Balkanizing PG&E won’t be foolproof or fireproof
The possibility of a state takeover or a breakup of California’s Pacific Gas & Electric (PG&E) is still among the possibilities as the fate of the bankrupt utility hangs in the balance; however, turning all or parts of the company into smaller government-run enterprises might not be the best way to go, industry observers warned.
The main event in the ongoing bankruptcy case would seem to be over dueling bankruptcy plans out of San Francisco and Wall Street. There is also a third possibility that has been floated by the political side of the state: the idea that Californians would be better off if the state took over PG&E outright or broke the investor-owned utility (IOU) up into a collection of smaller municipal power companies. The theory goes that removing PG&E’s investors from the equation would keep a lid on rates and earmark funds for the hardening of transmission lines to help prevent devastating wildfires like the ones that pushed PG&E into bankruptcy in the first place.
The idea has not gotten much traction so far, but California Gov. Gavin Newsom reminded the state and the utility industry in his January budget announcement that the idea of a state takeover was an option that was still on the table. “The budget reflects necessary support for the Administration’s efforts to achieve the required transformation of PG&E within the bankruptcy process,” said the budget proposal.
“However,” the proposal continued, “if protecting Californians’ interests and ensuring the necessary transformation requires further intervention, including a state takeover of the utility, the Administration will work with the Legislature to secure necessary statutory changes, appropriations to support transactional and planning costs, and liquidity measures.”
But shifting one of the nation’s largest utilities from the IOU it has been for decades to a ward of the state or a constellation of small, regional entities would take some Herculean doing. And utility experts say these local gas-and-electrics would face the same daunting issues that PG&E faces with only a fraction of its resources. But would it be worth the time, money, effort, and even more money that it would take for the state to acquire PG&E or for smaller government entities and agencies to break it up into a collection of local government utilities?
“These are the right questions to ask,” said Emily Fisher, General Counsel & Corporate Secretary for the Edison Electric Institute, the association that represents U.S. investor-owned electric companies. “What problems would municipalization solve? That’s not clear.”
The big thing that municipalization won’t solve, Fisher told Daily Energy Insider, is the legal hazard known as “inverse condemnation.” This Catch 22 makes utility companies responsible for damages caused by their equipment, including power lines that snap or spark during California’s dreaded Santa Ana winds and trigger brush fires. Negligence on the part of any utility is not a factor in whether it must pay, and Fisher said a government-owned power company would not be exempt from inverse condemnation in the event of another fire that destroys entire neighborhoods, if not towns. “It applies equally, if not more so, to public entities,” she said. “And these public entities would likely have far fewer resources than PG&E to address these situations.”
Fisher pointed out that Newsom and the state legislature have thus far declined to make any adjustments to inverse condemnation that might help PG&E emerge from bankruptcy or shield any other utility in the state – public or IOU – from avoiding a similar fate. The law, she said, was not designed as a “deep pockets” option for homeowners to recover their losses, but rather a way for local governments to “socialize” the costs of a disaster by requiring everyone to chip in.
In the case of a utility, the cost recovery would come through an increase in customer rates across its entire service area. PG&E reports that it has 5.4 million customer accounts; a smaller local utility would have far fewer. “That money either comes from the customers or from the taxpayers and there is going to be a lot of overlap between the two,” said Fisher, who added that the rising cost of fire insurance in high-risk areas, aggravated by regulations limiting rate hikes for reinsurance purposes, means that “a lot of people are chronically under-insured.”
At the same time, utilities may find themselves taking over PG&E’s task of hardening its electric grid against such calamities, including the ongoing, labor-intensive chore of vegetation management. “PG&E needs to make investments to make lines more resistant to fire, but it’s a huge system that covers a lot of rural terrain,” Fisher said.
Hardening the grid could be financially daunting for a local utility, which could require the floating of new bonds in a sophisticated market better suited for an investor-owned utility.
Despite the level of public irritation at the financial dilemma PG&E has found itself in, the company still has a high level of flexibility in the capital markets and can offer consistent dividends to stockholders. The price of PG&E Corporation’s shares were slightly above $13 on Jan. 21 compared to a 52-week range of $3.55 to $25.19 per share.
Fisher said, “Ours is the most capital-intensive industry in the U.S. and PG&E is still attractive to investors.”
