In 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:
- Separating PG&E into separate gas and electric utilities or selling the gas assets;
- Establishing periodic review of PG&E’s Certificate of Convenience and Necessity (CPCN);
- Modification or elimination of PG&E Corp.’s holding company structure; and
- 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.
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.
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.
M.Cubed partner Steven Moss wrote this editorial “Publisher’s View: Pacific Gas and Electric Company” in the Potrero View on how PG&E might move forward into the future.
The California Legislature is still struggling with whether and how it should protect PG&E from a $17 billion liability from the Sonoma wildfires that could push the utility into bankruptcy. The latest proposal would have the CPUC conduct a “stress test” on PG&E’s finances if it faced a large liability, and then PG&E could raise rates sufficiently to cover the difference between the total liability and exposure deemed sufficient to maintain financial solvency. We don’t have enough details to understand how well the stress threshold is defined and how it would differ from the current cost of capital evaluations, but this is a bad idea regardless.
Firms need the threat of bankruptcy to perform efficiently and effectively. We’ve already seen how PG&E manages and performs sloppily, whether its maintaining vegetation (which has been a problem since the early 1990s), tracking its pipeline maintenance (which led to the San Bruno accident), or managing risk in its renewable power portfolio (which has added a $33 per megawatt-hour premium to its cost.) Clearly CPUC oversight alone is not doing the job. Outside litigation may be the only way to get PG&E’s attention, especially if it creates an existential threat.
Policymakers have taken the wrong lesson from PG&E’s previous bankruptcy, filed in 2001 during the California energy crisis. The issue there that lead to the final resolution was whether PG&E was required to provide power to its customers at whatever cost. This situation is not about PG&E’s obligations but rather about its management practices, and a bankruptcy court is much less likely to require a cost pass through.
Instead, the state could simply step in buy PG&E for $1 if the utility declares bankruptcy (an option that Governor Gray Davis was too much of a coward to consider in March 2001.) The state could then directly manage the utility, or better yet, parse it down to eight or ten smaller utilities. (Two studies in PG&E’s 1999 General Rate Case, and the subsequent decision, found that the most efficient utility size is about 500,000 customers. PG&E now has over four million.) Customers would find the utilities more accessible and responsive, and by creating municipal utilities, rates could be much lower with cheaper financing cost. It’s time to rethink where we should head.