OFFICE OF THE CITY ATTORNEY
SAN FRANCISCO

OF THE MAYOR
SAN FRANCISCO

 

LONDON N. BREED DENNIS J. HERRERA
MAYOR Cur ATTORNEY

July 24, 2019

Governor Gavin Newsom
State of California

1303 10th Street, Suite 117'3
Sacramento, CA 95814

Re: San Francisco?s Proposed Acquisition of Assets
Dear Governor Newsom,

We write to update you on San Francisco?s efforts to pursue purchasing the 
facilities needed to provide electric service to all of San Francisco. In particular, we describe
why we believe the current circumstances present an historic opportunity for the City and why
the City?s acquisition of these facilities would further the work you have undertaken to ensure
safe, reliable and sustainable electric service to California customers. As you may have heard
from your staff, we would like to meet with you soon to discuss these matters in more detail,
including the benefits of such a transaction to PGdi'tE and California.

Brief Background

In January 2019 the City initiated intensive work to determine the feasibility of an
acquisition. Our offices are working closely with the San Francisco Board of Supervisors, Public
Utilities Commission, and a team of independent experts who are examining the ?nancial,
engineering and operational feasibility of the acquisition and studying the potential impacts on
the City and its constituents as well as on remaining ratepayers, creditors and other
stakeholders. The City family has been aligned in its support of this endeavor.

In May, the City?s Public Utilities Commission issued a preliminary report
showing that public ownership of San Francisco?s electric grid has the potential for signi?cant
long-term bene?ts relative to investment costs and risks, including helping the City meet its goal
of being 100 percent carbon neutral by 2030 and providing more stable rates and more
transparency for customers. importantly, the also stated in its report that the City would
welcome existing workforce into community?owned public ?service culture,
where safety and efficiency are priorities. (Here is a linlt to that report:
org/modules! 6.)

The City is continuing its due diligence on these and many other issues to examine the
feasibility and public benefits of acquiring certain of electric assets serving San
Francisco. Based on the analyses to date, we are optimistic that the City will be in a position in
the near future to make an attractive offer to to purchase those facilities. We expect to
have the support of the SFPUC and the Board of Supervisors before making that offer.

 

1 DR. CARLTON B. PLACE, ROOM 200
SAN CALIFORHM 921102-468}
TELEPHONE: {415} 55443141

Now is an Opportune Time to Acquire Facilities

As you know, the 1913 Baker Act intended the City to provide not only water but also
electricity to everyone in San Francisco. The City started producing electricity in 1918 to power
construction of Hetch Hetchy and has served City departments and related entities for decades,
paying to transmit City power over lines to City customers in San Francisco.
The City has sought to use its power resources strategically to support economic development,
decarbonization, affordable housing and other City goals. You may recall some of these efforts
that began under your leadership as Mayor, including the City?s decision to be the sole provider
of electricity at the Hunters Point shipyard redevelopment project.

Yet, PGSLE has vigorously opposed these efforts and consistently sought to limit the
City?s ability to serve customers. Indeed, has delayed service to City departments and
imposed requirements that increased costs for no good reason, affecting every type of City
facility, including police services, parks, and homeless services. Despite years of negotiations,
PGSLE continues to create obstacles, and matters have only gotten worse during the bankruptcy.

As recent newspaper articles have detailed, including a critical report in the Wall Street
Journal that even caught Judge Alsup?s attention in the federal criminal case against 

has chosen to defer
investment in its infrastructure to help ensure reliability and safety. We have lost trust in 
as a steward of the public utility in San Francisco and we have lost patience in trying to work
with to ?irther the City?s electric service goals. bankruptcy ?ling to avoid
liability to wild?re victims only highlights our concerns and loss of trust. We believe 
bankruptcy presents an historic Opportunity for a restructuring that allows the City to take control
over its energy future while at the same time helping to emerge from bankruptcy on solid
?nancial footing in a way that compensates fire victims, protects remaining ratepayers and better
serves California.

In June 2018, San Francisco voters laid the groundwork for this acquisition by amending
the Charter to authorize the Board of Supervisors to approve selling revenue bonds to ?nance the
cost of building or acquiring electric transmission and distribution facilities. This measure
recognized that the threat of global warming required the City to use its power resources to
decarbonize not just the electric sector, but also to support decarbonizing other sectors like
transportation and housing; all of this requires a modern open-access distribution grid to
facilitate new technologies. Without local control of the distribution grid, the City will be unable
to fully achieve these objectives.

