Public v. Private: How a State Takeover of PG&E Might Look in California

Widespread power blackouts and years of destructive wildfires have brought California to a place where it has never been: Lawmakers are looking at replacing the nation’s largest utility with a public entity. Could such a plan overcome the regulatory, legal and political barriers, and if it did, would it be a better system than the one we have now?

Frustration toward Pacific Gas & Electric has boiled over in recent weeks, leading California Gov. Gavin Newsom to insist the company’s entire system must be “reimagined” and the potential for a government takeover should be explored as part of that process.

Shanin Specter, a Stanford law professor and partner at the firm Kline & Specter, has reservations about a government-run utility. He thinks free-market principles make utilities more efficient and that political considerations can taint a government-run utility’s decision making.

But he also believes PG&E’s repeated failures and a pattern of “negligent and reckless conduct” make a public-run utility look more appealing.

“They seem to be so endemically incompetent, that maybe the government would do a better job,” Specter said of PG&E.

The company declared bankruptcy this past January, facing a potential $30 billion in liability for more than 20 wildfires allegedly caused by its equipment in 2017 and 2018. It recently announced it could be liable for more damages as a broken jumper cable is suspected of causing Sonoma County’s Kincade Fire on Oct. 23, which scorched more than 77,000 acres and destroyed 374 buildings.

PG&E insists its infrastructure “is not for sale” and changing the company’s structure “would not create a safer operation.” But with a continuing pattern of utility-caused wildfires and widespread prophylactic power outages, calls for radical change are growing stronger.

“It’s hard to imagine anyone doing a worse job than PG&E,” said Mindy Spatt, spokeswoman for The Utility Reform Network (TURN), a ratepayer advocacy group.

PG&E and its shareholders are currently locked in a bankruptcy court battle with hedge funds vying for control of the company. But a growing number of Californians are pushing for a new path forward, one that would replace PG&E with a public entity or customer-owned cooperative.

Legal and political hurdles

Seizing an investor-owned utility’s power system through eminent domain has been done before, but the process is neither simple nor easy. It requires lengthy reviews by state and federal regulators, gobs of cash from state or local governments and court battles that can last years.

With PG&E already embroiled in the Chapter 11 process, such a plan would require approval by the bankruptcy court and California Public Utilities Commission, which is reviewing PG&E’s bankruptcy plan for its impact on rates, reliability and service.

The first step would be to create a public entity endowed with billions of dollars to buy PG&E’s assets and perform necessary upgrades and maintenance in the future. Such funding must be approved by legislators or come from bonds issued by local governments, which often require voter approval.

State Sen. Bill Dodd, Democrat from Napa, thinks it would be a hard sell in the Legislature to get Southern California politicians to authorize billions of dollars for a state-run utility to replace PG&E.

“I don’t think it’s practical to expect where a majority of votes are probably in Southern California that we’re going to get the votes to do a state-run utility in Northern and Central California,” Dodd said.

For California Assemblyman James Gallagher, Republican in Chico, it’s not just politically impractical but a reckless use of taxpayer dollars. Gallagher, who represents the town of Paradise destroyed in the 2018 Camp Fire, predicts ratepayers will pay more if the state spends billions acquiring PG&E’s assets.

“We’d be paying even more [for electricity] than we are right now, which is the highest in the nation,” Gallagher said. He noted the state has bad track record of maintaining infrastructure, citing the Orville Dam crisis of 2017.

Former CPUC President Loretta Lynch disagrees. She believes a multibillion-dollar investment would pay for itself in a matter of years, with hundreds of millions of dollars now dedicated to PG&E’s annual profit instead going to pay off debt and improve safety.

“That money could be plowed back into the system to make it safe,” Lynch said.

She also believes the Legislature and courts could act quickly enough to accomplish a PG&E takeover by June 30, 2020, the deadline imposed by legislators for PG&E to emerge from bankruptcy.

“Look how fast they did a bailout last summer,” Lynch said, referring to Assembly Bill 1054, which created a $21 billion insurance fund for future wildfire claims equally funded by utilities and ratepayers.

Once a public entity is established with financial backing in place, the next step would be to seize PG&E’s assets. To do that, the government would need to pay fair market value for the power lines and equipment. Establishing that dollar figure often takes years in court. Utilities seldom sell their assets without a fight, typically arguing that their system is worth far more than the government is willing to pay. A judge would ultimately decide how much the power lines and equipment are worth.

