My turn: What I learned from the last time PG&E went bankrupt

Fred Keeley

Fred Keeley was an assemblyman from Santa Cruz. He teaches at San Jose State University, and the Panetta Institute for Public Policy in Monterey, frederickkeeley2016@gmail.com. He wrote this commentary for CALmatters.

Californians are right to be feeling a sense of déjà vu as Pacific Gas & Electric Co. prepares once again to head into bankruptcy, and maybe a little wave of post-traumatic stress.

I certainly do, having served in the Assembly during the energy crisis of 2000 and 2001. At that time, the Assembly Speaker, Bob Hertzberg, tasked me with breaking down the problem and posing solutions.

The bankruptcy then and the one to come are at once similar and very different. But we did learn lessons the hard way in 2000. I hope the mistakes don’t get repeated by policy makers confronting the new crisis.

The common feature of these twin crises involving California’s largest regulated utility is human activity and error.

In the mid-1990’s, Gov. Pete Wilson and virtually all members of both parties in the Legislature deregulated electricity. The motive was to retain businesses in the Golden State, and reduce retail prices of electricity by 40 percent.

To put it mildly, it backfired.

When PG&E filed for bankruptcy protection in 2001, it was a direct result of massive market manipulation brought about by deregulation of the electricity sector of the California economy.

As California businesses and residential customers began to experience brown-outs and black-outs, there was a mad rush to solve the problem. Unfortunately, that mad rush to solutions skipped the proper first step: properly defining the actual problem.

The first faux solutions were based on the erroneous belief that there were simply not enough electrons in the system.

California’s population had grown by 500,000 people each year for 12 years, and yet no new power plants were brought on line. The solution, thus, was to waive regulations, and fast track the building of power plants.

Because the problem was improperly defined, the solution was wrong as well.

When a more deliberative analysis was undertaken, the actual problem was revealed: massive market manipulation by merchant electricity generators, not a lack of electricity generation.

Electricity deregulation in 1996 required the regulated utilities, including PG&E, to sell off most of their power plants to companies such as Duke Energy.

Because Duke and others were in the wholesale electricity business, and because California failed to require “power purchase agreements” between sellers such as PG&E and the new owners, wholesale prices skyrocketed far beyond the regulated retail price that PG&E could charge customers.

When California policymakers and the California Public Utilities Commission made clear that there would be no retail price increase, PG&E filed for bankruptcy protection.

The actual solution to the problem was to have the state through the Department of Water Resources become a market participant that bought long-term electricity contracts at lower prices.

In 2017 and 2018, the massive wildfires that have led to the new crisis are, its commonly agreed, a direct result of climate change. This will happen again and again. This is about climate change, not about individual weather events.

This is a human-made problem, and must have a human-made solution.

PG&E also is on the hot seat at this moment due to claims that it failed to maintain its equipment properly. The company’s financial exposure is massive, and far more than its current or anticipated state-approved revenues.

PG&E’s corporate parent seems to have no intention of helping the regulated utility survive. Thus, bankruptcy seems inevitable.

The question facing Gov. Gavin Newsom, the Legislature, the California Public Utilities Commission, and ratepayers is simple enough: What to do now? The answer is not simple.

Some advocates will urge the removal of the profit motive by replacing the regulated utility with a public corporation. By eliminating the profit, the argument goes, the public entity could provide utility services at a lower cost and be more directly responsible to the public.

Maybe.

A publicly-owned utility could work, but it would not eliminate future liabilities that result from climate change-related fire and other disasters.

Ratepayers would be on the hook for liability, rather than the current system in which ratepayers and PG&E shareholders share responsibility.

Having lived through the last bankruptcy, my suggestion to policymakers is to slow down and conduct a thorough analysis to fully understand the nature of the problem.

John Burton, the former president pro tem of the Senate, used to say “speed kills in the Legislature.” They are wise words. The new governor and the Legislature need to make good laws, not good headlines.