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Why we should not sell the electric utility


Tuesday, June 10, 2008 6:10 AM PDT

Comments (32 comment(s))

Do we sell the electric utility or not? Do we sell the swap or not? These are two issues recently addressed in op-ed pieces by Mr. John Johnson.

My objective is to help you understand that these issues are not always as simple as some would want you to believe.

In 1910, the city fathers made the decision to buy their own power system, a step that has allowed the citizens of Lodi to benefit for nearly a century from the funds generated by electricity sales.

PG&E is an investor-owned utility and individuals purchase shares that they expect to make a profit on. You are, in a sense, a shareholder for Lodi Electric without having to purchase shares. Your dividend is in the form of police and fire protection, parks and recreation programs and other General Fund departments. In the recently approved budget, $6.8 million will be transferred from the utility account to the General Fund.

Comparing rates is complicated. Any comparison snapshot can show a different result, depending on when and how much energy is used.

Both Lodi and PG&E use a five-tier system for residential rates. PG&E's rates are more favorable in the first two tiers, but those who need a higher amount of energy fare better with Lodi's rates. Also, Lodi's industrial rates are 26 percent lower than PG&E's, which helps keep some 2,000 jobs in Lodi. And our commercial rates are 6 percent lower than our nearest competitor's.

Another difficulty in comparing rates is that some cities add a utility tax to the energy bills. Another factor is that the baseline of energy costs is seasonal. Rates are also based on the climate zone that the customer lives in.

Mr. Johnson wanted to know of an electric utility that is higher than Lodi for 1,000 kwh of energy used in March. He quoted the Lodi rate as $225.45. Well, I have an answer. Two, really: Southern California Edison provided a quote of $240.01; and San Diego Gas and Electric quoted $246.24.

Should we consider selling our electric utility? Not in my book. The result would have a long-term consequence of higher rates. Remember, it was PG&E that once declared bankruptcy and not the city of Lodi.

The City Council has made the difficult choices needed to build up the utility's cash reserves and add stability to energy purchase policies. This effort was recently validated by Wall Street's recent upgrade of the utility bonds from BBB+ to A-.

This new bond rating will lower financing costs for ratepayers in the future. We also are working hard to have better control over the cost of the energy we purchase. We hope to build a new natural gas-fired generation plant and eventually connect to Western Power, a federally operated transmission system. This will enable us to deliver power at a lower cost.

Another benefit to come is that the cost of bond debt is scheduled to fall in coming years. One bond series will be paid off in 2012 and another in 2015, reducing annual interest payments by a net $3 million, beginning in 2016.

Finally, Mr. Johnson recently suggested the City Council was premature in its decision to refinance both elements of the 2002 bond series, the variable rate and the swap. I want to provide some background on why I voted to pay off the swap, despite its $9.2 million estimated cost. First, because the swap was designed to complement the variable-rate bonds, resulting in a "synthetic" fixed interest rate, keeping the swap makes financial sense as long as the variable-rate bonds are in place. However, the council decided to purchase a fixed-rate bond.

If we waited, as Mr. Johnson suggested, to terminate the swap until a later time, it would require either a large cash outlay or issuing taxable bonds that will cost the utility more in interest. If the swap remains, the Electric Utility continues to be exposed to interest-rate risk and a future significant cash outlay that could be triggered by a ratings downgrade of the swap insurer.

I think of the swap as a time-bomb, only you don't know when it may go off. It may be a dud or it may be a huge explosion. It was not a risk I was willing to take.

Larry Hansen is a Lodi city councilman.

Reader Feedback

papercut wrote on Jun 14, 2008 5:04 PM:

" Thank you, fruitful, for clarifying the downfall of Lodi financially, and the mess LEUD is in because some expert, with the help and urging of the NCPA, bought that power and broke Lodi. Thanks, Mr. Hansen, for again meddling in something you actually know nothing about except for your taxpayer paid trips and nice hotel stays and dinners to attend their meetings every week or so. I don't think overnight stays in Sacramento are very appropriate to charge us taxpayers for. And don't they have meetings at or real close to Disneyland twice a year? And how about your other NCPA destinations? I thought it was supposed to be business, not a vacation? Do you also pick up the tab for the NCPA rep? "

