The wildfires in California ignited by poorly maintained transmission lines have themselves ignited a debate about whether the guilty – and now bankrupt – energy utility PG&E (the largest in the state) should now become publicly owned. That in turn has led Severin Borenstein at the Energy Institute at Haas to consider the pros and cons of public v private in this vital activity. The first thing to note is that electricity transmission and distribution services are both a natural monopoly and an essential service. Monopolies do not allow for truly competitive markets. Essential services cannot be allowed to fail, or even drop below a minimum threshold. Borenstein runs through the big questions: do profit-driven utilities harm safety and reliability? Do they raise costs? He notes publicly owned firms also fail and get sued and bailed out by government like any private firm.
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/PG&E), and the growing wildfire threat from climate change?
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.
Essential services monopolies: profit-driven markets don’t work
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.
…yet non-profits can also fail
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.
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 favourable 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 recognise 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.
Solving 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?
There is no easy answer
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.
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.
This article is published with permission
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