Public takeover of PG&E isn’t going to solve every problem

This article in the Los Angeles Times about what a public takeover of PG&E appears to take on uses the premise that such a step would lead to lower costs, more efficiencies and reduced wildfire risks. These expectations have never been realistic, and shouldn’t be the motivation for such an action. Instead, a public takeover would offer these benefits and opportunities:

  • While the direct costs of constructing and repairing the grid would likely be about the same (and PG&E has some of the highest labor costs around), the cost to borrow and invest the needed funds would be as much as 30% less. That’s because PG&E weighted average cost of capital (debt and shareholder equity) is around 8% per annum while muncipal debt is 5% or less.
  • Ratepayers are already repaying shareholders and creditors for their investments in the utility system. Buying PG&E’s system would simply be replacing those payments with payments to creditors that hold public bonds. Similar to the cost of fixing the grid, this purchase should reduce the annual cost to repay that debt by 30%.
  • And along these lines, utility shareholders have borne little of the costs from these types of risks. Shareholders supposedly get a premium on their investment returns for these “risks” but when asked for examples of large scale disallowances, none of the utilities could provide significant examples. If ratepayers are already bearing all of those risks, then they should get all of the investment benefits as well.
  • Direct public oversight will eliminate a layer of regulation that PG&E has used to impede effective oversight and deflect responsibility. To some extent regulation by the California Public Utilities Commission has been like pushing on a string, with PG&E doing what it wants by “interpreting” CPUC decisions. The result has been a series of missteps by the utility over many decades.
  • A new utility structure may provide an opportunity to renegotiate a number of overly lucrative renewable power purchase agreements that PG&E signed between 2010 and 2015. PG&E failed to properly manage the risk profile of its portfolio because under state law it could pass through all costs of those PPAs once approved by the CPUC. PG&E’s shareholders bore no risk, so why consider that risk? There are several possible options to addressing this issue, but PG&E has little incentive to act.
  • A publicly-owned utility can work more closely with local governments to facilitate the evolution of the energy system to meet climate change challenges. As a private entity with restrictions on how it can participate in customer-side energy management, PG&E cannot work hand-in-glove with cities and counties on building and transportation transformation. PG&E right now has strong incentives to prevent further defections away from its grid; public utilities are more likely to accept these defections with the possibility that the stranded asset costs will be socialized.

The risks of wildfire damages and liabilities are unlikely to change substantially (except if the last point accelerates distributed energy resource investment). But the other benefits and opportunities are likely to make these costs lower.

1 thought on “Public takeover of PG&E isn’t going to solve every problem

  1. Pingback: PG&E’s bankruptcy—what’s happened and what’s next? | Economics Outside the Cube

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s