Blog: Energy whiz Severin Borenstein on keeping the lights on and the fires out after PG&E’s bankruptcy

What happens after a fire that killed 86 people and burned thousands of homes also threatens to devastate the state’s biggest energy company? Pacific Gas and Electric will be filing for Chapter 11 bankruptcy reorganization at month’s end. It could face $30 billion in liability for wildfires over the course of two years, as investigators work to determine whether the cause of some of those fires can be laid at the feet of PG&E.

Sixteen million Californians get their light and heat from PG&E. What happens to them, to the people who own shares in PG&E, to the people whose lives were blasted by the fires, to the taxpayers of California? Severin Borenstein is a professor at UC Berkeley’s Haas School of Business and faculty director of the Energy Institute at Haas. And he undertakes to answer the question of, what now?

When we hear about the troubles of PG&E and the question of bankruptcy, we think of 2008 and “too big to fail.” Is there such a thing, and does PG&E fit that category?

I don’t think PG&E is too big to fail. They in fact have been in bankruptcy before, in 2000-2001 during the California electricity crisis, and that didn’t actually disrupt the electricity service of customers.

It definitely hurt the shareholders, and I think that’s happening already and may continue to happen.

The longer-run question is, should this be the configuration of the company? Should the gas and electric companies be combined, which is not the case in much of Southern California?

But PG&E does both, and PG&E has a huge geographical area they cover, and there are many people asking, would it work better if they broke it up into smaller pieces?

The bankruptcy early in the 2000s was a reorganization bankruptcy. Is that what we’d be talking about again with PG&E? Or would it go on the market? Could a company, say, from Russia or China come in and buy it?

Well, it would be a Chapter 11 reorganization, just as they did in 2001. I don’t think it would be a takeover by another company, but rather a reissue of stock once the company has been reorganized, which is what happened last time.

And I’m sure it will not be a company owned by a potentially adversarial country. Utilities are one of the areas where control is exercised over ownership.

Critical functions are often government functions, like police or fire. In Los Angeles, you have the municipal, proprietary Department of Water and Power. When it comes to regulated utilities like PG&E, are they fish, or fowl, or a little bit of each?

These are private companies. They’re owned by shareholders. They earn a rate of return on the capital they invest. But they are regulated because they are monopolies; in the United States, that is how most utilities operate. Most customers are served by what are called investor-owned utilities.

Los Angeles’ Department of Water and Power and, in Northern California, the Sacramento Municipal Utility District are exceptions. There are a lot of so-called municipal utilities like them, but they actually serve a minority of the customers in the US. The IOU — investor-owned utility model — is the most common.

On the one hand, many critical functions are often done by government, but not all. Building housing is a critical function, but we let the private sector do that. Producing food is a critical function, and we let the private sector do that.

But there are many things like police and protection from fire and so forth that are done by government. Utilities have ended up sort of in the middle, where some is done by private regulated firms and some is done by utilities. I don’t think we have a good answer to which is the better model.

Didn’t the unregulated model fail California during the blackouts — there was that notorious remark by some energy marketeers about “Grandma Millie” and leaving California in the dark.

A badly designed market can cause major problems, and that’s what happened during the electricity restructuring in 2000 and 2001. The blackouts actually were pretty limited. People have made them into a much more widespread phenomenon than they actually were.

The threats of blackout were more significant, and the cost imposed on customers and on shareholders of the utilities were very significant. … California then retrenched to a much more regulated market, as we have operated in ever since then.

It’s important to recognize that that is a completely different situation than we face now. The problem now is not a market issue. The problem is that we have a new liability that was just not foreseen before, which is wildfire.

While we’ve always had fires, and we’ve always had fires started by electricity service, the magnitude of those fires — largely due to climate change — has completely changed. The damages now dwarf the entire value of the firm, which just wasn’t the case 20 or 30 years ago.

How much authority does the California Public Utilities Commission have? How deep can it go in saying, this is what you have to do on a daily basis?

In theory they have tremendous authority. The issue is not a constraint on whether they could do those things; the issue is whether, in practice, they’re able do those things; as they dig deeper and deeper into the company and start to manage in more and more detail, the whole idea of it being a separate investor-owned utility starts to go away. They essentially become an arm of the government, if the government is managing even the day-to-day operations of the firm.

Historically that’s not how investor owned utilities have worked. Historically, the regulator has said, you have to provide electricity. We will allow you to recover your costs, but you’re the energy company, so you figure out the best way to build the lines, maintain the lines, do customer service etc.

