San Francisco Bay Guardian - January 29, 1997



How PG&E -- once again -- crushed public power to preserve its illegal monopoly. The anatomy of a world-class scandal.


By Savannah Blackwell


It was a historic compromise.


The preservationists, backed by John Muir, did not want to see a dam built in the spectacular Hetch Hetchy Valley in Yosemite National Park. But San Francisco needed a stable water supply, and the Tuolumne River in Hetch Hetchy was one of the few acceptable places left whose water rights were not already owned by some other city.


In 1913 Rep. John Edward Raker, from the state’s Third Congressional District, which included Yosemite, forged a deal: San Francisco would get the unprecedented right to dam a national treasure -– on the condition that it use the dam not only for water but also to generate power, to be sold directly to the citizens, through a municipal power agency, at the cheapest possible rates. The point, as the U.S. Supreme Court confirmed in 1940, was that it was acceptable for San Francisco to destroy a priceless resource only in exchange for a major public benefit –- in this case, the replacement of the private Pacific Gas & Electric Co. (PG&E) with a nonprofit public-power agency, and the destruction of a nascent utility monopoly.


It was supposed to be the Magna Carta of public power. Eight-four years later, it is the shame of San Francisco.


Over and over, year after year, public-power advocates have tried to enforce the will of Congress, the rule of the Supreme Court, the City Charter, and the interest of the citizens, who are losing at least $200 million a year by letting PG&E continue selling high-priced monopoly power in the city.


And year after year, PG&E uses its muscle at City Hall to block those efforts.


This is the story of the latest in a long line of bold attempts to break the PG&E monopoly –- and how the private utility crushed it.


The stakes in the current battle, which began in earnest in 1994, went far beyond San Francisco. At issue was also the privatization of the National Park System, the future of utilities under deregulation, and the ability of American cities to survive on their own in the bleak new world of federal and state cutbacks in funding for essential public services.


The following are some of the key events of the past two years:


  • The sabotage of a public-power feasibility study. After years of struggle, public-power advocates, under the leadership of Supervisor Angela Alioto, finally managed to get the city to spend $150,000 on a preliminary study of whether the city should take over PG&E’s distribution system. But the study was so favorable to PG&E that it might as well have come from the company's public relations office. The San Francisco Public Utilities Commission (PUC) and PG&E worked together to make sure that a firm with ties to PG&E did the study. The PUC even blew off the recommendation of its own advisory committee to ensure that a PG&E-friendly firm got the contract


  • The failure to audit PG&E’s franchise fees. The city controller and city attorney allowed PG&E to slide on the money owed San Francisco – potentially millions of dollars –- for using city land to deliver power to the Presidio and other military installations from 1939 to 1991.


  • Hetch Hetchy’s attempt to operate as a PG&E subsidiary. Hetch Hetchy Department of Water and Power is a part of the PUC and is the city’s own public-power agency. In 1994 it had a historic chance to expand its operations to the Presidio or Treasure Island or Hunters Point -– places where the city could make millions by supplying power to residents. Instead, Hetch Hetchy officials gave in to PG&E, not only undermining a potential revenue source for San Francisco but also setting a ruinous precedent for privatization of essential resources in the national park system.


  • The grand jury’s grand duck. San Francisco’s civil grand jury prepared a report last spring attacking the PUC’s too-close relationship with PG&E, but that report was never released. Sources have told the Bay Guardian that a report was put to a vote to be released to the public but did not pass. Two versions of the report obtained by the Bay Guardian show that some jurors found that the PUC and PG&E enjoy an inappropriately close relationship and that the PUC botched the selection process on the feasibility-study bid.


