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Would Non-Profit Utilities Cure What Ails California Electricity?

Converting an investor-owned utility to a non-profit is no silver bullet.

Wildfires, possibly sparked by electrical lines, are still burning here in California, and there is no rain in the forecast. In policy circles and the media there are endless discussions of the right response, many of which confuse two crucial, but quite separate questions: What should be done in the next few months to get through the worst of our fire season? And what should be done in the next few years to address the sad state of some of the electricity infrastructure, the bankruptcy of the state’s largest utility (Pacific Gas & Electric), and the growing wildfire threat from climate change?

IOU-POU-CoopCounties

The discussion dominating Northern California politics and media in the last week has been whether PG&E – the bankrupt utility whose equipment has sparked the most devastating fires – should be converted, in whole or in part, to a non-profit customer-owned cooperative or publicly-owned utility (POU). There are some technical distinctions between public and customer ownership, but they are minor compared to the drastic change from for-profit investor ownership. We will get to the “in part” conversion proposals below, but first let’s talk about non-profit utilities more generally.

IOU-POU-CoopSharesWhy Should Electric Utilities Be Different From Other Businesses?

The U.S. economy has thrived with most goods and services produced by private, for-profit companies competing to sell their products. History has shown that the lure of profits generally leads firms to be more innovative and more effective at controlling costs.  Almost no political leaders in the country, even those on the most progressive end of the Democratic Party, argue that we should move very far from that model. Not even “Medicare for All” is a call for government ownership of drug companies or hospitals. So, why should electricity be any different?

Well, actually there are a couple of common arguments. The first, and I think less persuasive, is that electricity is too important to be left to for-profit companies that are not operating with the public good as their primary mission. While electricity is important, so are food, housing, drugs, gasoline, telecommunications and many other industries that are served by competitive privately-owned firms.

The more compelling argument is that a competitive market is simply not an option when it comes to providing electricity transmission and distribution services — two of the primary activities of electric utilities today. Either we have public ownership or we have local investor-owned utility (IOU) monopolies operating under stringent economic regulation. Deregulation has benefited the country in natural gas production, airlines, gasoline, trucking, and numerous other industries, including electricity generation. But transmission and distribution remain natural monopolies, for which there is no credible model of a competitive market.

So, the choice is government/coop ownership or government-regulated IOUs. Given the horrendous fires we’ve seen in the service territories of California’s IOUs, many people now see government ownership as a better choice. Yet, it isn’t hard to come up with examples of non-profits that have failed their customers. Puerto Rico’s public electric utility (PREPA) after hurricane Maria is the most horrendous example. Nor is it hard to come up with California government agencies that its residents love to hate, from the state’s Department of Motor Vehicles to local planning departments that review building permits.

Do Utility Profits Harm Safety and Reliability?

One of the most frequent arguments against IOU’s is that the need to earn profits discourages private utilities from spending money on safety and reliability. But that’s not clear at all if the regulator — the California Public Utilities Commission (CPUC) in this case — allows the utility to pass through prudent costs to ratepayers. Utilities are generally fine with spending the ratepayers’ money on safety and reliability, but it takes effective regulatory oversight to make sure the expenditures are actually delivering as promised.

To do that, however, the state has to fund the regulatory agency and pay its employees at a level that assures real oversight. From talking to CPUC personnel — and to my own students who have declined to apply to the CPUC or left after a couple years due to low salaries – it’s clear to me that California is failing to provide the resources for effective oversight.WildfireAroundTransTowers

In fact, many advocates for public or customer ownership are also the most outspoken critics of the CPUC. If they think that the CPUC, a state agency, is such a failure, why are they so confident that a government agency (or a non-profit coop) running the utility will be a success?

Do Profits Raise Costs?

Paying profits to shareholders is also held up as a problem because IOUs must earn higher revenues to make those payments. Well maybe, but non-profit utilities also face a cost of raising capital. They just do it all through selling bonds, and paying interest on them, rather than also selling equity and paying returns to shareholders.

Nonetheless, advocates of public power note that the interest rate on public utility bonds is typically lower, which is true. But why is that? One reason is the favorable tax treatment of local government bonds, which is, of course, not an efficiency, but just a subsidy from the federal government. There may be an argument for grabbing that subsidy, but let’s also recognize that paying for those subsidies means that either federal taxes have to rise or federal expenditures on other public services have to fall.

A second reason is that the local or state government backing the bonds of a POU is taking on risk that shareholders would bear under an IOU. Think about what happens when the power lines of a POU start a wildfire that damages property and takes lives. The liability would then be on the government entity, which would have to cover the cost to the victims and still make good on the bonds, or it would have to declare bankruptcy.

