Municipal Power Struggle

The weather was sizzling and the electric bills sizable in August when Tulare City Manager Kevin Northcraft opened a letter promising a tonic for the Central Valley town’s energy woes.

If Tulare were to form a municipal utility, it could lower the power tab for businesses and residents alike, went the pitch from EES Consulting Inc., a mid-size engineering firm in Kirkland, Wash.

“Don’t just listen to the daily complaints of your friends and neighbors. Join the growing list of California communities that are trying to do something about high electric costs,” said the missive from the president of EES, Gary Saleba.

In classic calamity-breeds-opportunity fashion, EES Consulting and a small group of other firms have turned the wreckage of California’s ill-fated energy deregulation experiment into something of a cottage industry, peddling their expertise to communities that might want to break free of the large investor-owned utilities that have always brought them electricity.

Among the other municipal-electricity consultants working in California are Henwood Energy Services of Sacramento, R.W. Beck of Seattle and Navigant Consulting of Chicago.

For its part, EES Consulting has played a prominent role in the three major efforts in the Southland over the last 18 months to create government-owned electric utilities, including a recent bid by Corona to seize Southern California Edison Co. facilities using its power of eminent domain.

Edison and other utilities are fighting back. They say EES exaggerates the benefit -- and low-balls the cost -- of starting up a municipal utility. And in at least two cities that have hired EES, public officials say they were dissatisfied with the company’s work.

So far, the counterattacks have helped stall or defeat most of the attempts to take away hundreds of millions of dollars of annual revenue that come from distributing electrons to customers. But EES officials stand by their work, saying they fulfill a legitimate need to help cities find a way to break free of the grip of the utilities.

“There are a lot of people,” like those in Corona, who are “just fed up with what’s gone on over the last five years, who decided to take their future into their own hands -- and I say, more power to them,” Saleba asserted. “I get calls from other cities weekly, if not daily.”

Higher electricity rates are one of the hangovers from California’s energy crisis of 2000 and 2001, afflicting the customers of Southern California Edison, Pacific Gas & Electric Co. and San Diego Gas & Electric. It is a headache not visited on customers of municipal utilities in the state -- including those of the Los Angeles Department of Water and Power -- who sailed through the turmoil with fewer problems.

In Corona, which announced plans in October to take over Edison’s distribution system, EES Consulting has projected that the city would save 15% on electricity rates under a municipal utility. EES also made similar savings projections for a six-city coalition in the Coachella Valley and for the San Diego County city of San Marcos.

Based near Seattle, the 50-person firm provides a variety of energy-related consulting expertise, from estimating the value of power plants to helping groups of customers band together to acquire natural gas or electricity service.

In San Marcos, the Coachella Valley and Corona, EES Consulting was hired to forecast the cost of seizing the existing power distribution systems and the rates a new municipal utility would charge. EES Consulting landed those jobs through a competitive bidding process.

“EES had the best sales pitch,” said Indian Wells City Councilman Percy Byrd, who headed an electricity study group for the Coachella Valley cities of Indian Wells, Palm Springs, Palm Desert, Rancho Mirage, Cathedral City and Desert Hot Springs. “They had the best track record of putting together the best report.”

But Edison, which faced EES Consulting in Corona and the Coachella Valley, and San Diego Gas & Electric, which came up against the company in San Marcos, are sharply critical of EES’ studies.

The reports were riddled with errors, utility representatives contend, including underestimating the value of existing facilities, inflating potential savings and presenting only a best-case projection of costs.

In San Marcos, which wanted a municipal utility to serve newly developed parts of town, “we felt the report was very optimistic,” said Frank Urtasun, a San Diego Gas & Electric regional public affairs manager. SDG&E; put out its own study that predicted rates would not fall 23% to 36%, as EES Consulting had said, but instead would increase.

“We tried to educate the City Council that the energy crisis was about generation and not about the delivery system,” Urtasun said. “This is a very complicated industry with a lot of risk and uncertainty and a regulatory arena that changes very often.”

In Edison territory, the choreography was similar.

Corona marks “the second time we have seen their work, and it’s the second time a community has been given a recommendation to move ahead with an expensive taking of a utility distribution system,” Edison spokesman Charley Wilson said.

