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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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Should The State Take Over Pacific Gas & Electric?

Wildfire

First by poison (Aliso Canyon), then by gas explosion (San Bruno), and now by fires (Northern California). This is no joke. There’s an almost biblical cast to crises related to California’s electric and gas utilities.

Yesterday, another shoe dropped for utility investors. PG&E Corp. omitted both common and preferred stock dividends. Since the company's shares declined about 14 percent in a day, it seems that investors didn’t fully anticipate these actions.

In a recent article, we wrote about trust and the public’s faith in local political institutions like state and county government. This issue comes up again here.

At this point, Californians should ask themselves a basic question: Who should provide electric and gas service? There are two main choices.

Either the state or one of its political subdivisions owns and operates the utilities or private, for-profit utilities continue to do so. A third alternative under consideration elsewhere is for local cooperatives to operate non-profit entities, but so far, no such agencies operate on the scale required in California.

Yesterday’s dividend cut announcement by PG&E laid the blame for this action squarely at foot of California’s courts. Specifically, the company cited the court’s "inverse condemnation” doctrine. From the perspective of PG&E’s management this means, “Even though we don’t believe we caused those fires, we’ll probably still have to pay liability settlements of large but indeterminate amounts.”

Related: The Man Behind The Oil Price Rally

But this only tells half the story. What happens after the flames are extinguished and life gradually returns to normal? The utility companies will rebuild their destroyed systems, reconnect customers and shortly thereafter seek payment for their extensive work from the state’s public utility commission.

But there’s always something. Could state regulators in good conscience compensate the states’ utilities in full for these new (rebuild) investments if the courts found them legally liable for causing these conflagrations in the first place?

Given the accumulated level of public grievance (real or imagined) as well as emotion, this issue may migrate into the political realm. If so, politically sensitive regulators may find it difficult to fully and adequately (in the minds of investors) compensate private, for-profit utilities for these system rebuilds in recently ravaged areas. This line of reasoning may also have been behind management’s decision to omit dividends.

If we look to the future, the basic utility issue in California goes back to trust. Who will do a better job of providing a basic, essential services like electricity and gas?

It’s now possible that the state’s three investor-owned utilities (PG&E, SCE and SDG&E) have collectively lost the public’s confidence. There are other locally available utility ownership options on offer in California, notably the Los Angeles Department of Water and Power (LADWP) and the Sacramento Municipal Utility District (SMUD) which together serve 5.4 million people.

If the courts as well as the state’s PUC ultimately prove less than financially supportive, the individual ratepayers and investors both stand to lose. The desire for punishment in the present context is understandable. But ultimately it doesn’t help keep the lights on and eventually ill serves the broader community as well with deteriorating public services.

Related: The Drastic Drop Off In U.S. Oil Imports

In addition, we haven't even begun to address the lingering environmental uncertainty here. Are wildfires of this type and magnitude the ‘new normal’? If the courts continue to blame utilities for these fires and the state's utility commission piles on punitive regulatory rulings afterward, it will be impossible to run a for-profit utility in California.

Rather than being consumed with protracted legal and regulatory fights, perhaps Californians would be better served by focusing immediately on government or not-for-profit utility ownership as an alternative. In other words, buy out the existing utilities, transform them into not-for-profit entities—and get on with life.

By Leonard Hyman and Bill Tilles

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  • TWray on December 24 2017 said:
    What a joke to think that the state would have the ability to operate a utility. Look at happened during the energy crisis, which the state caused by their attempt at deregulation. PG&E was forced to purchase energy at wildly inflated prices, which where above their operating cost. As a result, the Utility went bankrupt and the state stepped in to purchase power. Drew Davis signed 20 year power purchase agreements, which we are still suffering from as California currently has one of the highest rates in the country. PG&E has been in business well over one hundred years and knows how to operate their system and keep the lights on. What they can’t control are droughts and crazy liberal judges and legislators. Let the state take over the utilities? You have to be crazy, even to suggest it!
  • John Scronce on December 24 2017 said:
    I dont think the state would do any , looka the dams maintained by CADWR in Oroville.
  • Daniel William Thorne on December 25 2017 said:
    NO!!!!!! The government in California can barely run the state let alone a power company. Look whether or not it's a for profit or not for profit either the power company will suck the customer dry or the state will tax everyone to death. The cpuc isn't doing it's job.
  • BTilles on December 26 2017 said:
    Hi T Wray,

    "What they can't control are droughts and crazy liberal judges and legislators." That is precisely our point. If PG&E's management can no longer effectively control (or limit the damage from) these things, then perhaps it is becoming impossible to operate a for profit business.

    Hi John Scronce,

    Unlike the state dam example you cited, municipal electric utilities pay for themselves via custoner's electric bills. As a result they typically have access to all the "maintenance" funds they need. If not they raise prices to cover their costs.
  • Mark on December 29 2017 said:
    The energy crisis was caused by multiple issues. Enron was gaming the system which is why the CEO & CFO were prosecuted & received a prison sentence. SDG&E had completed its requirements to free itself from the state rate freezes which neither PG&E nor SCE had completed. That is why SDG&E did not need state financial support because they merely passed the higher costs onto their customers like any for-profit business does. The other 2 utilities were operating under a rate freeze & could not pass off the higher costs to their customers which is why they faced bankruptcy. Finally, while the state's DWR (Dept of Water Resources) bought supply contracts on behalf of the 3 utilities. Some of those had to occur on the spot market while the other contracts were purchased for much longer terms to help lower their costs. There are other contributing factors to what occurred but they are not the main cost contributors. A few years later the DWR renegotiated many of their long-term contracts either lowering the rates or cutting the terms of the contracts once more generation, ie competition, was available. The most notable issue was that residential rates were capped at below the cost of electricity while commercial rates were allowed to float. Commercial rates rose to cover the imbalance created by the residential rate cap. After the DWR contracts were renegotiated & prices began to drop, residential rates were kept at artificially higher rates, at the rate cap, to reimburse commercial accounts which had previously paid for the imbalance. That should be mostly cleared by now. Issues that complicated the deregulation included that customers were able to switch between utility serviced electricity provision & electricity provided by private enterprise. When rates began to rise, customers returned to the utility serviced electricity which was lower for customers in the PG&E & SCE regions. Until the DWR began negotiating long-term contracts, the provision of power was handled on the short-term spot market because the utilities were not permitted to negotiate long-term contracts. As the DWR completed its contracting, commercial accounts were free to leave the utility provided service for private enterprise power provision. This led to those commercial accounts being required to pay for the DWR negotiated contracts as well. Later the utilities & the CPUC would sort out the contracted overage & determine if refunds were due to commercial accounts which had been double billed for their electricity. As a result of this deregulation & Enron created crisis, Governor Gray Davis would be recalled.

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