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Fruitful47 wrote on Jun 14, 2008 1:18 PM:

" Overall, the electric utility has been run to the benefit of residents and businesses in Lodi. But when Hansen started messing with it, Lodi rates moved to some of the highest in the State of California. It all started on October 4, 2005 when Hansen thought he knew how ot buy power. He did. At the highest rates ever, just after Katrina. Police officers should stick to police business. "

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Cogito wrote on Jun 13, 2008 9:46 AM:

" Educated reader, excellent point. Using fear as tactic is much more effective a motivator than honesty. Because the truth be told, it would be difficult to sow a compliant attitude by saying that there are a lot of people with fat salaries at the city's end, that depend on overcharging you, the customer, in order to maintain their current and future lifestyles. Oh yeah, and to pay for past failures and political promises, don't forget those! "

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papercut wrote on Jun 13, 2008 9:15 AM:

" educated reader, just what is Hansen doing running LEUD anyway? Just get rid of Morrow and his outlandish salary for just being a fixture and let Hansen take over. We'll be broke in a week. Butt out Hansen and let the utility director run the show. You can't even run the city properly and need to step down and let the next generation take over. All of you council reps except for Madam Mayor Mounce still have the same ideas and thoughts that're twenty years old and you're the laughing stock of the majority of Lodi's real citizens and not the yes men for the rich and famous anymore. "

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papercut wrote on Jun 13, 2008 9:09 AM:

" You have to watch Hansen and LEUD and check your bill carefully every month to make sure you're charged on a 30 day billing. They have this dirty little practice of billing for 31 or more days so they can push your KW hours over the minimum usage and add those hours for those extra days to your usage to put you over the minimum and charge you the higher rate for those extra days they add. Is anyone aware of this dirty little scheme? Just check your bill and review the yearly usage and see how many 31+ days you were billed for during the year. This needs to be corrected and all LEUD residential customers should be given their money back. "

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educated reader wrote on Jun 13, 2008 12:55 AM:

" It is no coincidence (nor is it surprising) that only 5 sentences into his argument for keeping the electric ultility, Mr. Hansen raised the fearful specter of having no police or fire services and, worst of all, no parks or recreation services. Public safety and sports are so near and dear to every citizen that we can easily be terrorized into thinking they will disappear if the city sells Lodi electric. What we can certainly expect is not to have any higher electric rates than we do currently. When it costs a household of two $400 to $500 a month for heat in the winter and air conditioning in the summer it is just plain ridiculous. I keep praying for moderate temperatures so I don't have to turn on the heat or A/C. And forget it if my kids come home to visit and I have to use my washer and dryer more often. Maybe we need to look at Mr. Hansen's retirement package to find out why HE can afford such high rates (or do ex-city employees get a discount?). Investors indeed! "

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Cogito wrote on Jun 12, 2008 11:08 PM:

" You know what Girard, I'm much more inclined to trust your figures than anything I read in the paper. "

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girard74 wrote on Jun 12, 2008 9:26 PM:

" Cogito - All I did was take a look at the PG&E website that publishes their standard rates and compared them to the bill that I received today. As I stated, mine was a very 'simple comparison,' asking for more sophisticated minds to enlighten me.

I've often found that simple answers can come from simple calculations. In my personal situation being on a very fixed income (not that too many folks aren't limited by their budgets), virtually every nickel counts especially with the cost of gasoline and other necessities rising almost exponentially. "

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Cogito wrote on Jun 12, 2008 8:26 PM:

" Girard, If you'll look again, I was comparing Galt's costs of electricity vs. Lodi's. I was comparing 2 publicly owned utilities, you know, apples to apples. A recent column in the LNS compared the cost of 1,000 Kw of power. Lodi was in the 225.00 ballpark, Galt(SMUD) was in the 85.00 area.(by the way, PG&E was around 200.00) Then I suggested putting the difference in PG&E stock due to its excellent performance in the market over the last 5 years, since Mr. Hansen humorous statement calling those in Lodi being gouged for power, "investors". The entire article is an affront to anyone with a modicum of intelligence. "

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Observer wrote on Jun 12, 2008 6:04 PM:

" I am all in favor of providing preferential electrical rates to those companies that provide employment to several hundred individuals. The City should be doing everything possible to attract and retain business in this community. The benefits of employment far outweigh the small savings on electrical rates. This is a no brainer. "