Despite those legal hurdles, Lynch believes the process can be expedited.

“Obviously there should be an evidentiary hearing on facts to be found for what the fair market value is,” Lynch said. “That does not take years. It takes months.”

Public v. private

Public power tends to be cheaper than electricity from investor-owned utilities, according to data from the American Public Power Association. In 2017, the average residential customer served by a public utility paid 11.8 cents per kilowatt hour, compared to 11.9 cents for nonprofit cooperative utilities and 13.5 cents for investor-owned utilities.

Public power advocates say the reason is simple: When profit is eliminated, rates go down.

“Overall public power does have lower rates because it does not have stockholders,” said Ursula Schryver, vice president of education and customer programs at the American Public Power Association.

According to the group, more than 2,000 cities and towns in the U.S. get their power from a publicly owned and operated utility.

Investor-owned utilities, which make up 73% of the market, have advantages too. They tend to be larger, enabling them to benefit from economies of scale when buying power and materials. They can also take greater financial risks and raise capital through shareholders to invest in things like cleaner energy and smart grid technology.

“Electric companies are leading the transition to lower carbon energy. That requires an incredible amount of investment,” said Richard McMahon, vice president of energy supply and finance at the Edison Institute, which represents private utilities.

They can raise money from investors, but they cannot avoid paying taxes. Government-run utilities operate tax-free and can fund vital improvements through tax-free bonds, but the greatest benefit of public power, according to Schryver, is local autonomy.

“It all comes down to local control and having the ability to focus on the interests of the community,” Schryver said.

That’s what prompted the city of Boulder, Colorado, to explore providing its own public power more than a decade ago. The city has been plotting since at least 2007 to wrest control of its power system from the private Xcel Energy, the main supplier of electricity in Colorado.

The motive was simple. Boulder wanted more autonomy to meet its goal of relying on 100% renewable energy sources by 2030. Then the area was hit by a catastrophic 100-year flood in 2013, causing $4 billion in damage to roads, homes and infrastructure.

“It got us really moving on the track of thinking what a resilient energy system looked like,” said Jonathan Koehn, regional sustainability director for the city of Boulder.

As an Xcel customer, Boulder cannot make solar panels and energy storage a larger part of its power system without going through Xcel. It also wants to adopt micro-grid technology and bury more lines underground to make the system more durable in storms.

“There was not only an economic incentive but added benefits of being able to deploy and invest in creating a more resilient system,” Koehn said.

Last month, Colorado’s public utility regulator advanced Boulder’s plan to take Xcel’s power lines and equipment through eminent domain. The dispute will now move to the courts, where a judge will decide the fair market value of the system unless both sides reach a deal.

The city initially offered $68.5 million before upping its bid to $80 million. Xcel said its equipment was worth about $150 million, according to Koehn.

A cautionary tale

Countless cities, counties and regions have transitioned from private to public power over the last century, but not every changeover ends in success.

In 1998, the troubled Long Island Lighting Company in New York ceded control of its power system to a government entity, the Long Island Power Authority (LIPA). It followed decades of tumult over rate hikes and a $6 billion nuclear power plant that was scrapped before construction was completed due to safety concerns.

LIPA’s first order of business was cutting customers’ electric rates by about 20%. Many thought it was the start of a new era for lower rates and better service, but the public soon learned the agency was plagued by mismanagement. In 2011, LIPA revealed it had overcharged customers $231 million.

Then Superstorm Sandy struck in 2012, exposing that the agency was “completely unprepared for a severe weather event at all levels,” according to Richard Berkley, executive director of the Public Utility Law Project of New York, a ratepayer advocacy group.

A commission appointed by New York Gov. Andrew Cuomo uncovered LIPA’s “highly questionable billing practices” and systemic problems, including “inefficiencies, disorganization, and lack of planning.”

After the commission recommended privatizing the agency, Cuomo turned over operations of LIPA’s system to PSEG Long Island, a subsidiary of New Jersey-based investor-owned Public Service Enterprise Group. LIPA was kept in place as a shell oversight agency so the state could remain eligible for 90% federal reimbursement of $800 million in storm damage costs.

One factor contributing to LIPA’s downfall was $7 billion in debt, much of that inherited from the $6 billion construction of a failed nuclear power plant, Berkeley said.

