Editor’s Note: This is the second in a two-part series on the consequences of a hypothetical state takeover of PG&E. Part one ran in Saturday’s edition of the Record-Bee and online at Record-Bee.com
A radical third way: Treat wires like highways
In order to make PG&E safer, somebody – either investors, taxpayers or customers – will have to contribute significant sums of money to bury the most fire-prone power lines and do the necessary “hardening” of the electrical grid. PG&E’s rates are already high for the state, if not the country. And taxpayers are already paying for the firefighters who have to be deployed before a wildfire starts. For the upcoming wildfire season, Newsom said teams will be pre-positioned along PG&E’s transmission lines.
David Freeman, who headed the Los Angeles Department of Water and Power and served for decades as general manager of the Sacramento Municipal Utility District, is proposing a radical third way: Take over all the poles and wires in California and treat them as a public good as the state does with roads, highways and bridges.
Freeman proposes creating a new state agency to take over all transmission systems in California and tasking it with making the infrastructure safe and reliable. The cost to taxpayers would be tremendous, perhaps to the tune of $1 trillion over 10 years, but he argues the cost of disrupting the state economy is even higher.
“This problem is more fundamental and bigger than the utilities,” Freeman said, referring to the climate change that is driving high winds and extreme temperatures now in summer and fall. “With all due respect, I think the governor and many other people in California are just lacking in vision. I think we’ve reached a fundamental tipping point. I think we need to be thinking of the electric delivery system as perhaps even more important than our highways.”
Utilities would continue to run the business of selling electricity. Freeman said treating the power lines like freeways would actually improve utilities’ finances because it would relieve both public and private utilities of strict liability for disaster damages — an ongoing issue that stems from a legal doctrine in state law known as “inverse condemnation.”
“I’m not saying this is an easy thing to do,” Freeman said. “But like Jack Kennedy said, we do some things because they’re hard. This problem is going to encompass everybody as time goes on.”
A refresher on PG&E resistance
PG&E, which serves 16 million people in 48 counties, has long thwarted defectors. Nearly a century ago, the citizens of Sacramento voted to establish a community-owned, not-for-profit electricity service, and to get out of PG&E’s service territory. Decades of litigation ensued.
The Sacramento Bee’s investigative role in the fight is part of the paper’s lore now. Only in the late 1940s did the Sacramento Municipal Utilities District begin operations. More recently, PG&E sank more than $46 million into a failed campaign in 2010 on Proposition 16, which would have limited the ability of local governments to enter the electricity business. The initiative would have made municipal power authorities harder to establish by requiring cities and counties to win two-thirds approval before spending public money to start or join a public power agency.
Today, PG&E says it’s committed to exiting the bankruptcy process as quickly as possible. A white paper conducted by Concentric Energy Advisors outlines rebuttals to both municipalization and cooperatives, citing high debt and high customer rates.
“We remain convinced,” the company stated, “that a government or customer takeover is not the optimal solution that will address the challenges ahead and serve the long-run interests of all customers in the communities we serve.”
What does the governor really want?
Newsom made multiple takeover threats during an appearance at the Public Policy Institute of California last week.
“PG&E, that company no longer exists,” Newsom said. “There’s gonna be a new company or the state of California takes it over and that new company is going to be transformed and in five or 10 years, I think that an IOU (investor-owned utility) potentially could make every one of us proud and could be a model for the rest of the nation if we do our job.”
What the governor is specifically demanding are significant changes within PG&E — namely a more qualified and independent board of directors made up of a majority of Californians; a way for the state to step in in extreme conditions; and for shareholders to give up some of their interests so the company has more capital to focus on safety. As things stand, Newsom says PG&E’s reorganization plan uses a combination of debt and securitization that leaves it with little financing room for making billions of dollars in safety investments.
It’s not clear if PG&E’s latest offer to turn over some board seats and name directors with more safety expertise, which follows weeks of closed-door talks with Newsom’s lead negotiators, is enough to appease the governor.
Time is running short. PG&E doesn’t just need to reemerge by June 30 to tap $21 billion in state financing. Sometime in July, it will lose its 18-month exclusive right to propose a reorganization plan in bankruptcy court. In that unlikely scenario, the court could look to competing reorganization plans from wildfire victims to bondholders.
And, of course, there’s another looming deadline. “Fire season is coming,” noted Ellias, the law professor. “And it would be really good if this company is out of bankruptcy by then.”
