JUICE: Small is Beautiful

2 Jun 2020

As appalling as Pacific Gas & Electric’s track record of safety deficiencies has been over the years—from sparking massive wildfires to gas pipeline blowouts—turning it into a centralized public utility could be worse. It could create one big albatross hanging on Californians’ collective neck.  

The high stakes matter is riddled with financial, legal, and political landmines.  But those are not the most troubling part, nor is making the for-profit utility into a state nonprofit. The big problem is size. Turning California’s biggest private electric and gas utility, covering 70,000 square miles serving 16 million, into a one public entity would create a political monolith. 

A massive public utility would put unelected bureaucrats in the driver’s seat, Bill Marcus, energy economist with MCPM Economics, warned. “PG&E will own our state.” He added that it would tie the state’s credit rating to PG&E, which has suffered downgrades from the huge wildfire claims.

SB 350 by Sen. Jerry Hill proposes to takeover PG&E if it causes another devastating wildfire or fails to implement its reorganization plan, which is expected to be approved this month. There apparently is no public analysis yet looking at the pros and cons of converting the heavily leveraged investor-owned utility into a public entity. The legislative Appropriations Committee would conduct one if the bill were to advance. And surely investment bankers, which own big chunks of PG&E, would insist on an in-depth analysis. But time is running out.

Also, the bill to create Golden State Energy, which Hill insists is a safety backstop, was pulled from an energy committee hearing last week and a hearing date has yet to be set.  The bill must be passed by the Senate by June 26.

The legislation’s prospects appear slim. But it is worth exploring SB 350’s end goal because of the uncertainties surrounding PG&E’s exit from bankruptcy.

Creating Golden State Energy or another similar state utility nonprofit would mean the provider no longer answers to shareholders and other investors. It also would allow the use of tax-exempt bonds to finance state projects, making them more attractive to many prospective buyers. (However, taxable bonds would have to be used to pay for a takeover under long standing law.) But, do we really want one big California utility to take over PG&E’s nearly $60 billion in financial liability and its dangerous electric and gas infrastructure for starters? The pandemic alone has created a huge state deficit.

A better course, should PG&E collapse under its debt or get hit with more fire liability, is to slice up the behemoth. Specifically, PG&E should be broken up into several public regional organizations. Utility regulators’ direction to PG&E to establish regional executive and safety officers to manage specified regions called for in last week’s decision approving the company’s financing plan could be the launching point.

Smaller regional utilities should be taken over by community energy organizations, along the lines of what San Jose, San Francisco and other aggregators proposed months ago. That would remove the need to satisfy shareholders, while avoiding the creation of a massive new bureaucracy. As Marcus noted, “Meet the shareholders, they are us.”

Another plug for decentralizing PG&E into smaller public entities is the risk of California going from a left leaning state to the right, which is hostile to big government and public funding. We have seen the result of PG&E not investing in necessary upgrades.

As E.F. Schumacher, the author of Small is Beautiful, wrote: “Any intelligent fool can make things bigger, more complex… It takes a touch of genius—and a lot of courage—to move in the opposite direction.”

Elizabeth McCarthy

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