That’s why Berkley recommends a detailed forensic analysis to determine how much deferred maintenance and antiquated equipment exists before anyone takes control of a private utility’s system.

“When you buy a private utility, you’re buying all these problems and it can be expensive,” Berkley said.

Though a nonprofit model can free up cash for lowering rates and other priorities, Berkley warns poor management and susceptibility to political influence can also doom a public utility.

The ability of private utilities to take financial risks can also make them superior to government-run utilities in some instances, Berkeley added, citing a private company’s construction of New York’s first hydropower plant at Niagara Falls in 1882.

A success story

Public power is not a unique concept in California, where more than 40 government agencies provide electricity for cities and towns, including in Los Angeles, Redding and Palo Alto.

A unique success story can be found in Sacramento, which wrested control of its power system from PG&E in 1946 following a 23-year effort. Customers of the Sacramento Municipal Utilities District (SMUD) pay lower rates than PG&E customers today.

However, lower rates did not drive the capital city to take over PG&E’s power system when the campaign started in 1923, according to Nathan Hallam, history professor at California State University, Sacramento.

The motive was to build a water and power project on the American River watershed, which failed to materialize for decades. Sacramento voters approved creating a public power district in 1923 but repeatedly rejected ballot measures to borrow money to pay for PG&E’s system and build a hydropower plant.

It wasn’t until the 1930s when the federal government completed the Central Valley Project, a water irrigation and hydropower system north of Sacramento, that the capital city could get energy from a source other than PG&E.

“Now PG&E got nervous and so there were a series of lawsuits in the late 1930s,” Hallam said.

In 1934, Sacramento voters approved a $12 million bond to acquire PG&E’s assets. What followed was a 12-year legal battle. The Railroad Commission, predecessor to the California Public Utilities Commission, approved Sacramento’s bid to take PG&E’s wires and equipment by eminent domain for $11.6 million. PG&E challenged that decision in federal and state court, eventually losing when a state appeals court ruled against it in 1946.

SMUD took over PG&E’s system, bought electricity from the federal government and started building its own hydropower system on the Upper American River in 1957. SMUD’s first hydroelectric plant on the American River was completed in 1961.

Today, SMUD delivers power to 1.5 million customers in Sacramento County. Hallam says residents are generally satisfied with their electric service.

“Rates are lower than our neighbors who obtain power from PG&E,” Hallam said. “We in recent weeks have not experienced the blackouts.”

Despite its success, PG&E has managed to stave off more recent attempts to expand SMUD’s territory. In 2006, PG&E spent millions of dollars to defeat a ballot measure in Yolo County that would have allowed SMUD to take 77,000 customers away from PG&E.

In 2001, PG&E also beat a San Francisco ballot initiative to permit the city to create its own public power agency. San Francisco voters rejected another ballot measure in 2008 that would have authorized a feasibility study for public power; PG&E spent $10 million to crush that initiative.

Then-San Francisco Mayor Gavin Newsom opposed the 2008 initiative, framing it as veiled attempt to take over PG&E’s wires that could cost $4 billion and raise monthly electric bills.

An alternative path

Another proposal that has gained steam in recent weeks is the concept of a customer-owned cooperative to take over PG&E’s system. That idea is supported by leaders from 22 cities and five counties representing more than 5 million residents, making up about a third of PG&E’s customers.

The plan, first proposed by San Jose Mayor Sam Liccardo, envisions a nonprofit cooperative that is exempt from paying federal taxes and can operate “without the burdens of paying dividends to shareholders.”

In a Nov. 4 letter, the local leaders urged the CPUC to seriously consider a customer-owned cooperative as it evaluates PG&E’s plans for exiting bankruptcy.

In 2017, there were 900 customer-owned cooperatives in 47 states providing electric service to 56 percent of the nation’s landmass, according to the National Rural Electric Cooperative Association, which represents power co-ops.

Dodd, the state senator from Napa, says a customer-owned cooperative “seems like a better idea,” but he said it needs more scrutiny.

Whatever the future holds, Dodd says cities like San Jose and San Francisco should not break away from PG&E to create their own public power districts. Losing a large number of city ratepayers would mean less revenue to fund wildfire prevention work in more rural areas, Dodd said.

“We need to be all for one and one for all,” he said.