Tag Archives: risk and vulnerability

Non-Profit Utilities Could Cure What Ails California Electricity

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Severin Borenstein at the Energy Institute at Haas, asks “Would Non-Profit Utilities Cure What Ails California Electricity?” I am posting my response here as that I find his post overlooks several important points and distinctions.

I’ll start by saying I wrote an op-ed in the Sacramento Bee in the early 2000s noting that creating a new municipal utility was not going to deliver the same low rates as existing munis and I’m still aware that such a transfer is unlikely to reduce rates much. But it does change the governance structure in a way that is likely to be more accountable and less influenced by the private interests of utility shareholders. Communities are joining together to push for acquisition of PG&E by a cooperative, which would have a similar governance structure to a municipal utility.

First, the complaint about government is largely about agencies that I will call “ministerial” or “administrative”. These agencies issue permits and licenses or provide social services. In contrast, the government agencies that deliver utility services, which are “enterprises” largely deliver service with few complaints. About 80% of water utilities and almost all wastewater utilities are publicly owned. I work in the water arena as well, and the only utility that I hear complaints about from customers is LADWP (both water and power sides). (The SDCWA-MWD fight is between agencies’ managements, not from customers). On the other hand, all three or California’s electric IOUs are the target of customers’ ire. And the IOU staffs (which I have frequent contact with) are no better than government employees in their responsiveness or competence. One advantage the enterprise agencies have over the ministerial/administrative ones is that they generally pay a higher salary so employees are motivated in much the same way as those in the private sector. Moving from oversight by a ministerial/administrative agency (CPUC) to management by an enterprise utility should overcome the problem of recruiting competent motivated staff.

Second, shareholders shoulder very little risk now, particularly in California. I testified in the IOUs’ rate of return case and we asked for the amount of disallowances that shareholders had to bear over the last two decades. Other than SDG&E’s 2007 wildfire costs due to negligence on the utility’s part, they came pack with amounts that were in the tens of millions, which amounts to less than a 0.1% of their revenues collected over that period. Utilities’ generation investment is now so protected that the CPUC reversed itself last year and removed the 10 year recovery cap from exit fees for generation that the utilities built knowing the cap existed. They are now getting bonus dollars! (Same thing happened with Diablo Canyon in 1996.) Yet the utilities are claiming in that rate case that the return on equity should be increased even further! I have a blog post about how the current return is already too high. (Part 2 is the next day.)  Public ownership in contrast can reduce the return on capital from close to 10% (before tax) to 5% or less, which can cut rates substantially.

We can see how PG&E in particular has been incompetently managed for decades. I posted about its many foibles since the 1960s as well. The supposed incentives and efficiencies of the private sector have failed to materialize for California utilities, and meanwhile we pay higher costs for capital with no real risk mitigation. (Ratepayers still had to pay for PG&E’s debts after the 2000-01 energy crisis, and it looks like the same may happen again.)

Finally, the question arises as to whether municipalizing piecemeal would create inequities. The premise of the statement is that the current economic distribution is equitable. But the fact is that rural residential customers in the wildland/urban interface (WUI) have not been paying their full share of their costs and have been heavily subsidized by urban customers. Those customers in the WUI tend to be better off than average (poor rural customers are more likely to live in agricultural communities that are not subject to the same fire risks and for whom service costs are lower), so we already have an adverse wealth transfer in place. And those subsidies have facilitated expansion of housing into those high risk areas that also encourage longer commutes with more GHG emissions.

The better question is how can the rural service areas be better served in the future without relying on the traditional utility structure? Moving toward microgrids and other DER solutions to improve reliability while reducing fire risk is one solution. Spending a $100 billion on undergrounding lines to be paid for by everyone else is NOT a good solution.

What should strict liability look like for wildfire costs?

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Governor Newsom, the Assembly Speaker and Senate Pro Tem have publicly opposed eliminating the strict liability doctrine applicable to utilities for allocating responsibility for wildfire costs.

Maintaining inverse condemnation better assures wildfire victims that they will receive at least some compensation for their damages. However, there needs to be a limit on the types of damages that can be collected if the utilities are allowed to pass through those costs to ratepayers will little review.

Punitive damages are intended to incent the bad actor to fix the problem. But if that bad actor–the electric utility in this case–is shielded from most or all of the punitive damages, then they will have no incentive to change their behavior. Why should they if what they are doing now is costless?

Only if utility shareholders must bear 100% of all punitive damages and the proportion of damages attributable to negligence should the remaining costs be passed through to ratepayers in this situation. Only in this way can California derive the benefits of privately-owned utilities. If these conditions are unacceptable to shareholders, then the only alternative is public ownership so that ratepayers can reap both the benefits and risks of asset ownership.

 

The two problems to be addressed head on by nuclear power advocates

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Nuclear power advocates bring up the technology as a supposedly necessary part of a zero-GHG portfolio to address climate change. They insist that the “next generation” technology will be a winner if it is allowed to be developed.

Nevertheless, nuclear has two significant problems beyond whatever is in the next generation technology:

  1. Construction cost overruns are the single biggest liability that has been killing the technology. While most large engineering projects have contingencies for 25-30% overruns, almost all nuclear plants have overruns that are multiples of the original cost estimates. This has been driving the most experienced engineering/construction firms into bankruptcies. Until that problem is resolved, all energy providers should be very leery of making commitments to a technology that takes at least 7 years to build.
  2. We still haven’t addressed waste disposal and storage over the course of decades, much less millennia. No other energy technology presents such a degree of catastrophic failure from a single source. Again, this liability needs to be addressed head on and not ignored or dismissed if the technology is to be pursued.

California utilities continue to ask ratepayers to shoulder more and more risk

Wine Country wildfires may have been caused by PG&E electrical lines.

PG&E proposed to the California Public Utilities Commission in an ex parte meeting with a Commissioner that ratepayers rather than shareholders should bear the liability costs from the Wine Country fires. This is part of a larger pattern where the investor-owned utilities have pushed off procurement and management risks onto ratepayers. Yet, the IOUs continue to ask for investor returns that reflect much higher shareholder risks at 14% pre-tax.

If ratepayers are not getting the single most important benefit from investor-owned utilities–that is risk insurance–then it may be time to consider cutting our the middleman–the shareholder–and just go with public ownership. In the end, it looks like there will be no real differences in costs and risks, and we are no longer unduly enriching the wealthy who hold shares in the utilities.

William Nordhaus now urges a more dramatic response to climate change – CSMonitor.com

William Nordhaus has long relied on traditional economic cost-benefit analysis to minimize the costs to the world economy from potential climate change impacts. This article discusses how he now views the increasing risk, the continuing uncertainty, and the likely increasing costs from delayed responses as driving the need for a more rapid effort.

Source: Why a climate economist is giving carbon’s ‘social cost’ a second look – CSMonitor.com