PG&E, Pacific Gas & Electric, the largest utility in California, is cutting electricity to hundreds of thousands of customers to stave off the possibility of literally sparking another Camp Fire. The blackouts are the correct response by PG&E. The potential cost in lives lost and billions of dollars in devastation are too great when weighed against relatively little lost revenue.
The path to this predicament has been straightforward for PG&E and serves as a lesson to other states and utilities.
PG&E’s prior bankruptcy came about due to the state-regulated price cap on electricity while PG&E’s cost of natural gas fuel and replacement electricity generation sources soared to almost three-times the price cap. Selling any product for less than the cost is not sustainable. Today, PG&E is again suffering for having sold electricity for less the cost of providing it to California.
The fault lies both with the California government, which wants cheap electricity for consumers, and with PG&E for failing to change.
The watershed event was not the Camp Fire but the 2010 San Bruno pipeline explosion, followed by years of lax oversight by the California PUC and continued indolence by PG&E.
The wildfire hazard in California is every bit as much a potential and predictable natural disaster as is an earthquake, rains, floods, tsunami and hurricane.
The challenge for utilities today is to convince state legislatures and public utility commissions that reliability requires more monitoring of old infrastructure and more capital expenditures for replacement and remediation of the grid.
The economically regulated transmission lines in the California grid are limited in what they can charge customers for providing the service of moving electrons about the state. It is an uneasy calculus of the PUC and the utility to weigh in the costs of blackouts, or as they are euphemistically called, load shedding events, against higher costs to be borne by consumers. Consumers typically do not vote to pay more for public services. In order for utilities to at least break even, they cannot spend more than they collect—this applies to investor owned utilities such as PG&E as well as state and municipality owned utilities. Operations and maintenance expenditures are usually targeted and reduced until the utility faces disaster.
· Reduced maintenance was behind the federal shutdown of the three Millstone nuclear power plants and the near-bankruptcy of Northeast Utilities in the 1990s. The board of directors and executive management had made the decision to reduce costs in order to meet financial metrics.
· Investor owned Centerpoint Energy in Texas was castigated after Hurricane Ike for failing—for years—to keep its lines clear from trees.
· Duke Power had a self-inflicted coal ash spill into the Dan River.
· The federal Tennessee Valley Authority’s coal ash spill into the Emory River is another example.
The issue for California consumers is not that PG&E has elected to curtail electricity to avoid another wildfire. The question for California consumers is how much they want to pay for safe and reliable electricity. For PG&E, the question is whether the company can live up to the legal contract and the social contract under the California PUC’s regulatory regime.