  • The city attorney’s malpractice. City Attorney Louise Renne argued PG&E’s case repeatedly –- and when she was forced by the Board of Supervisors to sue over the Presidio contract, she lost the federal case by blowing a key deadline (see “Presidio Power Outage,” 1/1/97). The court's decision in that case is under appeal. Meanwhile, Renne refused to provide Alioto with an opinion on whether the city is complying with the terms of the Raker Act. She also refused to enforce an ordinance passed by the Board of Supervisors to raise PG&E’s remarkably low franchise fees. And she refused to attempt to break the city’s 1939 franchise agreement with PG&E, even though the utility has substantially violated the terms of the contract in several ways.


So instead of reaping the benefits of cheap public power, residents and businesses are being charged for electricity at one of the highest rates in the country. Preliminary numbers for 1995 show that PG&E’s average rate for residents is 12.2 cents per kilowatt hour. That’s almost more than 50 percent higher than the national average of 8.2 cents per kilowatt hour, according to the California Public Utilities Commission.


Bay Guardian calls to PG&E representatives for comment on this story were not returned.


The public-power agenda


Public power began to move back into the center of public attention in the fall of 1994 when Supervisor Angela Alioto, then president of the Board of Supervisors, created the Select Committee on Municipal Public Power to try to put the scandal on the City Hall agenda. She saw the potential revenue that the city could earn from running its own public-power system ($200 million annually). She had read the 1913 Raker Act. And she was tired of PG&E pulling all the strings at City Hall. As she told the Bay Guardian on her last day in office, Jan. 6, “It just kind of clicked … that what was happening was so wrong.”


Alioto, with the help of then-supervisor Terence Hallinan, Supervisor Sue Bierman, and later, Supervisor Tom Ammiano, as well as public-power advocates, succeeded in the following two years in pushing PG&E harder on more fronts than ever before in the scandal’s history.


Their efforts reaped some real results.

In January and February 1995, the City Controller’s Office performed the first audit of PG&E’s franchise-fee payments (franchise fees are the rent the utility pays the city for the right to use city streets for delivery of electricity) and discovered that the utility had never paid the city for power it had been delivering to the Presidio since 1939. The franchise fee agreement already allows PG&E to pay one of the lowest returns on gross receipts in the country.


Despite opposition from the PUC and then-mayor Frank Jordan, in March 1995, Alioto succeeded in getting the city’s first preliminary look at whether PG&E’s distribution system should be municipalized. She and public-power advocates also forced the PUC to bid on supplying electricity to the Presidio and saved the federal government $12 million, the amount it would have paid to PG&E to upgrade the system. The PUC’s bid marked the first time the utility has ever tried to compete with PG&E.


But with each accomplishment came roadblocks. And with each effort PG&E and its City Hall allies worked feverishly behind the scenes to undermine any progress toward municipalization.


Though the City Controller’s Office was finally forced in 1995 to conduct an audit of PG&E’s franchise-fee payments, City Controller Ed Harrington intentionally limited the audit to the periods of 1991 to 1993 and 1994 to 1995. In January 1995 the Bay Guardian reported that the City Controller’s Office and the Chief Administrator’s Office had defied the terms of the 1939 franchise agreement by never conducting annual audits of PG&E’s franchise-fee payments.


“Every time in the last 70 years that the power that San Franciscans own has attempted to get its foot in the door, PG&E has stopped it,” Alioto said. “It’s an outrage. PG&E knows that once San Francisco gets its foot in the door, through the Presidio or a feasibility study, it’s in trouble. Once the citizens understand how they have been ripped off, they too will be outraged.”


Money and politics


Hallinan and Alioto tried in 1991 to get a feasibility study, a report that was expected to show that purchasing PG&E’s distribution system would make money for the city. But then-mayor Art Agnos refused to fund the study. In 1987 Agnos had been told by PG&E chief Dick Clarke that if he didn’t give PG&E what it wanted, the utility would “crush his political career” (see “A City Held Hostage,” 9/22/93).


In 1994 Alioto tried again. This time a new mayor, Frank Jordan, refused to provide funds for the study, and Alioto didn’t have enough support on the board to override his veto. In 1995 she tried a third time, and with crafty legislative maneuvering she was able to get the study funded (see “Anatomy of a Scandal,” page 16).


