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SSJID weighs next step in bid to enter retail power on Thursday

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POSTED September 1, 2009 2:51 a.m.
The last time South San Joaquin Irrigation District met to formally air its plans to enter the retail power business, a large contingent of PG&E employees and retirees showed up prompting a move to a nearby church sanctuary.

PG&E also contracted with a media production company to videotape the proceedings.

Round 2 in the SSJID’s bid to reduce retail power costs across the board 15 percent in Manteca, Ripon, and Escalon starts this Thursday at 9 a.m. at the district office, 11011 E. Highway 120. That’s when the directors will conduct a public meeting to decide whether to move forward with an application to the San Joaquin Local Agency Formation Commission to grant it permission to add retail power delivery to its repertoire of public services that includes irrigation water, wholesale power generation, and assisting Manteca, Lathrop, and Tracy with their domestic  water supplies.

The first time LAFCO rejected the SSJID proposal over several of its board members concern about the use of eminent domain with several expressing a personal distaste for a public agency using it to take over parts of a private concern. PG&E, though, is a quasi-public agency that itself has eminent domain powers it uses much more frequently than most government jurisdictions. Also, as a protected utility, the state allows to PG&E to operate with protection from competition will assuring it of a return on their investment – or profit – in excess of 11 percent.

PG&E – besides crying foul over eminent domain – contends SSJID will actually end up raising rates by 15 percent.

This time around a PG&E spokesman was quoted in the media as saying the system that SSJID may end up acquiring is worth $500 million while SSJID’s consultant who is an expertise in electrical system acquisition puts the value at significantly below $70 million. The LAFCO hearing won’t decide that. By law, they can only decide on whether it makes sense for SSJID to enter the retail power business to serve residents in its jurisdiction.

SSJID has made it clear it would prefer to purchase the system at fair market value from PG&E without having to resort to eminent domain which it is empowered to do under the California Constitution. It also has the option of simply building its own distribution system.

If it does come down to a disagreement over price, it would ultimately be settled in San Joaquin County Superior Court.

If PG&E sells, the courts have to go on fair market value which includes the fact PG&E has depreciated its assets over the years in order to take advantage of tax breaks. In other words, the law requires the utility to be paid for fair market value which is much different than replacement value.

The last time around was also marked by bizarre incidents including PG&E paying SSJID for its legal costs and other expenses relating to a contractor PG&E hired breaking into the SSJID computer system to access the district’s files pertaining to its strategy for entering the retail power business.

PG&E offered carrot to help districts like SSJID enter retail power
In an ironic twist, SSJID decided to consider entering the retail power business on a carrot extended by PG&E and other major California utilities to sway the state legislature to de-regulate public utilities when Gray Davis was governor.

The utilities led by PG&E offered irrigation districts such as SSJID the opportunity to obtain exemptions from transmission charges for a set number of years to help get them started in the retail power business.

SSJID was the only irrigation district in the state to take up the utilities on the offer they made in good faith as part of bargaining with the legislature to reduce regulations governing their activities.

There had been three different efforts to jump start SSJID’s retail power business working with PG&E. In several instances, PG&E blocked efforts to inter-tie with a new substation to start servcie to smaller areas of SSJID’s 72,000 acre district. One was on Lovelace Road near Delicato Vineyards and the other was tying in at the old Heinz plant in Tracy. The third time PG&E offered to sell SSJID an aging system south of Manteca to the Stanislaus River that at the time had many improvements dating back to the 1920s.

SSJID leaders are confident they’re on firm ground when it comes to being able to purchase and separate the PG&E system in Manteca, Ripon, and Escalon while upgrading service and cutting rates 15 percent across the board.

SSJID has $61M set aside to help its effort
That confidence is based on $61 million accumulating in an undistributed reserve from the board’s stewardship of the district’s share of hydroelectric revenue from the Tri-Dam Project SSJID operates in conjunction with Oakdale Irrigation District.

At a time when virtually every California public agency is pondering rate increases, furloughing workers, slashing budgets and cutting back servcie the SSJID is forging ahead with major initiatives from a massive water conservation and quality program by converting irrigation canals southwest of Manteca into a closed piped system to solar power initiatives. The SSJID also has kept rates unchanged for irrigation customers for more than two decades while managing the system well enough to have water when other areas don’t.

They went as far as even suspending basic water charges last year. It would be the same as the State of California operating for a year without collecting a large chunk of revenue while maintaining services and actually socking away another $10 million annually.

The district instead plans to launch the retail system with $10 million from its undistributed reserves. The fact they will still have almost $45 million in undistributed reserves the year after starting the system will allow the district to secure high investment grade ratings for taxable and non-taxable bonds to acquire and upgrade the system.

In the initial four years that would be an $8.7 million annual debt servcie. Even if Tri-Dam didn’t generate another penny – which is highly unlikely as it has been bringing in a minimum of $10 million a year from power sales – and the district didn’t collect a dime from its systems, the SSJID could still pay debt servcie and have money left in its bank accounts.

That undistributed cash reserves are expected to reach $75 million in by 2014 after retail start-up expenses are incurred. The undistributed cash reserve is designed as a safety value should the district ever need help making its debt servcie on retail power. It is what will allow the district to retain the highest possible bond rating.  The annual debt level peaks out at $10.8 million annually after five years and stays that way until bonds are paid off in 2040.

The business plan also provides for capital improvements to be made to the system after the initial start-up and upgrades five years into the SSJID selling retail power. It starts at $3.3 million a year and escalates up to $7.1 million annually by 2040.

Based on bond counsel research, the SSJID’s business plan would continually build an ending cash balance each year start at $15.7 million the first year, reaching $45.8 million after five years, $90.8 million in 10 years, $319.9 million in 20 years, and $764.6 million in 30 years.

The Tri-Dam Project was financed by selling wholesale power to PG&E over 50 years. Tri-Dam is a series of three dams with hydroelectric plants on the Stanislaus River. After the bonds were paid off, instead of money going to debt service it went to unrestricted cash reserves.

The district intends to keep using those unrestricted cash reserves as they go to upgrade and reduce costs for its water side – just like PG&E suggested – as well a guarantee rates at least 15 percent lower than what PG&E charges at any given time.

They SSJID estimates they can put $140 million back in the pockets of local businesses, families, and government agencies during the first 10 years of providing retail servcie due to lower rates.
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