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papercut wrote on Jun 12, 2008 3:02 PM:

" jerry, are those residential figures you're tossing out there or does that include the near free power to General Mills, Cottage Bakery and the high power using employers here in town. And the commercial, who also pay half what residential does? And who do you think would be foolish enough to buy the utility with almost 100 million debt and that doesn't include other hidden costs and the decrepit system that would come along with it? "

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reality wrote on Jun 12, 2008 2:57 PM:

" girard74 i cant wait to see the "better informed" response from papercut to your thoughtful comment. "

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girard74 wrote on Jun 12, 2008 1:57 PM:

" Not being anywhere near an expert but after performing a cursory review of the basic seasonal rates offered by PG&E for electricity, I would be paying them $0.19563 per KWH as opposed to City of Lodi's rate of $0.14200 per KWH.

Where I see a possible problem is the cost of water, wastewater and solid waste on my bill. Would selling off of the Electricity portion of the City's business result in any savings to individuals? From my simple comparison I don't think so. I welcome any better-informed opinions. "

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papercut wrote on Jun 12, 2008 9:07 AM:

" Cogito, these are the same crooks that're stealing LEUD blind to pay for that million and a half that Hutchins loses each year, those dinners and weekends at wine&roses, building the citys cash surplus, and paying Morrow around 150K a year, while letting some inept ex-police chief make the calls. We're shareholders alright. That is so funny. Only Hansen or Johnson would be ignorant enough to make a retarded statement like that. When are we going to see some pollution cleanup, water meters and infrastructure repairs with that money instead of paying down the debt you bamboozlers have gotten us into? "

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Cogito wrote on Jun 12, 2008 1:19 AM:

" OOOOOHHHH, You, as a Lodian, are a "shareholder". That's hilarious. I live in Galt and pay less than half of your rates. We have police, fire departments, and parks and recreation too. If I were to have taken the difference in costs for the last 5 years, and invested it in PG&E stock, I'd be able to pay cash for a new car. What a politician! "

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OTH wrote on Jun 11, 2008 4:07 PM:

" Jason at eyesofargus has been on vacation. "

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Observer wrote on Jun 11, 2008 12:59 PM:

" I find it fascinating that the papercutting taxpayer is so infatuated with eyesofargus. Although he is extremely caught up with the Sacramento's Mayor's race (supporting the good ol girlz incumbent) he's very anti union and very supportive of free enterprise....including Walmart. "

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reality wrote on Jun 11, 2008 10:33 AM:

" hey papercut have you checked eyes of argus lately. he is not nearly active as he once was and even then it was one persons opinion of the situation. if you are using him as a reference and benchmark you need more help than i origionally thought "

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Observer wrote on Jun 11, 2008 7:16 AM:

" Taxpaying papercutter.....why do we have to wait for eyesofargus to reveal this information that you've had for months. Come on, let us in on it. "

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papercut wrote on Jun 10, 2008 8:41 PM:

" realty, subscribe is the right word. What did our Mr. Hansen and the NCPA pay to subscribe to S&P? They paid enough to get an A- bond rating , which is one of the lowest ratings there is and paid 9 million up front yo do that. Doesn't count these next three rate increases before 2012 to cover that cost and Mr. Hansen's second giant blunder in less than three years. Your little one man cheer leading group with the four or five different names doesn't convince me of very much at all. You seem to be the ones hiding behind susie's skirt with the same old attaboy for the leaders each time. Just stay tuned to eyesofargus.net in the near future for news of how your heroes tales are coming to an end with the truth embarrassing some of your big boss men and their lapdogs. "

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OTH wrote on Jun 10, 2008 8:34 PM:

" I will sleep well tonight after reading Mr Hansons's column. Now I know that my fellow citizens, rich or poor, elderly on a fixed income are subsidizing multi-million dollar corporations thru higher electic rates.

I'm sure the senior citizen when going to the store the way prices are on everything silently says to themselves "Thank you Lord for letting me help those companies keep their profits up."

