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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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California's Blackouts Are Part Of A Far Bigger Problem

California Blackouts

This past weekend, Pacific Gas & Electric had to resume electricity blackouts to 930,000 customers affecting upwards of three million people around San Francisco. Meanwhile, two major wildfires, one of which may have been caused by malfunctioning utility equipment, are burning and evacuations are underway. PG&E has informed customers that power in the affected areas may be out for up to one week.

It would not be overstating the case to talk about an air of crisis or panic in the state. Unfortunately, good ideas to resolve difficult, thorny issues seldom arise in troubled circumstances. And California’s Governor Newsom provides us with a ready case in point.

Yesterday Bloomberg News reported that the California Governor was interested in a takeover of PG&E by Warren Buffett’s Berkshire Hathaway Corp. On its face, it sounds logical in several ways. First, Berkshire already owns utilities serving California, Oregon, Washington, Nevada, Utah. Wyoming and Idaho. PG&E would fit in. Second, Buffet notoriously has told investors to buy when there is “blood on the streets”, that is, where the investment outlook looks bleak and most investors stay away, fearful of principal risk. Presumably, the governor envisages Berkshire purchasing the PG&E’s equity at a steeply discounted price, replacing a considerable portion of the utility’s outstanding long-term debt and appointing new senior management and a new Board of Directors.

There is one difficulty here in viewing Mr. Buffett as a potential financial white knight riding to California’s rescue. The current crisis is caused by an extensive above-ground high voltage transmission network sparking wildfires in an increasingly arid environment. Stated differently, the world that this transmission system was built for no longer exists. This is a profound operational problem. Having Mr. Buffett alter the utility’s capital structure, management and board would not address these issues. The Oracle of Omaha might be amazing, but he can’t reverse the impacts of climate change and the immense operational difficulties it presents for this utility. But it would solve one problem for the Governor. Related: Pakistan’s New Energy Proposal Is A Double-Edged Sword

A crisis of this magnitude requires politicians to at least appear to act on behalf of the public good. A change in utility ownership might deflect criticism away from politicians and regulators and buy some time. But this is like a hot-potato-in-the-lap: it has to be removed immediately regardless of the consequences. Not an ideal environment for sober reflection on difficult infrastructure questions.

What compounds the present political difficulties is the unfortunate legacy of the Enron scandal in California and its political aftermath. The bottom line? Shortly after being elected to a second term Governor Grey Davis lost a recall election and became only the second governor in US history to be removed from office in this fashion. The cause? The calamitous introduction of electricity deregulation in California, complete with price spikes, dodgy energy trading, rolling blackouts and the bankruptcy of PG&E The villain then was Enron and its various schemes (one of which was literally called “Starve Granny”) to manipulate wholesale power prices. Today’s “villain” is an inhospitable climate for conventional high voltage power transmission.

Every politician in California is aware of this history.

We would propose something simple to start. Right now California needs ideas. We propose the Governor constitute a commission of energy experts with two simple mandates: do a quick 30-day assessment and then a lengthier report at the end of twelve months. What the brief assessment would do is something no politician wants to say. That is, there are relatively few steps to ameliorate this situation in the short term. But there may be a lot to do given longer time frames.

Sober policymaking in the present environment is almost all but impossible. The electric power delivery system has become problematic almost in its entirety. It's even impacting the state's electric vehicle industry. Solutions will be neither quick nor cheap. Perhaps naively, we believe that telling unpleasant truths via a commission of energy experts is the best path forward.

By Leonard Hyman and Bill Tilles

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  • Carl Eby on October 28 2019 said:
    California enviromentalists and their irresponsible mandates have finally come home to roost and the Rooster is now crowing and watch all of them run to ground-yelling it is not my fault the sky is falling!!!!

    Clear back in the 1940 the Forest representatives were calling for controlled burns to stop out of control fires, yet the environmentalist& stopped this. Back when all the midwest states in the 1950's and 1960's were establishing watershed dams to stop flooding and manage water resources responsibly the environmentalist stopped California from this as well which has contributed to their drought. These droughts then cause more problems with above ground lines.

    California's out of control fires are now contributing to pollution and deforestation, which is a major issue for climate change problem due to not manage your resources properly. Now those electric car's you wanted to charge at home are shut down because no one in state government is managing your resources wisely.

    In the midwest and southeast almost all utilities are buried underground, so what idiot state politician allowed utilities to be aboveground? Power lines are ugly so which state official took bribes to allow PGE not to incur the extra cost of burying the power lines? This is so idiotic that it baffles the mind!!!!

    Did you know in California and NY that electricity cost is 50-60% higher than natural gas yet both states will not allow natural gas connections. California will also not allow new hookups for natural gas for furnaces in new homes, so here is another case in point where some of the volume carried on natural gas lines are now required to be electric and electricity transported via above ground lines, causing more and more fires.

    California better vote these politicians out of office as based on current projections, the only people remaining are going to be the homeless and Hollywood!! Even Hollywood is going to bail with these kind of problems, but lets hope Hanoi Jane, Bette and Glenn stay in California as Canada rejected them and we sure do not want them in the other 49 states!

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