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The City Should Pump the Brakes on Government-Run Energy

The city of San Diego is relying on a study it says shows reason to move forward on setting up a government-run energy program. But the study fails to credibly show that such a program is even feasible, and it confirms that there are too many unknowns to make an informed choice on establishing one in San Diego.

In their drive to reduce greenhouse gas emissions, a number of communities, including San Diego, are pursuing community choice aggregation, or CCAs – a government-controlled energy program. These entities seem like a viable solution in some instances, but the analysis San Diego is using to potentially move forward with the plan is deeply flawed. With our environment and finances at stake, there is too much uncertainty to move forward with confidence.

CommentaryI want to achieve reasonable climate goals that benefit San Diegans. Our environment has always been vitally important to me, but as an economist, my training has taught me to carefully weigh the costs and benefits of any plan.

The CCA concept is relatively straightforward: A government entity replaces the public utility as the purchaser of power to more actively pursue non-fossil fuel sources of energy at lower costs. It sounds like a great idea, but the devil, as they say, is in the details.

The Fermanian Business & Economic Institute at Point Loma University, for which I serve as chief economist, was commissioned by Sempra Services to conduct an independent analytical review of the study the city commissioned to help determine the feasibility of a government-run energy program in San Diego.

It should be noted that asserting something is “feasible” is a relatively low bar. It says nothing about whether a project is capable of being successful. In over 800 pages, the study fails to credibly show that a CCA is even feasible, and it confirms that there are too many unknowns to make an informed choice on establishing one in San Diego.

Consider this finding from the study: Lengthy consideration is given to the potential impact of building a solar facility in San Diego that the study then says is not feasible due to space requirements. The study shows that such a facility would create just 11 jobs, but one half-time employee would earn $2.3 million.

It does not take an economist to notice that analysis like this requires additional scrutiny.

Fermanian Business & Economic Institute’s analysis found flaws in all of the study’s conclusions regarding the feasibility of community choice aggregation for San Diego and a notable lack of supporting data.

A CCA could be a tremendous financial drain. The study concludes that it would be financially feasible, but in calculating the financial outcomes of 11 possible outcomes, only two cases show a positive financial outcome. Unfortunately for the city and San Diego taxpayers, the liability could be as high as $2.8 billion, according to the study’s own calculations.

The study relies on unrealistic cost-savings projections. The study brings no credible analysis or data to its conclusion that CCA customers would receive lower rates. It begins with CCA rates being above that of the utility, and ends with them being lower only because of an implausible assumption. Although the CCA and utility would operate in the same energy market, the study assumes that power acquisition costs would be flat for the CCA, but rise by about 3 percent per year for the utility. The study’s authors do not offer their reasoning for why this assumption is made.

The study’s claims of consumer benefits are not supported by data. The CCA would need new financial capital to invest in building renewable energy capacity. But the study indicates the CCA would operate at a loss for several years after starting up. If the city wants to invest in this scenario, it would need to secure new funds by taxing residents or borrowing money, which could negatively impact the city’s credit rating to borrow money for core city services.

The study’s claims that a CCA would reduce greenhouse gas emissions are unfounded. Under its Climate Action Plan, the city’s goal is to receive 100 percent of its energy from renewable sources by 2035. Accomplishing this goal is the most important motivation for a CCA, yet the study’s base case for the government-run program only achieves a 51 percent renewable energy supply by 2035.

Beyond the study’s shortcomings, two critical pieces of information could drastically alter the cost-benefit analysis of implementing a CCA.

Future state legislation could mandate that all utilities, including SDG&E, meet a 100 percent renewable goal. This would enable the city to achieve its renewable energy goals without undertaking the huge financial risks associated with operating what would be the largest CCA in existence.

The California Public Utilities Commission is revising formulas used to make utilities whole – for long-term renewable energy contracts – when residents or businesses leave a utility for a CCA. This is a cost incurred by a CCA. The size of this “exit fee” could significantly magnify the worst-case financial outcome, a $2.8 billion loss, citied in the city-commissioned study. It’s also important to note that the California Public Utilities Commission is not simply resetting or calculating exit fees, something it does annually because market prices change. In addition to resetting exit fees, the commission is revising the methodology used to determine those fees.

Lack of sufficient information often is the root of bad policy. Given the high costs, risks and many unknowns outlined in its own study, the city should take a step back and work to resolve these issues before committing to move forward. There is no rush, and San Diegans will benefit from informed decision-making.

Lynn Reaser is the chief economist at the Fermanian Business & Economic Institute at Point Loma Nazarene University and the chair of the Treasurer’s Council of Economic Advisors, where she advises State Treasurer John Chiang on issues impacting California’s economic climate.

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