PGEServiceAreaandPopDensitySolving the Problem for All Customers

It’s not a coincidence that the first area to advocate for making their part of PG&E territory into a public entity has been the city of San Francisco, an urban area in which the power lines pose very little wildfire risk. It is possible that PG&E is too big, and the best solution is to break it up, but it is certain that carving off the low-fire-risk areas will leave the more wooded and rural — and, on average, poorer — parts of its service territory where the fire risk is highest. No one is going to want to be the public (or investor-owned) power provider for those areas unless someone else covers the wildfire liability. Without a holistic plan to provide power in all of PG&E’s service territory, cherry picking what are now the low-cost areas will just create massive wealth transfers and exacerbate inequality.

And, by the way, San Francisco gets nearly all of its electricity from other parts of the state. How do you think that power gets to the city?ElecCoopsMap

None of this is an argument that non-profit power would necessarily be worse (or better) than having an investor-owned utility running PG&E’s system. Some studies have suggested that public power agencies have lower retail prices, but it is very difficult to know how much of that is driven by service territory differences, state energy policies, tax advantages, access to cheap federal hydropower, or historical accident.  In any case, the last few years has made clear that there is a lot more to being a successful or unsuccessful utility than rates.

What’s clear to me is that converting PG&E to a public or cooperatively-owned utility would not be the silver bullet that creates a more efficient, reliable and safety-oriented electricity provider for Northern California. It would at best be just the beginning of a long road to re-invent the utility. And in the meantime we also need to figure out how to get from here to the next rainy season, which can’t come soon enough.

Would a Non-Profit Utility Cure What Ails California Electricity?

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Suggested citation: Borenstein, Severin. “Would Non-Profit Utilities Cure What Ails California Electricity?” Energy Institute Blog, UC Berkeley, November 12, 2019, https://energyathaas.wordpress.com/2019/11/12/would-non-profit-utilities-cure-what-ails-california-electricity/

 

Severin Borenstein View All

Severin Borenstein is E.T. Grether Professor of Business Administration and Public Policy at the Haas School of Business and Faculty Director of the Energy Institute at Haas. He has published extensively on the oil and gasoline industries, electricity markets and pricing greenhouse gases. His current research projects include the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. In 2012-13, he served on the Emissions Market Assessment Committee that advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. He chaired the California Energy Commission's Petroleum Market Advisory Committee from 2015 until its completion in 2017. Currently, he is a member of the Bay Area Air Quality Management District's Advisory Council and a member of the Board of Governors of the California Independent System Operator.

25 thoughts on “Would Non-Profit Utilities Cure What Ails California Electricity? Leave a comment

  1. This 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.

    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 customer). On the other hand, all 3 or California’s 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 blog post today about how the current return is already too high. (Part 2 is tomorrow.) https://mcubedecon.com/2019/11/12/utilities-returns-are-too-high-part-1/ 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: https://mcubedecon.com/2019/10/14/pge-apologizes-yet-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.

  2. Severin — don’t you have your arguments mixed up? Clearly electricity T and D is currently a natural monopoly and maybe it should stay that way (though one can think of plausible alternatives – another argument for another time). But you seem to equate or confuse the ‘importance of electricity’ – as delivered by a sole provider (monopoly) with other important goods and services “food, housing, drugs, gasoline, telecommunications”, as (mostly) delivered via competitive markets (the exception, it seems to me, is the area of very specific – mostly non-generic – drugs). I won’t try to argue that food, gasoline, telecommunications, etc. aren’t important (though electricity may be first among equals), but clearly I have choices and if one of my usual providers of food goes on strike or raises their prices, etc., I can always go to other stores – and now I can go to competing cell phone services too. So I fail to see the persuasiveness of citing these types of alternatives as shooting down the idea that having a robust supply of electricity is too important to be left to a private utility whose mission is mixed, at best. In fact, I would argue the issue of having an almost fail-safe supply of electricity is only going to become more important as we decarbonize large chunks of our energy economy (e.g., buildings and transportation) and thus become ever-more-dependent on electricity.

    You cite as PREPA as an example of a failure by a non-profit (government owned?) utility, but surely you recognize that the socio-economic and political situation in which that utility is embedded is far different than that experienced by most/all utilities in the US. You don’t cite SMUD or LADWP as failures? Are they? Arguably SMUD made a huge mistake a number of years ago with Rancho Seco, but as far as I can tell they seem to have recovered. BPA and the assorted PUD’s in the Pacific NW seem to be doing well by their customers (my only data points are from relatives living in their service territories).

    Seems to me there is also the lesson learned right here in CA after the private utilities sold off most of their thermal generation, Enron manipulated the electricity supply market to the significant detriment of the state (and itself). All this having been said, I agree that converting PG&E into a publicly owned entity (-ies) may not be a universal silver bullet. But its also clear that what we have now isn’t likely a good model for what we need in the future, especially one that’s almost completely electrified.