We will oversee it at a high level, to make sure that you’re providing good service and taking appropriate safety measures. But we’re not going to go into the day-to-day operations.

If it turns out that that doesn’t work anymore, particularly given the increased risks with wildfires, I think that’s when we start to revisit the question, what’s the best way to organize this company? If the regulators are going to have to be involved in the day-to-day operations, maybe it does make more sense for it to just be a government entity.

But when we go down that road — and I’ve heard many people say, we should just take over PG&E — I think we have to be careful and remember who “we” is.

“We” is the state. Anybody who’s stood in line at the DMV or dealt with state agencies in other contexts knows that government isn’t the most efficient or most effective organization all the time, either. So that’s the tradeoff that we constantly face.

We clearly need whatever organization provides electricity to be much more focused on safety than they needed to be 20 or 30 years ago, when these wildfire risks were not as severe.

And then we have to ask, well, what’s the best way to do that going forward? The issue is what’s the best way to either regulate an investor-owned utility, or to switch to a government-operated utility? And is that a way to assure better safety? What’s the right size of the utility? Should it be one very large utility, both in terms of number of customers and geography? Or should it be broken up into a number of smaller utilities?

Which might arguably be more responsive to particular regions and the different needs of those regions.

There is another issue, though, which is that the wildfire risk is not uniform across PG&E territory. There are some areas that, if we start really ratcheting up maintenance to avoid wildfire risk, will be much more expensive than other areas.

We also have to ask the question, do we want to maintain this as a large utility, where these costs are smoothed across all of the customers? Or are we going to break it up into smaller utilities, recognizing that the ones that have to cover all this wildfire risk are probably going to turn out to be more expensive?

Gov. Jerry Brown took heat for signing what was called the PG&E bailout bill. He said it’s complex and requires investment, but it’s absolutely necessary. What does this bill do?

I’m not a lawyer and I haven’t really focused on what it covers. It is backward-looking: It looks at the 2017 wildfires. I will tell you the one thing it doesn’t undo, which is the big focus for the utilities: inverse condemnation, which essentially makes utilities, like governments, the responsible party when something they do causes losses, even if they are not actually found to be negligent or grossly negligent.

At the same time, the regulator — the California Public Utilities Commission — has said you can’t pass that [cost] through to their customers, and I think the utilities, with some justification, are saying, well wait, if we’re not found negligent … it’s not fair to make us pay for it and not let us smooth that [cost] across the customers.

The bailout bill really didn’t change that. What it did say in a sort of ad hoc way was, for those fires in the past, we are going to let them pass through a certain amount of the cost [on to customers].

The logic behind that is something I don’t really think is well-supported, which is it’s so disruptive and costly to have a utility go into bankruptcy, we have to make sure they don’t.

And I think that it’s a mistake to take away the risk of bankruptcy, because one of the things that makes a utility pay attention and not be asleep at the wheel is the risk that if they actually do something negligent, they will lose a lot of money for shareholders.

I sort of wince when I hear some legislators say, “Oh, we just can’t let the utility go into bankruptcy.”

Bankruptcy is a very costly thing. We’d rather not have it happen. But it is certainly not so costly that we should never, ever allow it to happen. If the utility really behaves badly, they should pay the cost. And bankruptcy is that cost.

But what about the prospects of California taxpayers shouldering some of this burden?

I think that California taxpayers are going to bear some of the costs. That’s almost without a doubt. The utilities would not be able to cover all of the costs that will be imposed by these fires.

Some of those costs will be borne by the individuals whose houses burned down. Some of them are going to be covered by the government. If we are successful, a lot of that will be the federal government. Under this president, that’s very, very hard to predict.

But if the federal government stiffs us, then I think the state is likely to cover a lot of those costs, rather than having those individuals who have been hurt by the fires get no help at all.

Will PG&E’s problems affect California’s work toward its greenhouse gas limit goals?

I already can see that happening. PG&E is really focused on, how do we deal with wildfire risk and how do we deal with the financial risk and crisis they are now facing. And that inevitably gets in the way of new innovative things that they might otherwise be doing, such as installing more vehicle chargers or changing rate structures to encourage more renewable electricity.

Those are all very important priorities. And a year or two ago, even a few months ago, they were front and center for PG&E.

The problem is that the executives now have to turn their attention to day-to-day operations and getting through this crisis. So I think this will inevitably be a barrier or be a drag on California’s progress in moving to a low-carbon electricity system.