By Matthew Hirsch

Each year around tax time, as California cities go about the grim task of choosing which vital services to cut in order to balance the budget, most of them collect what's known as a franchise fee from one of the state's three big electric utilities. Depending on what the city negotiated in exchange for giving up access to the public right-of-way, the franchise fee can be a valuable source of local revenue.

San Diego, for example, took in about $40 million last year. San Jose took in $13.5 million. And what did San Francisco get from Pacific Gas and Electric Co. for electricity services? Just $3 million.

That money seemed like pocket change as city officials went to work on a $347 million budget deficit. But the city's franchise fee would have been a small sum even if the budget were balanced.

San Francisco's franchise fee is the lowest among the five biggest cities in California – not including Los Angeles, which operates and generates revenue from a public power utility. San Diego charges San Diego Gas and Electric Co. 3 percent of its annual sales to local customers. San Jose has a 2 percent fee. San Francisco charges just 0.5 percent.

Amazingly, San Francisco is the only one of these cities (in fact, the only city in the country) that's directed by federal law to offer cheap public power. The U.S. Congress wrote this condition into the 1913 Raker Act before granting the city permission to dam Hetch Hetchy Valley, but the city never fully complied with the law.

Instead of setting up its own public power entity, the city signed a franchise agreement for retail electricity with PG&E. According to a Bay Guardian study done two years ago, that agreement costs the local economy about $620 million a year in high electric rates (see "The $620 Million Shakedown," 9/4/02).

Incredible as it may seem, the franchise agreement was signed without an expiration date. And so the city has never managed to renegotiate its miserably low franchise fee or any other term of the agreement.

Over the years the Bay Guardian and public power groups have agitated for increasing the franchise fee. The San Francisco Board of Supervisors actually voted 10 years ago to increase the fee fourfold, but the city failed to enforce the higher fee.

Now, with San Francisco facing $97 million in immediate budget cuts (the result of state raids on local property taxes and the recent failure of a proposed sales tax and a gross-receipts tax, which could have made up the difference), the idea of renegotiating the fee is again picking up momentum.

Sup. Tom Ammiano last month asked City Attorney Dennis Herrera to lay out the city's options for bumping up PG&E's annual payments. And Sup. Aaron Peskin, the likely incoming board president, told us the franchise fee would be a top-level priority during the next legislative term. The City Attorney's Office declined to comment until Herrera issues an opinion, which Ammiano told us he expects in January.

It will probably take a creative legal maneuver to break the PG&E franchise – Oakland attorneys have been in court for three years trying to do just that – but the potential economic benefit for the city makes it well worth the effort. Consider what happened when Long Beach renegotiated its deal with Southern California Edison five years ago.

There are some remarkable similarities between Long Beach – located about 20 miles south of Los Angeles – and San Francisco. Both cities are noted for having distinct, culturally diverse neighborhoods. Their economies depend heavily on technology, tourism, and trade – all of which consume lots of electricity – and both have demonstrated interest in setting up a public power system.

The difference is Long Beach has some favorable terms in its franchise agreement with SCE, which includes a 1.6 percent franchise fee. One provision lets Long Beach go to arbitration with SCE if it wants to municipalize the electric system rather than fight it out in court.

So when it came time for Long Beach to renegotiate the franchise fee, city officials said they were interested in buying the whole electric system, and that forced SCE to make some concessions.

According to Chris Garner, director of the publicly owned Long Beach Energy, those negotiations proved fruitful for the city. Long Beach persuaded SCE to move its purchasing sector within city limits, bringing along new jobs and increased property tax revenue. SCE also handed over a 10-story office building, and it agreed to boost its meter-reading service to the city. In return, Long Beach agreed to back off its public power plans for 10 years, Garner said.

Something similar happened recently in San Diego as the city convinced San Diego Gas and Electric to bury overhead power lines more quickly and at a lower cost to taxpayers. San Diego managed this as part of its franchise renegotiation.

"Going into the 2000 renegotiation, we were not happy with the pace of the undergrounding," Fritz Ortlieb, a San Diego deputy city attorney, told us. "Basically, if we had kept it at the old rate, it would have been more than 100 years before we had all the lines underground."

Long Beach and San Diego demonstrate the value of renegotiating franchise fees. Neither city actually increased its fee, but what they got might be worth a whole lot more.

It's a rare instance when a city can hold leverage over a major corporation as when it's renegotiating the franchise fee. The only problem, critics will say, is that if San Francisco manages to increase its fee, the California Public Utilities Commission might allow PG&E to pass the additional cost on to ratepayers.

That may be true, city officials said, but as long as San Francisco has one of the lowest franchise fees in the state, the city is basically subsidizing other PG&E customers in northern and central California. That's because the cost of a fee increase is spread across all PG&E customers, not just customers in one city.

"The reality is, it's an unfair rate structure," Peskin told us. And while city officials are pushing a franchise fee increase to raise revenues, they're also promoting a local law known as community choice aggregation, which Ammiano said would drive down the cost of energy.

P.S. A chart showing all of PG&E's franchise fees for 2003 is online here.