    BTW, the recent experiences of my circle of friends with the (your red-herring example) DMV – for getting real-ID’s – has been decidedly mixed – for some of us it was a piece of cake — others more like a root canal – YMMV

  3. Based on several decades of work in the federal, private, and public sectors (as well as a few years in academia), there are no silver bullets anywhere. I’ve seen well-run utilities of all ilks, but also flaws across the board. The asymmetric information often touted as undermining FERC and state PUCs has a public analogy if City Councils are not fully informed of the implications of their choices. Regulators of privately owned utilities can be captured by IOUs, but federal entities are regularly captured by political arguments disguised as facts and economic reality. In the end, we need to accept that no institutional solution is perfect, but keep working at improvements.

  4. Severin,
    You probably saw the WSJ board editorial, “Fires and Blackouts Made in Sacramento.” They suggest that green mandates raise the cost of electricity and public pressure has restrained the PUC from allowing further rate increases for safety measures. There is an efficient way to go green. But ad hoc mandates and subsidies may be pushing California off course.
    Jim

    • “What should be done in the next few years to address …the growing wildfire threat from climate change?” That’s a big enough assumption at the outset to make me leery of reading further. USGS research ecologist and UCLA Professor Jon Keeley has found that California wildfires have declined in number over the past 40 years, while their severity has increased. This argues forest mismanagement rather than climate change. The notion that any entity can effectively fight climate change supposedly happening so quickly that its advance over the past few years is virtually observable to the naked eye is ludicrous.

  5. Thanks for the timely summary. The questions that are bigger than PG&E governance are: What costs from disasters affecting general populations should be socialized, and and through what vehicle? Fires, wind, flood, and civil disturbance are all candidates for needing relief of some sort. We’ve got a couple of specific examples that have begun the process. Compare for instance the Carr and Camp fires. The initiators are different, but the damages to life and property comparable. Who gets monetary relief and from whom? What other direct and indirect costs are socialized; roads, water, building code upgrades? Who takes responsibility, leadership, for mitigating future foreseeable events in a changing climate?

    We can’t expect leadership on any of these from the CPUC.

  6. ” it’s clear to me that California is failing to provide the resources for effective oversight”

    Your article clearly begins to address one of the many issues contributing to the wild fire management issues, however your focus only on CPUC regulation is too limiting. First, PG&E management obviously share a major part of the responsibility for not continually pushing to upgrade distribution system safety and control systems. The governor(s) and California legislature also need to be held accountable because their mandates for low income rate subsidies, wind, solar, batteries and prohibitions against other viable forms of energy build in enormous costs that the impact CPUC objectives to limit rate increases. When the CPUC is faced with legislated mandated costs, utility requests for system upgrades get reduced. Add to this mix the environmental lobbying that prevents proper easement maintenance and forest management together with local zoning authorities that allow development in fire prone areas and you get the diasters California is experiencing. All of these factors are common to both investor and publicly owned utilities.

  7. While I agree with the article’s conclusions, and generally agree with its arguments, I have one fairly large quibble. it is simply not true that CPUC (or FERC, for transmission) approval of maintenance expenditures means that they will happen. The CPUC and FERC approve total revenue requirements. The justification for that revenue requirement may include maintenance expenditures, but the approval of the revenue requirement does not create any obligation to actually spend the money, or to spend the money for the stated purposes. This was a big issue in the past with regard to tree trimming, where requests for money wee approved, but the money was not actually spent on tree trimming. The CPUC then instituted a use-it-or-lose-it ratemaking practice specifically for tree trimming, where if approved amounts were not spent for the approved purpose, they had to be rebated to customers. But that practice is not the norm, and applies solely to tree trimming (“vegetation management” in CPUC-speak). At FERC, where I was involved in PG&E cases for many many years, there was no requirement at all that approved revenues be spent on the purposes for which they were approved. There was thus a continuing incentive for PG&E to spend less than the approved mounts, and pocket the unspent amounts as profits. The process was so entrenched that FERC staff and intervenors routinely filed testimony (some of it mine) quantifying the historic mismatch between requested amounts and actual expenditures for O&M and other spending categories.

  8. Mention is made of the likely weakness of CPUC regulatory oversight. Possibly more revealing could be what happened in the PG&E rate case submissions and CPUC decisions over the last decade+.

    It would be interesting to examine the rate cases submitted by PG&E and the CPUC decisions on how much was allowed for transmission line upgrades, maintenance and vegetation management. Did PG&E submit “prudent” requests for these critical expenses? Did CPUC fully approve, increase or cut them to minimize retail price increases?

    The 2000-2001 restructuring lessons learned might be instructive. It had large bi-partisan support including, fatally, capping retail rates and freeing up wholesale rates. This confirmed, once again, that politicians want to avoid responsibility for raising consumers rates…and regulators read the political signals.

    The results of such an analysis would go a good ways toward allocating responsibility for the questionable state of PG&E’s transmission system. Was PG&E understating the transmission needs and revenue request? Or did CPUC reduce the revenues requested for transmission upgrades and maintenance?

    Any graduate students looking for a useful research topic?

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