But, let's face it they can't possibly make campaign contributions in the amount a corporation can. "

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reality wrote on Jun 10, 2008 2:27 PM:

" hey commonsense1 isnt it interesting that when someone steps to the plate and refutes papercut, he wimps out. lets keep the pressue on him and maybe he will shut his yap until he has something legitimate to comment on.
btw papercut you dont negotiate or buy off S&P! They make their money from the people who subscribe to their services! "

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beentheredonethat wrote on Jun 10, 2008 12:52 PM:

" SELL IT!!!!!! What do five city council members know about running a utility? Not much. "

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commonsense1 wrote on Jun 10, 2008 10:55 AM:

" Papercut, the foam coming from your mouth must really make a mess of your t-shirt. I think Mr. Hansen gave a rational, reasonable and easy to understand response to Johnson's article. I know it's difficult, if not impossible for you to grasp words like "reasonable", "rational" or "easy to understand", but give it a try when you aren't too busy spitting at people. "

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Observer wrote on Jun 10, 2008 10:52 AM:

" The City should absolutely not sell the utility to PG&E. You have to look at the performance of the utility over its history and not the past two years. Were some bad decisions made on the purchase of power...yes. Were they intentional...no. It's no different that looking at any other investment you may own. Over the long haul the utility has provided power for less than PG&E and helped the general fund. History tells us it will occur again. The last thing we need to be dealing with is attorneys and CEO's in San Francisco. If you don't like those who control the utility we always have the option of making a change every two years when we vote for our City Council. "

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papercut wrote on Jun 10, 2008 10:45 AM:

" Mr. Hansen, shouldn't this have been written by Mr. Morrow, the LEUD department head? Why are you giving us your perspective and not letting him tell us the real truth? You're the time bomb and you blew up in 2005-2006 when you and the NCPA brokered that electricity buy that dropped in half two weeks later and caused that 17% rate hike and downgraded bond rating along with that 100 million dollar debt. And Fitch wouldn't give you a higher bond rating so you switched to Standard & Poor and put us further into debt with this fixed rate and passed some money and future gimmes to them to upgrade to A, which is still right there near the bottom. It doesn't take much googling to find out the real truth. "

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reality wrote on Jun 10, 2008 10:43 AM:

" what bankruptcy in 2005-2006 papercut? "

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papercut wrote on Jun 10, 2008 10:34 AM:

" How's that realty, you happy now? "

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papercut wrote on Jun 10, 2008 10:33 AM:

" LET MR. MORROW RUN LEUD AND YOU STICK TO PUTTING THE CITY FURTHER IN DEBT, NOT LEUD. PLEASE, MR. MORROW, QUIT COWERING AND QUIT LETTING THESE CC MEMBERS HOW TO DO YOUR JOB. HANSEN, YOU JUST PUT LEUD 9 MILLION MORE IN DEBT JUST BY CHANGING FROM VARIABLE TO FIXED RATES AMOUNTING TO 46 MILLION MORE DEBT OVER THE LIFE OF YOUR REFINANCE. YOU JUST DO WHAT'S GOOD FOR THE IMMEDIATE SITUATION AND LOVE LEAVING THAT LONG TERM DEBT FOR OUR CHILDREN AND GRANDCHILDREN. PLEASE STEP DOWN. YOUR MUTTERING AT THE CC MEETINGS STILL MEANS NOTHING. "

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papercut wrote on Jun 10, 2008 10:25 AM:

" Mr. Hansen, we should sell it so you don't put it any further into debt than you already have. Isn;t Mr. Morrow the director? I watch every comcast TV meeting and you seem to be the one who keeps meddling into LEUD and bought the power that bankrupted them in 2005-2006. Wouldn't it be better to let Mr. Morrow run that department and not you and the floundering NCPA? If we're share holders, Mr. Hansen, why are we constantly paying higher rates, eg losing money? Don't investors dump those stocks that're losers year after year? That's what you've made LEUD. It's now a hundred million dollars in debt and you say that's great along with Mr. Johnson? It's time for you to step down, especially after writing some crap like this and still not admitting you're the one who broke them in the first place. "

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reality wrote on Jun 10, 2008 10:18 AM:

" What? No comment papercut? You can't handle the truth! "

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reality wrote on Jun 10, 2008 9:56 AM:

" What no comment papercut? As Jack Nickolson said in the movie A Few Good Men - you can't handle the truth! "

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