But the PUC, whose commissioners had repeatedly voted against feasibility studies, worked behind the scenes to make sure that a PG&E-friendly firm received the study contract. Four city employees selected by Hetch Hetchy staff chose Strategic Energy Limited (SEL) of San Rafael. In testimony before the Board of Supervisors’ Select Committee on Municipal Public Power, it became clear that the four never considered SEL regional manager Phillip Muller’s past 13-year employment with PG&E to be a potential conflict of interest. In December 1995 Alioto and the Bay Guardian asked the civil grand jury to investigate the contract-selection process. The day after that request, the PUC threw out the SEL contract.


When the civil grand jury published its annual reports in June 1996, it did not include a report on the contract-selection process. According to grand jury sources, the jury did not muster enough votes to release that report to the public. Two versions of the report, one written by the committee handling Alioto’s request and the other a less punchy rewrite done by the jury’s editorial committee, have been obtained by the Bay Guardian. Both raise serious questions about the relationship between the PUC and PG&E.


One version reads, “It appears that the PUC does not clearly understand the issue of conflict of interest with PG&E…. While there is not a marriage between Hetch Hetchy and PG&E, the relationship is very close and can be characterized as cohabitation.”


Indeed, in an interview with the investigating committee, Laurie Park, Hetch Hetchy’s manager of water and power resources, said that she was in contact with PG&E on a daily basis.


The report continues, “There is a perception of undue influence of a private corporation over the city.”


The report found that the PUC and Hetch Hetchy did not want to participate in a feasibility study: “It appears that Hetch Hetchy and the PUC were mandated to do something they did not want to do.” As for the selection process, both reports found it “complicated and unclear.”


PUC general manager Anson Moran had told jurors in an interview that he had not been informed by Hetch Hetchy General Manager Larry Klein that another bidder, a San Francisco firm called "Economic & Technical Analysis Group" (ETAG), had protested the selection process.


However, the jury’s report said that it was “inconceivable that PUC’s upper management did not know of the protest lodged by one of the bidders.”


Meanwhile, the PUC had again started looking for a firm to conduct the study -– and this time it was supposed to consider the recommendation of an eight-member technical review committee.


But under heavy lobbying by PG&E, the Public Utilities Commission ignored the technical review committee’s May 6, 1996 recommendation that Wilson & Associates, of Washington, D.C., win the feasibility-study contract. Instead the PUC discussed the matter behind closed doors and chose ETAG.


After repeated attempts by Klein to delay delivery of the study, the report came out in mid-October 1996. And as public-power advocates had expected, it was biased against municipalization. The report found that municipalizing PG&E would mean a modest (perhaps 5 percent) savings in electric rates. ETAG, which relied heavily on data from PG&E to figure various possible purchase prices of the utility’s San Francisco distribution system, said public-power systems only have lower rates because they qualify for tax-exempt financing and because of their tax-free status. But the American Public Power Association and public-power advocates discounted that claim and pointed to various other reasons why public-power systems have lower rates than investor-owned utilities: residents have more control over utility rates and operations, administrative salaries are lower, and there are no stockholder pockets to pad.


PG&E spent the summer of 1996 lobbying against municipalization. According to a report filed with the Ethics Commission, from July 1 to Sept. 30, 1996, the utility spent $11,000 campaigning against a feasibility study and against municipalization. During that same period, PG&E lobbyists Lawrence Simi and Sam Lauter bent the ears of Supervisors Amos Brown, Tom Hsieh, Leslie Katz, Barbara Kaufman, Mabel Teng, and Michael Yaki as well as of former supervisor Kevin Shelley.


In December 1996, while PG&E was paying its public-relations and lobbying firm, Solem & Associates, nearly $12,500 to monitor issues related to fighting municipalization, board Budget Committee members Hsieh and Kaufman removed from board consideration an ordinance drafted by Alioto to conduct a complete feasibility study, an investigation more thorough than the ETAG report. In so doing they denied Alioto, who was forced by term limits to leave office Jan. 6, a chance to vote on her own legislation.