The City?s Acquisition Appears to be Feasible

Although the. City continues its work on-this question (as we referenced above), the
City?s preliminary analyses show that the City could pay an attractive price for facilities
and still be able to offer rates to customers at or below the level of rates ordered by the
California. Public Utilities Commission Unlike the City will not pay an
equity rate of return, shareholder dividends or high management salaries. The City would expect
initially to match level of service, and to improve service overtime by investing in the
system and focusing on the particular needs of local customers.

The City is ?nancially stable and the SFPUC has well established access to the capital
markets for its current operations, including power. These investment grade credit ratings are
based on the strength of the service territory, customer base, and utility operations to date. We
are therefore con?dent we will attract the debt capital needed to fund the acquisition, cover other
related costs, and operate and maintain the system responsibly over time. Needed capital
improvements could be funded using lower cost debt not available to thereby

accelerating replacements to improve safety and reliability while reducing customer rates over
the long~term.

While the City currently operates electric transmission and distribution facilities, the
scale of those Operations would substantially increase if it were serving all of San Francisco.
The City would expect to add a large number of experienced electrical workers and would recruit
existing employees who are responsible for the facilities serving San Francisco, offering
competitive union jobs and stable careers, with appealing wages and bene?ts.

And as a supplier of electricity, the City is well positioned to take on the added
responsibility for serving all of San Francisco since it already'provides the majority-of. the
electricity used there. Indeed, the City?s municipal utility and its community choice aggregation
program, CleanPowerSF, together are responsible for nearly 80% of the electricity used in
San Francisco. The SFPUC also is well positioned to meet customer needs, something it does
for water and wastewater customers throughout the City.

The Public Bene?ts of the City?s Acquisition are Consistent with the State?s Energy Goals

In addition to the substantial bene?ts to the ratepayers of San Francisco, the City?s
acquisition of system wouldalso provide bene?ts to other stakeholders, including
remaining ratepayers. Most immediately, the City?s purchase of facilities
would provide a substantial cash infusion to help fund emergence from bankruptcy.
These funds will be available to recapitalize the company on attractive terms that are not dilutive
and do not require any ?nancial engineering. This would benefit ratepayers, shareholders, and
creditors, including ?re victims whose claims have not been quanti?ed yet. The City?s-
acquisition can help emerge from bankruptcy quickly, consistent with the deadlines in the
recently enacted wild?re hill, and at no cost to PGdzE?s ratepayers. The City recognizes the
importance of this deadline and is prepared to work expeditiously to ensure any transaction is
consummated on a timeline consistent with emergence.

The CPUC must approve any transfer of utility property under Public Utilities Code
Section 851 to determine the impact on remaining ratepayers and the adequacy of the purchase
price. The CPUC decides how to allocate the gain on sale from a transfer of utility assets, and it
has considerable discretion in allocating gain on sale between ratepayers and shareholders. This
provides the State another tool for balancing the burdens associated with emergence
from bankruptcy.

Also, San Francisco is committed to the State?s environmental goals and has its own
goals for addressing climate change. The City would be able to decarbonize much more
aggressively if it were serving all electricity customers in San Francisco. And the City?s long
term commitment to employees and workforce stability would also benefit current
employees and the local labor market. Similarly, the City has a strong commitment to safety and
reliability, and those will not be sacri?ced to shareholder dividends or management bonuses. In
fact, this transaction would end decades of major strife between the City and PGth, allowing
to focus on larger statewide issues, including wildfire safety, after it emerges from
bankruptcy. We look forward to working with new management and hope they will
recognize these benefits.

We look forward to discussing the City?s acquisition plans with you soon. Also, the City
has engaged a ?nancial advisor, Jefferies, to assist with this work. Je?e?es is available to
dlscuss the acquisition in detail with your ?nancial advisors or with other members of your team.

 

 

Very truly yours,
LONDON N. BREED DENNI JHERRERA
MAYOR CITY A ORNEY

cc: Members, San Francisco Board of Supervisors
Members, San Francisco Public Utilities Commission
Harlan L. Kelly, J12, General Manager, San Francisco Public Utilities Commission