San Francisco has more work to do if it wants to take over PG&E’s property in the city to start its own municipal utility. And it won’t be simple.
Lawmakers last month at the local and state level brought renewed scrutiny to the long-running plan, which was first proposed in 2019, and was formally petitioned to the California Public Utilities Commission in 2021.
To San Francisco’s frustration, the CPUC ordered the city to complete a complex valuation of the assets it wants to take, the impact to PG&E’s business, and the potential cost of replacing any infrastructure that would impact PG&E’s operations in San Mateo County.
San Francisco legal representatives were also told to figure out how much ratepayers remaining with PG&E will be affected, and how much the separation could impact PG&E’s gas operations.
The CPUC has the authority to regulate the sale or transfer of public utilities and determine the scope of any eminent domain action, which is known as a legal taking of property.
The timeline for both PG&E and the city to reach a valuation has been extended multiple times as PG&E sought further compensation than the $2.5 billion the city was offering.
The San Francisco Board of Supervisors unanimously passed a resolution in late February supporting the creation of a publicly owned utility and a bill recently introduced by state Sen. Scott Wiener, D-San Francisco, that would reform the CPUC process to make it simpler, according to Wiener’s office.
Setting a fair price
But under the process as it stands, San Francisco has hardly advanced from square one.
That’s because it needs to establish a fair valuation to offer PG&E before it can potentially move to take the assets through eminent domain proceedings in Superior Court, if the company refuses its offer.
PG&E balked at the city’s initial offer and said several issues were unaccounted for, including the cost of separating the two systems.
“San Francisco has dramatically underpriced the value of PG&E’s electric system, suggesting that the assets in San Francisco are worth only about $2-$3 billion,” PG&E spokesperson Lynsey Paulo said in an email. “Not only is that a lowball amount, but the California Public Utilities Commission (CPUC) has been clear that the City and County of San Francisco (CCSF) would have to pay far more than the value of the assets, which means a takeover will drive customers’ rates up, not lower them.”
The city has tried to minimize the scope of the CPUC’s role in the process and is simply seeking to have its offer sanctioned by the regulator before it could potentially go ahead with taking the assets in San Francisco Superior Court through the eminent domain process.
Crucial to the whole process is the question of what PG&E’s assets in the city are worth, but even more important, who is responsible for putting a valuation on them? The city’s initial petition stated an intention to acquire the assets in the city and asked PG&E, through the CPUC, to provide a valuation.
“San Francisco has dramatically underpriced the value of PG&E’s electric system, suggesting that the assets in San Francisco are worth only about $2-$3 billion.”
Lynsey Paulo, PG&E spokesperson
There are also a range of disputed costs and liabilities involving complex valuations for things that aren’t real estate or physical assets that highlight the uniqueness of PG&E’s public-serving, state-regulated business. For example, the parties disagree on how much to compensate the utility given that it has a guaranteed rate of return, or whether the city is responsible for keeping other ratepayers’ bills down.
PG&E’s first response was to ask the CPUC to use its discretion to reject the petition outright, which it declined to do. The CPUC did, though, grant what would be the start of a lengthy, bureaucratic back-and-forth between PG&E and the city that essentially boiled down to requiring the city to pin down exactly what physical assets it wanted to acquire, and how much to pay for the assets and the impact to PG&E’s business.
Impact on San Mateo County a consideration
The city was ordered in early February to create a formal list of assets it wanted to take possession of, create a written separation plan and establish its costs, and figure out a new figure to offer PG&E that would also include compensation to offset rates for customers that remain with the utility in San Mateo County. Those rates are anticipated to go up if San Francisco leaves the customer pool.
Part of that process involves first establishing a “fair valuation” for the property and any potential lost revenue, if the property is one that generates money. It could also involve replacing assets that connect PG&E’s grid to other service areas that use shared transmission lines and infrastructure.
Specifically, those are the cities of Brisbane and Daly City and unincorporated parts of San Mateo County.
A major issue hinges on how the city would separate the Martin substation from the grid without disrupting PG&E’s ability to keep providing service to San Mateo County customers. The substation is in Daly City, right at the San Francisco County line, and is responsible for moving about 70% of San Francisco’s power into the city, according to the CPUC.
The Martin substation contains transmission lines that link to the greater grid and serve multiple cities in San Mateo County, so PG&E wants San Francisco to be obligated to replace such components since PG&E is a public interest business that can’t simply stop its service. If even it was compensated for the real property being taken, it can’t readily build replacement infrastructure unless that is included in the compensation.
In other words, many eminent domain disputes revolve around a property owner that does not want to sell their property to the government. A fair valuation compensates them for their property, and if a property generates revenue, that is taken into consideration. But PG&E is essentially a business that has a legal obligation to keep serving its other customers. So San Francisco can’t simply put a fair price on PG&E’s sandwich shop and buy them out. The city has to pay PG&E enough to build another sandwich shop.
There is also a major gas line running beneath the Martin substation and the two parties had not agreed to how PG&E could continue to access it, since the city had not formally said how it will divide up the assets at the substation.
Dealing with ‘passthrough costs’
Another issue is whether San Francisco would be obligated to pay for either of two aspects of the separation that could impact remaining PG&E customers.
One of those are the “passthrough costs” that PG&E is allowed to charge customers to offset wildfire mitigation costs and subsidy programs.
The other is the fact that rural customers’ rates are generally subsidized by those in more dense areas, and San Francisco is one of PG&E’s most dense urban customer bases. Since rates are calculated for the entire system based on those customer bases, the CPUC determined that removing San Francisco would likely impact the rates that those remaining with PG&E in other counties would pay.
Wiener accused the process of being manipulated by PG&E and other investor-owned utilities, which repeatedly asked for more data, extended timelines, and more complex compensation schemes.
A spokesperson for PG&E said that was not the case and said the city had not provided information the CPUC and an administrative law judge overseeing the process had requested, including a final list of assets to be taken and a way to pay for actual logistics and work of the separation.
In February, the administrative law judge overseeing the process at the CPUC ordered the city and county of San Francisco to re-submit its written testimony on the valuation issues being considered. Particularly, the city must submit a separation plan and a single plan for separating the shared equipment at the Martin substation.
PG&E then has six months to submit its opening testimony, which sets off the rest of the timeline that could potentially include other parties’ testimony and the parties’ responses. Ultimately, the current timeline sets a decision on the valuation for likely sometime in mid-2027.
If PG&E declines a sale after a fair valuation is determined by the CPUC, the city could go ahead with eminent domain proceedings before an administrative law judge.