a number of years until you vest in the pension."

Herrera argued the city would be able to provide a strong enough benefits package to make up the difference.

According to Michael Wara, an energy policy researcher at Stanford University, private energy companies hardly ever voluntarily sell their infrastructure to municipalities. More often, municipalities will forcibly take over the infrastructure by exerting eminent domain, and then pay the utility for it.

One of the most recent examples of this in California is Sacramento's takeover of PG&E infrastructure in the 1940s.

"Sacramento decided to condemn the wires and have a municipal utility," Wara said. "The fight though occurs over how much to pay for those wires in Sacramento's case. I believe there was more than two decades of litigation over the conditions and the compensation for condemning the wires."

Even if PG&E agrees to sell to San Francisco, Wara said the process could drag out the utility's bankruptcy proceedings because the sale would have to be final in order for the bankruptcy to be resolved. It could also delay payouts to victims of wildfires started by PG&E equipment.

The potential sale would require approval from the San Francisco Board of Supervisors, the San Francisco Public Utilities Commission, and the California Public Utilities Commission.

The deal could also drive up rates for PG&E customers elsewhere in the state.

"San Francisco has no wildfire risk obviously and other areas have a lot of it," Wara said. "So if you remove the customers that don't create that risk you're going to maybe raise costs for other customers. I'm not saying that's certain, but it's possible."

Hale, San Francisco Public Utilities Commission's Assistant General Manager for Power, acknowledged rate increases could occur.

"We know that there is an impact on other remaining customers of PG&E," Hale said. "But our estimates show that to be a role of a relatively small amount that we think can be addressed in the approach taken by the regulators to how the proceeds of the sale are distributed."

Additionally, San Francisco is such a huge part of PG&E's customer base, according to Wara, the utility might not be a viable company without it.

Read San Francisco's offer letter to PG&E below.