SF Courts Bidders for New, Greener Power Company
The city lowers credit rating requirement to jumpstart creation of an alternative to PG&E
By JOHN UPTON on October 14, 2010 - 4:55 p.m. PDT
Wind turbines near Livermore
San Francisco is courting organizations with low credit ratings in an increasingly desperate bid to create a power company in the city to compete with Pacific Gas and Electric Company.
The city has been working for more than six years to establish an alternative electricity seller under California's Community Choice Aggregation law.
Only one municipality, Marin County, has established a program under the eight-year-old law, which force existing utility companies to allow competitors to use their infrastructure. Similar programs exist in other states.
Under San Francisco's proposed program, dubbed CleanPowerSF, PG&E's electricity customers could buy greener power from a competing organization, probably for a slight price premium.
CleanPowerSF customers would continue to receive their power bills from PG&E, but payments for electricity purchases would be passed on to the company's new competitor. PG&E would continue to charge for natural gas and for delivery of electricity through its power lines.
In an effort to move the stalled program forward, city officials recently extended bidding deadlines for organizations interested in running it and reduced bidders' minimum credit ratings from Baa2/BBB to Baa3/BBB-.
"This is lowest notch of investment grade rating," San Francisco Public Utilities Commission project manager Michael Campbell said during a Sept. 17 hearing at City Hall. "The next down is colloquially termed a junk rating."
The change was needed because of a shortage of qualified potential bidders, according to Campbell.
By easing the credit requirement for bidders, "we can at least get them in the door," Campbell said during the hearing.
The SFPUC is in talks with Power Choice, Morgan Stanley Commodities, Constellation Energy, Sempra Energy, Iberdrola Renewables and EcoSys in an effort to encourage those companies to bid to run CleanPowerSF, according to Sheehan.
A quarter-page advertisement promoting the program to potential bidders was recently published in Megawatt Daily, a major trade publication, Campbell said.
The new energy service provider must have the financial resources to meet the needs of CleanPowerSF, SFPUC spokesman Charles Sheehan told The Bay Citizen.
"This includes, but is not limited to, startup costs, startup payment for energy and the ability to absorb and manage price fluctuations in the energy markets," Sheehan said in an e-mail.
The deadline for bids, originally set for Oct. 6, is now Nov. 3. No bids had been submitted by Thursday, according to Sheehan.
Supervisor Ross Mirkarimi, who has championed CleanPowerSF and recently voted as a member of San Francisco's Local Agency Formation Commission to approve the recent bidding changes, said the state of the energy industry demanded an easing of credit rules.
"Due to fluctuations in the energy industry, a slightly revised bond rating could assist us in ensuring a healthy bid response," Mirkarimi said in an e-mail. "These days, no matter a sterling bond rating or not, the uncertainty in the rating markets requires us to be innovative and vigilant."
Mirkarimi said he is not concerned by the current lack of bids. "It's early, and bidders are like poker players," he said.
Efforts to establish CleanPowerSF have been thwarted during the past year by economic conditions, a PG&E-backed ballot proposition and other factors.
San Francisco appeared earlier this year to be close to signing a deal with a team assembled by startup company Power Choice to run CleanPowerSF, but the deal collapsed on the verge of the June election because of a dispute over financing.
Neither San Francisco nor Power Choice was willing to back a loan of up to $400 million needed to keep power prices competitive during the program's formative years. The loan would have been repaid through higher rates in later years.
Following the collapse in talks, the project was rebid using revised terms.
The earlier bidding process and subsequent negotiations with Power Choice were rushed in an effort to sign a deal prior to the June election, according to Paul Fenn, who helped craft the Community Choice Aggregation law and works as a consultant.
A heavily PG&E-funded initiative on the June ballot, Proposition 16, would have made it more difficult for municipalities to establish Community Choice Aggregation programs if it had passed. The proposition failed, with 52.8 percent of voters rejecting the measure.
San Francisco can now afford to take its time as it tries to establish CleanPowerSF, according to Fenn.
"The first RFP [request for proposals] was put out under duress," Fenn said. "We had Prop. 16 hanging over our heads."
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