Why not sell Palo Alto Utilities? It makes financial sense.
Original post made
by Otto, Crescent Park,
on May 10, 2007
Sell PAU. Going price that property would be in the neighborhood of $800M-$1B, maybe more. Take the money from that sale and invest (in safe securities and bonds) an amount sufficient to contribute the current average amount contributed to the General Fund by the utility. Use the rest of the money (probably several hundred million) to help pay for infrastructure (about $100M), and the remainder to drive a _steep_ discount solar program sufficient to get most Palo Altons to a place where the grid is paying them back for generating surplus electricity.
The general argument that many raise against selling PAU is that our rate structure is currently cheaper than adjoining municipalities. We would be in danger of the same fate _if_ we didn't use a large portion of the sale money to solar-enable local residences.
In fact, money directed from a sale of PAU to solar, with other innovative deployments, could go a long way toward relieving most Palo Altans from high rates, for good.
Why isn't this idea even considered, or debated at the policy level. Maybe it's a bad idea; maybe it's a good idea; maybe it's an OK idea that can be iterated to a great idea.
I want to see some REAL innovation here, instead of just talk and the occasional meeting about innovation. Ms. Mayor, how about it?
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Posted by Paul Losch
a resident of Community Center
on May 16, 2007 at 12:51 pm
My opinion is that there are two key questions being asked here. One has to do with the future role of the PAU asset--this is a more quantitative question. The other question has to do with what are the key features that are important to Palo Alto's future as a community, and this is a more qualitative question, with various points of view.
On the first question, I will draw from my MBA 101 lessons, and say that the asset can be kept or sold. If it is kept, the profits it generates can either be dividended to the City to be used for other purposes, they can be returned to the rate payers, thereby providing a lower than market cost for utilities, or some blend of both. If it is sold, the funds received either can be reinvested in other assets that the City deems appropriate, or put into some funds that generate an income, which can then be used as our elected officials deem appropriate, including services, salaries, new or upgraded roads, etc. Under this sold scenario, of course, the rate payers would pay market rates to PG&E, no prospect of lower rates as exists now.
My little excel spreadsheet says that at a certain sale price, the City is better off selling the asset and putting the proceeds of the sale to other uses. Below such a price, the value to the community is greater if we keep the asset and use the profits in a fashion as they are today, with lower rates or funding for other projects. Investment banking types can do magic with numbers to make a case for something either way along these lines, just attend a finance class at Stanford Business School, and you can see how the discussions work. (I am being a bit sarcastic here, but there is more than a grain of truth to my suggestion. See the recent Business Week article about these sorts of things happening elsewhere in the country--Web Link )
In all fairness, it would be useful to see such a financial analysis--it could show that one or the other alternative is a "no brainer." I suspect that, like most things around here, the answer would not be so clear cut.
Which gets to the second question, the more qualitative one, about what the role of the utility is in Palo Alto's makeup going forward? I highly doubt that if we did not have the utility, it would be high on our list of "things Palo Alto needs." We would just accept PG&E as other communities do, and move on to other things. Since we do have it though, should we keep it, given the role it plays in our community's affairs?
My instincts tell me it is worth having and keeping. It is well run overall, we do get better service than PG&E customers do, if you accept some of the anecdotal evidence offered by others on this thread, that certainly has been my own experience. I like the flexibility we have with using the proceeds the asset generates to do things that are called for at the time. Right now, the money is largely being used as a way to fund other activities that our elected officials and community as a whole consider to be important. At other times, it has and can buffer us from the exigencies of the market place, although we put ourselves at some risk here as well, as the Enron debacle here locally a few years ago demonstrates. But, for it to serve such a purpose well, it has to be well run and well maintained, not neglected or taken for granted.
And having it serve this purpose is totally independent of how monies are used for other purposes. It is a funding mechanism, not a spending decision. If we as a community do not like how our current monies are being spent, we need to address that issue foresquare, whether we have a utility or not. My evil MBA twin reminds me that it is important to separate funding sources and funding options from spending decisions. It is a lack of leadership to spend money just because it is there--Homer Tunnel is a great example of that (largely federally funded.) It may be easier to make bone headed decisions about how and what to spend money on if it is available, but don't kill the funding source because of unwise spending priorities or choices.