Studies Criticized

Yet it’s not just the utilities that have been critical of EES’ studies at times.

Former San Marcos City Councilman Mark Rozmus, for example, said he initially supported the creation of a municipal utility and the city’s investment in a 250-megawatt power plant in Burbank. But Rozmus, a certified public accountant, became dismayed when EES unexpectedly revised the projected savings figures downward on the eve of a key City Council vote.

“I don’t know that they were fully capable of giving us information that we could rely on to spend the public’s money reasonably,” Rozmus said.

Ultimately, San Marcos scrapped the muni concept after several legislative roadblocks, including potentially steep exit fees to leave SDG&E;’s system, stymied the city’s efforts.

In Palm Springs, meanwhile, contentious letters were exchanged by Saleba and Assistant City Manager Troy Butzlaff when the municipality hired another consulting firm to verify certain estimates by EES. Edison, which paid for the new study, said EES had inflated potential savings in the Coachella Valley.

Saleba refused a request by Palm Springs officials to provide the data that went into the EES analysis, maintaining that the city was on a witch hunt. The new study by Henwood Energy Services said EES’ estimate of a distribution rate used to determine savings was too high, and Edison’s estimate was too low.

In the end, Edison’s challenge of the EES report helped sideline the municipal utility drive in the Coachella Valley.

“All Edison wanted to do was criticize,” said Byrd, the Indian Wells councilman, who praised EES’ work. “They looked for an excuse to pick on one number and then say the whole thing was not valid.”

Saleba said he is not surprised that his firm’s studies have come under fire on occasion. “This is a big deal for the utilities,” he said. “There are a lot of Coronas out there.

“My experience is that the incumbent utilities usually have a standard way they go at this,” he added. “You do a study. It looks like the numbers pencil out. The incumbent utility will immediately question the numbers in the study ... cast doubt about the economic feasibility. And then the incumbent will begin their political stuff.”

Indeed, some Corona officials say they are bracing for a possible recall drive against City Council members, although Edison spokesman Paul Klein said his company has no plans to launch one. Edison has, however, vowed to fight the takeover in court.

Foes Are Well-Funded

The opposition to the new municipal utilities is well-funded, despite the recent financial problems at Pacific Gas & Electric, which is in bankruptcy proceedings, and at Edison, which plunged into technical insolvency during the energy crisis.

In San Francisco, PG&E; supplied the bulk of the $2.7 million spent to defeat a November ballot measure that would have authorized San Francisco to take over power-buying duties for the city, paving the way for a buyout of the PG&E; distribution system there.

Edison officials declined to say how much they have spent battling the formation of municipal utilities in the Coachella Valley and Corona. SDG&E; also refused to release spending figures for its battle in San Marcos.

All parties acknowledge that much of the dispute over rate estimates under a municipal utility stems from a disagreement over how to value poles, wires, substations and other distribution assets.

EES Consulting bases its estimates on what it would cost to build the structures today, less depreciation. Utilities prefer to value their distribution systems on the basis of the original cost, less depreciation, plus a premium. Utilities contend their method is more accurate, but it makes the systems more costly to buy.

The clash most likely will be settled in court, but no municipal utility push has made it that far, with efforts stalled in both San Marcos and the Coachella Valley.

For that reason, all eyes are on Corona, which has filed a condemnation lawsuit against Edison.

“Everyone is watching Corona right now because that’s going to be the big show,” Saleba said. “How Corona goes will probably dictate how a lot of other” cities go.

Corona City Manager George Guayante said officials are prepared for a tough fight, but he is convinced that EES’ recommendation makes sense. “We had a pretty good idea what we were getting into, but we think the numbers work for us,” he said.

As for Tulare, which got one of EES Consulting’s letters, the sales pitch fell flat.

Edison is a major employer in town, providing jobs for more than 100 of Tulare’s 40,000 residents at a service center, substation and an agriculture technology demonstration center, complete with exhibit hall and dining facilities.

Forming an electric utility “would have been a difficult policy issue for us to pursue because we are well vested with Edison,” said Northcraft, the city manager. “It seems highly risky, and we have our hands full already.”