Daniel Weintraub: Cheap green energy lures S.F. back to open market

Six years after a poorly written law and market manipulation caused a meltdown of California's electricity industry and halted the state's experiment with competition, it is coming back, in the strangest of places.

The city and county of San Francisco, thinking it can get its electricity greener and cheaper, are moving closer to declaring its independence from Pacific Gas & Electric and instead producing some of its own power while buying the rest in the private market.

San Francisco would not become a utility. PG&E would still deliver the electricity and handle the billing. But the city would take over the job of finding most of the power needed for its residents and businesses.

And if it works in San Francisco, the idea could take off across the state, peeling customers away from the monopolies that once controlled every aspect of California's electricity industry.

That was the original idea behind an ill-fated 1996 law that restructured the industry. Local governments, associations and private companies were supposed to jump into a newly created retail market and compete for customers, driving costs down with innovation and efficiencies.

But the retail market never really got off the ground. Although private energy marketers did a fairly robust business signing up large customers, residential users were left behind. That turned out to be one reason the experiment failed. With most retail customers locked into the monopoly utilities, there was little consequence in the market when private generators started jacking up prices. Eventually, the crisis forced one major utility into bankruptcy and another to the brink.

That economic disaster led many on the left to distrust the idea of competition in the electricity industry. Even now, Democrats in the Legislature are skeptical of letting more big companies leave the embrace of the utilities to buy power in an open market.

Yet San Francisco, a liberal bastion, is eager to jump into that world.

The Board of Supervisors voted last week to move toward what is known as "community choice aggregation" -- under which the government will gather residents in a purchasing cooperative to exercise their buying power. The city will likely contract with private energy companies to build and run its new electricity supply.

And lest conservatives think this is another move toward socialism in San Francisco, there is this important caveat: The city won't be able to force its residents into this arrangement. Homeowners or business owners who don't want to be a part of the city's effort will be free to opt out and remain with PG&E.

Robert Freehling, a Sacramento energy consultant who helped write San Francisco's plan, says it relies on the best of the public and private sectors.

"The public element is best when it sets the goals and targets," he said. "It may not always be so good at the execution. On the competitive side, we allow private suppliers to meet the need. That's the strength of the market. And nobody is locked in. We deeply respect the rights of individual people to make their choice."

The city plans eventually to have at least 51 percent of its electricity supplied by renewable sources of energy -- compared to about 13 percent for PG&E today. Those new sources could include a wind farm in Solano County, geothermal power from the desert, solar panels in the city's sunny southeast section and even wave power supplied by the Pacific Ocean.

A much more aggressive energy efficiency program would also play a role.

City officials and analysts believe that San Francisco can dramatically boost its use of renewable energy and still get its power for less than residents are paying now. One big reason: municipal bonds. The city can borrow money with low, tax-free interest rates not available to the private utilities.

That cheap money might be able to jumpstart renewable energy projects that otherwise would never get off the ground. Most such projects have high upfront costs and then fairly minimal costs to operate.

San Francisco has company. A collection of cities in the San Joaquin Valley might actually be the first to go their own way. Unhappy with PG&E's service and its reliability, the cities have already formed their own group and are preparing to build a 500-megawatt natural gas-fired power plant and buy or build another 400 megawatts of renewable energy.

Marin County and several East San Francisco Bay cities, including Berkeley, are also studying the idea. But San Francisco's plan will be the most closely watched, because the city of 750,000 would represent such a large number of consumers and because of the city's desire to go so green.

The ventures are not without risk. If San Francisco jumps into the fray and fails to hold down costs, its customers, especially big business users, could bail out. As more customers leave, those who remain would be forced to pay higher and higher rates. The entire arrangement could go into a death spiral.

But San Francisco is gambling on all kinds of public policy these days, from universal health care to mandatory paid sick leave for employees in the private sector. Why not take a flyer on the power of markets to supply cheap green energy?

About the writer:

• The Bee's Daniel Weintraub can be reached at (916) 321-1914 or at dweintraub@sacbee.com.