Judges, Lawmakers Also Could Determine Utility’s Future
By Hudson Sangree
The California Public Utilities Commission hosted a forum Friday where some experts urged it to break up Pacific Gas and Electric despite the challenges attending that move, while others favored keeping the troubled utility intact.
Whatever the outcome, PUC President Michael Picker said, the solution is likely to seem as bad as the problem to many people.
“It’s not a question of ‘out of the frying pan and into the fire,’” Picker said. “It’s ‘which fire are we going to pick?’”
Friday’s forum was the second in a series of public meetings on PG&E held by the PUC.
State regulators and other authorities have been discussing PG&E’s future with greater urgency since it filed for Chapter 11 bankruptcy reorganization Jan. 29. The utility cited billions of dollars in potential wildfire liability for its bankruptcy and said it might seek to rescind hundreds of costly power purchase agreements entered into when prices for renewable energy were higher than they are today. (See PG&E Wants to Undo Contracts, Revamp Biz in Bankruptcy.)
Recent disasters blamed on PG&E have increased public and political antipathy toward the 114-year-old utility, headquartered in San Francisco.
State investigators have concluded PG&E equipment started wildfires that killed at least 22 people in 2017 and 2018. Not included in that total is the Camp Fire, the deadliest in state history, which killed 85 residents and destroyed most of Paradise, a town of 27,000 in the Sierra Nevada Foothills. Investigators have yet to determine the cause of the fire, but PG&E said its equipment is likely to blame.
After “so much death and destruction,” the utility faces an unprecedented turning point, said David J. Hayes, executive director of the State Energy & Environmental Impact Center at the New York University School of Law. “You’re never going to have a time, I think, when the public is more supportive of extraordinary steps than you have right now,” he told PUC commissioners.
Hayes and others suggested that breaking up PG&E into smaller entities could accomplish several goals, including reducing the risk of cyberattacks. If attackers took down PG&E, it would eliminate gas and electric service for much of California, he noted. But “the system becomes more resilient” if PG&E is separated into smaller units, he said.
‘Culture of Entitlement’
The arbiters of PG&E’s fate go beyond the PUC. They currently include a federal bankruptcy judge and another federal judge overseeing PG&E’s criminal probation in the 2010 San Bruno gas pipeline explosion that killed eight residents of a suburban San Francisco neighborhood. (See Federal Judge to Review PG&E’s Wildfire Plan.)
Gov. Gavin Newsom, state lawmakers and the state attorney general’s office have weighed in. (See Calif. Must Limit Wildfire Liability, Governor Says.) So has FERC, along with ratepayer advocates, fire victims and generators that sell electricity to PG&E. (See Judge Puts Off Decision in PG&E v. FERC.) The FBI is helping local authorities conduct a criminal investigation of PG&E’s involvement in the Camp Fire, according to some news reports.
At stake in all this activity is the future of the state’s largest utility, which supplies electricity and gas to 16 million residents across 70,000 square miles of Northern and Central California, or about 42% of the state.
PG&E’s critics contend the public’s safety hangs in the balance, and that the utility’s finances must not take precedence. The utility is irredeemably flawed, some say.
“No amount of incentives, CEO compensation or board member replacement can fix a company infected with a culture of entitlement,” said Scott Hempling, a regulatory adviser and adjunct professor at Georgetown University Law Center.
PG&E believes it’s entitled “to remain the monopoly franchisee indefinitely, no matter how many rules you break, how much evidence you hide, how many felonies you commit [or] how much damage you do,” Hempling told the PUC.
To stand up to PG&E, state officials must be ready to adopt alternatives to the monopoly, investor-owned utility, he said. “We need to show that ‘too big to fail’ is a myth.”
PG&E insists it’s taking safety concerns seriously and trying to change. It announced plans this month to install a new chief executive and 11 new board members out of 13, touting the new members’ utility and safety experience. (See Former FERC Commissioner Brownell Named PG&E Chair.)
