A future San Diego City Council meeting may resemble a session at an auction house. Or maybe it won’t.
Under an Invitation to Bid process outlined by Mayor Kevin Faulconer on Wednesday, it is hoped that multiple energy companies will compete with each other to win the city’s franchise agreement — that is, the right to supply gas and electric services within the city limits of San Diego.
The current franchise agreement is held by San Diego Gas & Electric, as part of a 50-year pact signed in 1970 that is set to expire in January.
The mayor’s team on Wednesday unveiled some of the stipulations a potential winner of the new agreement must meet, including signing a 20-year deal with the city and putting up a minimum upfront bid of $80 million.
But most tantalizingly, Faulconer’s plan calls for bids from prospective companies to be opened live during a session of the City Council. Provided there is more than one entity making an offer that qualifies, the companies can then compete to win the council’s approval by upping their initial bids.
“Let’s say somebody came in at $80 million and somebody else came in at $85 million,” said Lee Friedman, Faulconer’s strategic energy initiatives manager. “The entity that puts in the lower bid still has the opportunity to up their bid by a minimum of 10 percent. And (the competitors) can keep on doing that back and forth, live, auction-style” until the highest bid is reached.
Under a franchise agreement, a utility is granted the exclusive use of public right-of-ways for transmission and distribution in a municipality, as well as the right to install and maintain wires, poles, power lines, and underground gas and electric lines.
Prior to Wednesday’s announcement, three companies had expressed interest in winning the San Diego franchise agreement — SDG&E, Orange County-based Indian Energy, and Berkshire Hathaway Energy, a subsidiary of billionaire Warren Buffett’s Berkshire Hathaway, Inc.
Prospective bidders have until Oct. 23 at 5 p.m. to submit their offers. Companies besides SDG&E, Indian Energy and Berkshire can make offers until the deadline but they have to prove they can take on the responsibilities of delivering electric and gas services and have the money to meet the upfront requirement.
The prospect of a live auction to win a franchise agreement is out of the ordinary. In fact, a number of financial analysts who follow utilities said they had never heard of such a thing.
“It’s not unusual for municipalities to try to extract concessions from a utility,” said Paul Patterson, analyst at Glenrock Associates in New York City. “But the drama associated with the situation in San Diego is, I would say, rather unique in my experience.”
It’s also something new for the City Council.
“I don’t remember any kind of project that’s come as a live bid in front of council before,” said Councilman Scott Sherman, who is stepping down in December due to term limits. “And quite frankly, the council has a tough time deciding on whether to tie its shoes or not. So getting us to agree on something of this magnitude is going to be very difficult.”
There’s no guarantee that a potential live auction will be held.
One complicating factor is the upcoming election in November that will result in a new mayor for San Diego and five new members coming to the City Council.
“I believe the new mayor and the five new members of the City Council need to be a key part of the decision,” said Councilwoman Barbara Bry, who is running for mayor. Bry said the city should negotiate an extension with SDG&E of about one year because “I think there’s a lot of homework that needs to be done before we move forward with these invitations.”
A potential auction would have to be placed on the City Council’s calendar by Councilwoman Georgette Gómez, who serves as council president.
Should a company emerge from the bidding as the top choice, it would then need to receive approval by a two-thirds majority of the City Council’s nine members.
“Getting to six (yes votes) I think will be very difficult unless there are lot of concessions being made by the bidders that I don’t know that they would be prepared to make,” Sherman said.
Will companies still pursue a franchise agreement that has an $80 million upfront price tag attached to it? The specifics of the Invitation to Bid did not get posted on the city’s contracts page until after 2 p.m. Wednesday.
A spokeswoman for SDG&E said the utility is reviewing the invitation’s details and will make a response later. Indian Energy and Berkshire Hathaway did not respond to emails from the Union-Tribune by the close of the business day Wednesday.
If no companies send in bids, the city has the option to form its own gas and electric utility through a process known as municipalization. The Los Angeles Department of Water and Power and the Sacramento Municipal Utility District are two of the most prominent publicly-owned utilities in California.
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