San Jose has temporarily pulled the plug on creating a municipal utility, choosing to move forward, instead, with a new PG&E deal that promises infrastructure and speed improvements as the city looks to meet future demand in its downtown and northern areas.
Rising costs, delayed projects and reliability concerns brought the city’s issues with the gas and electric provider to a head nearly 18 months ago when the city conceived San Jose Power, intending to study the feasibility of running its own power entity.
However, PG&E representatives have since attempted to repair their relationship with the city, including negotiating an agreement establishing enforceable milestones and funding a project team focused on coordinating and accelerating large-load projects.
“There’s a very unique opportunity for San Jose to drive a lot of economic development, and if we’re going to allow for higher rates for new large load customers in our economic development lands, I think in exchange we want to make sure San Jose and our residents are really seeing benefits in other creative ways through our partnership,” San Jose Mayor Matt Mahan said.
The potential for a municipal utility was never intended to replace PG&E but rather to service new customers in growth areas like the northern parts of the city that have seen interest in business and housing expansion, deputy city manager Kip Harkness said.
As the commercial real estate market slowed over the past few years, firms indicated that having reliable power hookups was one of the most critical factors, giving a competitive advantage to cities such as Santa Clara, which manages its own utility and could offer significant cost savings.
Like Santa Clara, Palo Alto also runs its own utility and is one of at least 2,000 jurisdictions to do so throughout the country.
With San Jose facing a challenging financial outlook over the coming years due to declining sales tax revenue, city officials have stressed the need to bolster economic development, including attracting data centers, to help infuse its coffers. For example, a single 99MW data center could result in $3.5 million to $6.4 million in annual general fund revenue.
Over the long term, the city estimated that a utility could generate an additional $30 million to $60 million in revenue annually.
However, despite the perks, officials acknowledged the complexity of getting a utility off the ground. Due to its financial limitations, the city assumed it would need to partner with a private developer to fund and construct most new infrastructure.
“If the implementation agreement is successful, we can expect to see a significant acceleration of large load customers in both North San Jose and downtown, with the resulting lift on the economic development side and the fiscal position of the city organization,” Harkness said.
“Having watched Silicon Valley for a while, you see these things come in waves, and those waves come quickly — and if you catch them, you accrete the next layer of innovation and the next layer of business possibility. If you miss them, they go on somewhere else, and so now is an opportunity to catch this next wave of investment around manufacturing and data centers, in particular, related to AI, and have that accrete here in the city so that the talent and the innovation remain here in Silicon Valley.”
Facing a litany of complaints from residents and business customers, PG&E Regional Vice President Teresa Alvarado said the utility provider has begun to address interconnection and reliability concerns.
She pointed to a decline in outages, an increase in new business hookups and a recent project in South San Jose aimed at curbing intentional or accidental power failures near high-risk wildfire zones.
“We’re not perfect, but we’re making tremendous progress that I’m very proud of for all of our customers,” Alvarado said.
While terms of the agreement still need to be ironed out and will not be completed until next month at the earliest, the City Council previously asked for several deal points to be included in any deal. Those provisions included:
PG&E funding two economic development and oversight positions and at least four positions in Public Works
tracking enforceable performance metrics for large load and regular customers
investing in workforce development programs
providing 250MW of electrical capacity for the first phase of developing the Regional Wastewater Facility’s economic lands
If PG&E fails to meet its commitments, San Jose officials wanted to ensure there was clear language in the contract that would give the city an offramp to pursue its own utility again.
Adding more intrigue to the equation, San Jose recently hired Manuel Pineda, the well-regarded former chief utility officer at Silicon Valley Power, to replace Harkness, who is leaving his city post soon.
“Manuel is a consensus builder and a do-er,” said land-use consultant Bob Staedler. “He just has a way of communicating complex issues and is one of the best city employees I’ve ever worked with. It’s a huge staff upgrade over running a utility and implementing what San Jose wants to do.”
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San Jose closing in on agreement with PG&E for improved infrastructure, service delivery
But for now, PG&E officials believe the new agreement with San Jose can be a win-win and help the city reach its goals.
“We strongly believe that today, more than ever, PG&E is best positioned to offer San Jose the commitments and investments needed that will enable the city’s vision without introducing risk to the city or its budget,” senior government affairs representative Christina Ramos said.