On April 22, however, PG&E provoked more public outrage by asking the PUC to increase its return on equity — a major source of profits — from 10.25% to 16% to help pay for $28 billion in fire safety and other upgrades over the next four years. (Southern California Edison, also blamed for deadly wildfires, recently requested that FERC approve a higher ROE for safety-related transmission line investments.)
“PG&E is proposing a $1.2 billion increase in its currently approved cost of capital, based on a 16% return on equity,” the utility said in a news release. The proposed increase is meant to ensure access to capital markets and would raise an average customer’s electricity bill by about 7%, it said.
“Investors must continue to play a vital role in providing the capital necessary to fund essential safety and reliability infrastructure upgrades,” CFO Jason Wells said in the statement. “These investments allow PG&E to offset the upfront, immediate costs of these long-term projects to our customers.”
Travis Kavulla, director of energy and environmental policy at the R Street Institute, a D.C. think tank, and a member of the Western Energy Imbalance Market’s Governing Body, said the applications for higher returns on equity filed by PG&E and SCE would base a quarter to a third of the companies’ future profits on predicted fire liabilities.
The utilities, especially PG&E, “have already made in essence an opening bid to say what amount of their profit is guided by wildfire-related risk,” Kavulla said. Instead, he said, profits should be connected to measurable results.
“A significant amount of this firm’s profits … should be tied explicitly to achievement of safety outcomes rather than simply being earned as a return paid on capital investments,” Kavulla said.
IOU vs. POU
In the debate about breaking up PG&E, Bere Lindley, assistant general manager of the South San Joaquin Irrigation District, a publicly owned utility, said it would make sense for some areas of PG&E’s territory to become municipal utilities. Publicly owned utilities (POUs) are governed by elected officials and responsible to customers, not shareholders, he said.
POUs have been shown, on average, to lower rates and increase reliability, he argued.
“Customers, owners and the public are the same people in the POU model. They have the same interests,” Lindley said. “The POU structure provides an elegantly simple solution to align natural stakeholder interests for a monopoly business.”
The Los Angeles Department of Water and Power, the Sacramento Municipal Utility District (SMUD) and 39 other public entities provide electric service in California. LADWP — the largest POU in the country — has 3.9 million customers; the smallest POUs serve fewer than 400 residents, according to the California Energy Commission.
Currently, only San Francisco, one of the nation’s wealthiest cities, is seriously considering acquiring PG&E’s equipment and forming a municipal utility, Commissioner Martha Guzman Aceves said. Other communities would likely lack the means, she said, leading to disparities in electric service based on wealth.
Susan Mac Cormac, a partner at corporate law firm Morrison & Foerster, moderated the panel. She said municipal utilities don’t have the resources to cover the billions of dollars in capital expenditures that PG&E likely faces to upgrade its infrastructure and cover wildfire costs. She recommended keeping the utility intact.
John Di Stasio, president of the Large Public Power Council and former CEO of SMUD, said municipal utilities often have top credit ratings and access to capital. Still, he acknowledged, local governments would face significant challenges in trying to take over from PG&E. SMUD faced difficult hurdles in attempting to annex outlying areas of Sacramento from the utility.
“This is a significant hill to climb,” he said.
One example of those challenges came from Sam Weaver, the mayor pro tempore of Boulder, Colo., who participated in the PUC forum by telephone.
Boulder has spent years battling Xcel Energy, the large IOU that serves the city, to take over its poles and lines and create a municipal utility. The results of that effort remain uncertain, and Boulder will likely pursue condemnation proceedings, Weaver said.
Even if Boulder’s municipalization effort ultimately fails, it may still achieve positive results in terms of rates and quality of service, he said.
Xcel committed in December to providing its customers with carbon-free energy by 2050, becoming the first large IOU to make such a pledge. The move was likely a response to Boulder’s pledge to provide all-renewable energy by 2030 if it created its own utility. (See Xcel Pledges to Go 100% Carbon Free.)
“It applies pressure to the [investor-owned] utility because you establish yourself as a customer, and not just as a captive ratepayer,” Weaver said.