Why California should take control of PG&E

A big chunk of California is once more on fire, and once again it is reportedly in part the fault of the state's largest utility, Pacific Gas & Electric, which provides electricity and power to much of the northern portion of the state. It deliberately cut power to hundreds of thousands of Californians over the last week in preparation for a forecast of severe windstorms — causing all sorts of problems for poor and vulnerable people — but not to its high-voltage lines, where a broken jumper reportedly sparked the Kincade Fire north of San Francisco.

PG&E has already filed for bankruptcy earlier this year, and its stock price and bond yields are plummeting in expectation of even more lawsuits over this latest foul-up. Yet the company has still attempted to pay out millions of dollars in executive bonuses. The whole episode shows that it's past time for California government to take direct control of its utilities.

The Kincade blaze is far from the worst fire PG&E has started (at least not yet). Last year, according to a state investigation, its equipment sparked the Camp Fire, which killed 85 people and virtually destroyed the city of Paradise.

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So what is to be done?

Power generation is a classic "natural monopoly," which is just economist-speak for saying there is really no way to do it with a competitive market. There are enormous fixed costs, in the form of power generation stations and transmission lines, but low marginal costs — meaning hooking up one additional customer to the grid is very cheap. Building an entire separate power grid just to have competition would be a huge waste of resources, and even if you did that, eventually the companies would merge.

Just how unwise it is to let private capitalists run a utility monopoly is well illustrated by California's experience with PG&E (which is officially regulated by the California Public Utilities Commission but is often left to its own devices). They will always skimp on maintenance, pay themselves enormous sums, and keep prices at the absolute peak profit-maximizing level. Then, when the inevitable disasters strike, they will try their best to blame others, and if that fails, declare bankruptcy while shoveling cash out the door as fast as possible. (PG&E has done every one of those things before this current crisis.)

So that leaves three sensible options. Either one can sharply regulate the utility, as California has clearly failed to do, the state government can own it directly, or it can make it into a cooperative owned by its ratepayers (and also regulated). In theory, direct state ownership is probably the best, since it allows for zero profits and hence the lowest prices (PG&E raked in profits of $1.68 billion in 2017 on the back of stiff rate hikes, though they have since plunged into the red due to lawsuits); or for any profits to go into the state's general revenue pot (and given that it has already filed for bankruptcy, PG&E should be cheap to buy), but it's also the hardest to execute.

Politicians at both the state and municipal level have proposed versions of this with PG&E and other California utilities. I won't presume to tell them which option is best. But I am confident in saying that whichever level of government takes the lead on this will need to start making some bold moves — and they won't be easy.

For one thing, clearly PG&E executives have been cutting a lot of corners over the years. There is a sizable backlog of maintenance and upgrades that will need to be tackled. But for another, it's not just predatory management that is enabling fires here — it's suburban and exurban sprawl. As Mike Davis famously wrote back in 1998, California has been pushing development far, far out into some of the most fire-prone landscapes in the entire world, and climate change-fueled extremes of drought and heat make those places even more of a tinderbox.

For instance, California has about 26,000 miles of high-voltage transmission lines, and 240,000 miles of smaller distribution lines. Most of these are the typical overhead lines, and they can indeed start fires. But burying them underground costs between $1.4 million and $4.6 million per mile for the small lines, and perhaps $80 million per mile for the high-voltage ones — the latter of which caused the Camp Fire and the Kincade Fire. Burying just PG&E's distribution lines would cost perhaps a quarter-trillion dollars, or about $15,000 per customer — which would be a huge effective subsidy for the sprawling cities and towns responsible for the bulk of the wiring distance.

In other words, California will soon face some difficult questions about whether it is worth spending the gigantic sums necessary to defend its most far-flung communities, lest they be burned to the ground in a matter of minutes. It will be critical to face that question squarely, and not allow lobbyists to push through a quiet bailout of PG&E, or a heavy implicit subsidy for fire insurance. Public ownership can help with that, by putting the price and the policy directly up front. PG&E is such a disaster that there is essentially no alternative to government stepping in; let it be done in a clear, simple, and fair fashion.

But whatever they do, Californians better get cracking — the winds are not going to wait.

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