Tag Archives: wildfires

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.

Should California just buy PG&E?

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Governor Gavin Newsom asked Warren Buffet to use Berkshire-Hathaway to buy PG&E. Berkshire-Hathaway has been acquiring utilities throughout the West including PacifiCorp and Nevada Power. However, other than deep pockets, it’s not clear what Buffet has to offer in this situation.

PG&E’s stock fell as low as $3.80 per share on Tuesday, closing at $5.03. The total market value, including the natural gas utility, is now $2.66 billion. The invested book value on the other hand is about $26 billion.

Not sure why California doesn’t just buy the company for, say, $5B instead of appealing to an out of state private owner. Several state legislators, including a key state senator, Bill Dodd, have expressed support for some sort of state acquisition. Then the state can either parse it out to public utilities, set up a cooperative or bid out the franchises to multiple operators or owners. Ratepayers/taxpayers will have to pay most of the wildfire liabilities anyway, so why not remove the high-cost (and apparently incompetent) middleman?

PG&E hijacks its own website

PG&E PSPS website clip

I was looking for PG&E’s 2019 Catastrophic Events Memo Account (CEMA) on its website at https://www.pge.com/en_US/about-pge/company-information/regulation/regulation.page, and instead I was redirected to PG&E’s PSPS website at https://www.pgealerts.com/. It does not appear possible to get around this website to the regulatory filings that PG&E maintains on its website.

I guess that’s one way to get enough bandwidth after crashing its website during the PSPS blackouts.

PG&E apologizes, yet again

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(Image: ABC 7 News)

I listened to PG&E’s CEO Bill Johnson and his staff apologize for its mishandling of the public safety power shutoffs (PSPS) that affected over 700,000 “customers” (what other industry calls meters “customers”?) yesterday. And as I listened, I thought of the many times that PG&E has fumbled (or even acted maliciously) over the years. Here’s my partial list (and I’m leaving out the faux pas that I’ve experienced in regulatory proceedings):

  • Failing to turn off power locally in 2017 and 2018 under hazardous weather conditions, which led to the Wine Country and Camp fires.
  • Failing to install distribution shut off equipment that was installed by San Diego Gas & Electric and Southern California Edison after the 2007 wildfires in Southern  California.
  • Signing too many power purchase agreements with renewables in the 2009 to 2014 period that were for too long of terms (e.g., 20 years instead of 10 years). PG&E is unable to take advantage of the dramatic cost decreases created by California’s bold investments. For a comparison, PG&E’s renewable portfolio costs about 20% more than SCE’s. (I am one of a few that has access to the confidential portfolio data for both utilities.)
  • Failing to act on the opportunity to sell part of its overstuffed renewable portfolio to the CCAs that emerged from 2010 to 2016. Those sales could have benefited everyone by decreasing PG&E’s obligations and providing the CCAs with existing firm resources. That opportunity has now largely passed.
  • The gas pipeline explosion in San Bruno in 2010 caused by PG&E’s failure to keep proper records for decades. PG&E was convicted of a felony for its negligence.
  • Overinvesting in obsolete distribution infrastructure after 2009 by failing to recognize that electricity demand had flattened and that customers were switching en masse to solar rooftops. (I repeatedly filed testimony starting in 2010 pointing out this error.)
  • Deploying an Advanced Meter Infrastructure (AMI) system starting in 2004 using SmartMeters that claimed that it would provide much more control of PG&E’s distribution system, and deliver positive benefits to ratepayers. Savings have largely failed to materialize, and PG&E’s inability to use its AMI to more narrowly target its PSPS illustrates how AMI has failed to deliver.
  • Acquiring and building three unneeded natural gas plants starting in 2006. Several merchant-owned plants constructed in the early 2000s are already on the verge of retiring because of the flattening in demand.
  • Failing to act in May 2000 to end the “competitive transition” period of California’s restructuring by agreeing to the market valuation of its hydropower system.
  • If PG&E had ended the transition period, it would have been immediately free to sign longer term contracts with merchant generators, thereby taking away the incentive for those generators to manipulate the market. The subsequent energy crisis most likely would have not occurred, or been much more isolated to Southern California.
  • PG&E’s CEO in 1998 made a speech to the shareholders stating that it was PG&E’s intent to extend the transition period as far as possible, to March 2001 at least. (We cited this speech from a transcript in the 1999 GRC case.)
  • Offering rebuttal in the 1999 GRC that instead confirmed the ORA’s analysis that the optimal size of a utility is closer to 500,000 customers rather than 4 million plus. Commissioner Bilas wrote a draft decision confirming this finding, but restructuring derailed the vote on the case.
  • Being caught by the CPUC in diverting $495 million from maintenance spending to shareholders from 1992 to 1997. PG&E was fined $29 million.
  • Forcing the CPUC in 1996 to adopt the “competitive transition charge” which was tied to the fluctuating CAISO day-ahead market price instead of using Commissioner Knight’s up front pay out for stranded assets. The CTC led to the “transition period” which facilitated the ability of merchant generators to manipulate the market price.
  • Two settlement agreements allow PG&E to fully recover its costs in Diablo Canyon by January 1, 1998 based on its authorized rate of return from 1986 to 1998, but also allows it to put into ratebase about half of its “remaining” construction costs as a prelude to restructuring.
  • Getting caught in 1990 telling FERC that PG&E was short resources and needed to build more, while telling the CPUC that it had a long term surplus and that it needed to curtail its payments to third-party qualifying facilities (QF) generators.
  • In the early 1980s, failing to set up a rationale process for signing QF contracts that limited the addition of these resources. In addition, PG&E missed an important pricing calculation mistake in the capacity payment term that led to a double payment to QFs.
  • In the 1970s, making many construction management mistakes when building the Diablo Canyon nuclear power plant, including reversing the blueprints, that led to the costs rising from $315 million to over $5 billion. (And Diablo Canyon in 3 of the last 5 years has operated at a loss and should not have been generating for several months each of those years.)
  • In the 1960s, signing an agreement with Sacramento Municipal Utility District (SMUD) to finance the construction of the Rancho Seco nuclear plant that essentially gave SMUD free energy when Rancho Seco wasn’t generating. The result was the mismanagement of the plant, which was so damaged that it was closed in 1989 (in part as a result of analysis conducted by the consulting team that I was on.)

The other two California IOUs are guilty of some of these same errors, and SMUD and Los Angeles Department of Water and Power (LADWP) also do not have a clean bill of health, but the quantities and magnitudes to don’t match those of PG&E.

CPUC proposes radical restructuring of PG&E

104778251-gettyimages-861000956In PG&E’s safety order institution investigation (OII), outgoing CPUC President Michael Picker (along with senior administrative law judge Peter Allen) has put on the table four dramatic proposals to address governance and incentive issues at the utility. These proposals are:

  1. Separating PG&E into separate gas and electric utilities or selling the gas assets;
  2. Establishing periodic review of PG&E’s Certificate of Convenience and Necessity (CPCN);
  3. Modification or elimination of PG&E Corp.’s holding company structure; and
  4. Linking PG&E’s rate of return or return on equity to safety performance metrics.

The OII originally was opened to investigate PG&E’s management of its natural gas infrastructure, but the series of electricity-sparked wildfires reinfused the OII with a new direction. The proceeding has been a forum for various dramatic proposals on how to handle wildfire-related issues and PG&E’s subsequent bankruptcy filing.

 

PG&E fails to provide safety support in Davis

This article on a local webnews site, the Davis Vanguard, describes how PG&E was slow to respond and has since failed to communicate with homeowners about subsequent measures to be taken. Note that in this case, the power lines run down an easement through the backyards of these houses. 

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.