On Jan. 13 the Board of Supervisors voted 8 to 2 against conducting a complete feasibility study. PG&E’s lobbying efforts had paid off again. (According to a report filed with the Ethics Commission covering the period of Oct. 1 to Dec. 31, 1996, PG&E had lobbied Supervisors Brown, Katz, Kaufman, Susan Leal, Teng, Yaki, and Leland Yee during that time.)


Only Ammiano and Bierman supported the measure. Surprisingly, newly elected supervisors Jose Medina and Yee reneged on promises made to the Bay Guardian that they would support a feasibility study. Newly reelected supervisor Katz did so as well. Yee –- who accepted $500 from Solem & Associates (whose Oct. 1 to Dec. 31, 1996, lobbying report shows the firm spoke with Yee and Mayor Willie Brown), $500 from Pillsbury, Madison & Sutro (a law firm frequently used by PG&E), $100 from Simi, and $250 from Cerbatos and Associates (an engineering firm that is a member of ETAG’s project team) –- told the Bay Guardian. “Just because they give you those contributions does not mean those contributions have an effect on you.”


While the city waits


Earlier this month the Bay Guardian revealed that City Attorney Renne had bungled the case for the city to provide power to the Presidio (see "Presidio Power Outage," 1/1/97). Winning the Presidio contract would have put millions into city coffers and served as a beachhead for public power in San Francisco. And according to documents obtained by the Bay Guardian under a California Public Records Act request, Hetch Hetchy Water and Power, which was recently authorized by the PUC to provide electricity to Treasure Island from April 1997 until the base closes in September 1997, is hardly jumping at the chance to supply electricity to Treasure Island and Hunters Point once the two bases are redeveloped (despite the fact that Hetch Hetchy officials had assured the Bay Guardian last November that they were actively exploring expansion) .


In an April 1, 1996 memo describing discussion at a meeting that day of city officials regarding the possibility of providing electricity to Hunters Point when it is redeveloped, Hetch Hetchy’s Park wrote, “We discussed the possibility of ‘forcing’ PG&E to provide service in the event that the capital investment required to rebuild the electric and gas service is prohibitive.”


A May 10, 1996 memo written by Park shows that Hetch Hetchy would rather focus on reasons not to expand its operations than on opportunities to expand. The memo was a revision of the minutes from an April 9 meeting between Hetch Hetchy officials and a consultant about the possibility of supplying power to and on Treasure Island. In the memo, Park had scratched out the words “HHWP only serves power to City-owned properties. Therefore, for HHWP to take on new services is a political issue” and written in “HHWP does not currently own or operate local distribution systems. Consequently, a decision to take title to the Navy’s existing electric and/or gas distribution systems would involve a change in policy as well as a change in its business operations.”


The memo then revealed Hetch Hetchy’s lack of inclination to take over the system: "HHWP would be willing to allow PG&E to acquire the local electric distribution system…. There is a question as to whether PG&E would be willing to … assume responsibility for the large capital outlays required to bring the system up to code.”


In a March 22, 1996 memo written by Park, she notes that the Navy “- doesn’t understand why the City is moving so slowly to take over responsibilities for the utilities.”


Public-power advocates say that although the Presidio may never get municipal power, they will fight to the final moment to save Hunters Point and Treasure Island from PG&E.


Stuck in the inferno


Alioto has devoted a chapter of Straight to the Heart, her upcoming book about corruption at City Hall, to PG&E.


“I believe without a doubt that it’s the biggest rip-off that has ever occurred in the city and county of San Francisco,” Alioto said. “I think it’s a fight, but if the public could just stand back and imagine that there’s this huge monster whose arms are wrapped around the city. We have tried numerous times to unwrap those arms but have been blocked by enormous power. Without PG&E, how prosperous we could be.” ■


For more information on PG&E’s stranglehold on San Francisco, including the full text of the Raker Act and Supreme Court opinions, point your browser to: For further information see Anatomy of a Scandal on page 16.




PG&E allies in City Hall


Mayor Willie Brown: Formerly an attorney for PG&E, the mayor has opposed all moves for a feasibility study. Most recently, he jumped into the controversy over the ETAG report by trying to delay delivery of the preliminary study until after Supervisor Angela Alioto’s term in office ended.


City Attorney Louise Renne: Renne has followed the historically wrongheaded, city-attorney line, interpreting the Raker Act on behalf of PG&E and against the city, by ignoring the clear public-power mandates of the 1913 federal law, the U.S. Supreme Court decision of 1940, and the court's injunction commanding the city to stop selling public power to PG&E and start selling it to the people of San Francisco. She refused to raise PG&E’s absurdly low franchise fees and has not challenged the legality of the city’s 1939 franchise agreement with the utility –- even though PG&E violated the terms of the agreement by supplying power to the Presidio without paying the city for use of city streets in doing so. Last October, by blowing a key filing deadline, she lost the federal case against the National Park Service (and PG&E) for illegally awarding the electric-power contract at the Presidio to PG&E.


SF's Public Utilities Commission: The PUC has never approved a feasibility study on its own. It was forced to do the recent preliminary study and worked to prevent an unbiased, fair firm from getting the contract and enabled a PG&E-friendly firm to get it. The PUC has a close relationship with PG&E. PUC General Manager Anson Moran and Hetch Hetchy General Manager Larry Klein have worked continuously on behalf of PG&E and against the expansion of public power in San Francisco, at the Presidio, and now at Hunters Point and Treasure Island.


City Controller’s Office: This office never once followed the provision in the 1939 franchise agreement with PG&E calling upon the city to conduct annual audits of PG&E’s payments –- until Supervisor Alioto forced it to do so in 1995. City Controller Ed Harrington then limited the audit to no earlier than 1991, thereby preventing the city from getting back millions of dollars possibly owed for delivery of power to local military bases from 1939 to 1991.


Chief Administrative Officer: Like the City Controller’s Office, this office never followed the provision of the 1939 franchise agreement with PG&E calling for annual audits of franchise-fee payments until Alioto forced it to do so in 1995. Then-CAO Rudy Nothenberg –- who, the Bay Guardian disclosed, owned PG&E stock –- said he couldn’t get involved in financial matters concerning PG&E because his wife worked for the utility. He produced a skimpy, noncritical report in March 1995. CAO William Lee, whose son owns stock in PG&E, produced a report in May 1996 that is even shorter than Nothenberg’s. In addition, PG&E and its public-relations machine, Solem & Associates, contributed to a dinner celebration for Lee last July.


Board of Supervisors: New president Barbara Kaufman, who was backed largely by downtown money and worked closely with the PG&E-friendly lobbying group the Committee on JOBS, began by killing the Select Committee on Municipal Public Power. After supporting a preliminary feasibility study by an eight-vote majority in 1995, the new board on Jan. 13 voted 8-2 against a feasibility study. In their votes against the study, three supervisors –- Leslie Katz, Jose Medina, and Leland Yee –- reneged on pledges they made during their campaigns to support a feasibility study.


San Francisco Civil Grand Jury: Every year the Bay Guardian asks the grand jury to investigate the PG&E scandal. In 1973, the grand jury found that the city was violating the Raker Act and should have been providing public power for residential customers. The subsequent report is stuck on a shelf. In 1995, Alioto and the Bay Guardian asked the grand jury to investigate the PUC’s selection of a firm whose key representative worked for PG&E to conduct the preliminary feasibility study. The Bay Guardian obtained two versions of that investigations report; both are highly critical of the PUC’s selection process and find that the department has an inappropriately close relationship with the utility.




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