Power To The People

power to the people

I started this Power To The People article in longhand on a yellow legal pad which is something that I rarely do any more. I would have been doing something else but the utility company, Pacific Gas & Electric (PG&E) had made a business decision to turn off my power and 1 million of my neighbors throughout northern California.

There were, at that moment, several wildfires burning in northern California that started from sparks emanating from PG&E’s equipment. By turning off the power PG&E was saying that they did not trust that their equipment was not a threat to public safety. 

There was good reason for PG&E’s managers to lack trust in the equipment the company was using.  Much of PG&E’s equipment is worn out, outdated and has been failing frequently for years often with catastrophic results.  It cannot be reasonable for any company to know that its equipment is dangerous and allow that dangerous equipment to stay in use.

In 2010, a PG&E gas line that snaked through a residential neighborhood south of San Francisco, ruptured and blew up killing 7 people, injuring many others and causing hundreds of millions of dollars in property damage.  The regulator’s investigation revealed that the incident was caused by PG&E’s failure to follow accepted industry practice when constructing the section of pipe that failed which is pretty straightforward.   The regulator noted other specific deficiency’s and also “a systemic failure of PG&E’s corporate culture to emphasize safety over profits.”

Camp Fire

More recently, in 2018, the Camp Fire killed 85 people and caused as much as $20 billion in property losses. The town of Paradise California was all but destroyed.  It appears that this fire was ignited by a PG&E transmission line.  A number of other smaller fires have been ignited by PG&E equipment over the years.

power to the people

When the power went back on last week a lot of people had questions. Intentionally turning off the power to 1 million customers is a big deal. 

Early on the company was trying to pat itself on the back for avoiding a greater disaster. It claimed it was left with little choice given the “historic” winds that were blowing over its transmission lines. But that was not the whole story. 

Management 

It seems that PG&E’s management had identified the power lines most in need of intervention, developed a plan to deal with those areas and then failed to execute. Management knew that their failure to remove trees and brush from the vicinity of certain transmission and distribution lines significantly increased the likelihood that their equipment would spark and ignite a fire. 

The “official” reason for PG&E’s failure to remove the brush, that they knew they had to be remove, may change with time as the lawyers get involved. For now, it seems that the company is saying that it could not hire enough “skilled” labor to get “all” of the brush removed. 

In sum, PG&E turned off the power and now argues it was the correct course of action because it is “better to be safe, than sorry” even if they created the unsafe situation in the first place. If there was a real danger of additional fires because of defects in their equipment, then arguably, turning off the power was a reasonable act. But it would have been far easier just to cut the trees and remove the brush that the company knew it needed to remove.

It would be even more reasonable for PG&E to replace or bury the transmission and distribution lines so they could not spark in the first place.  That would require a multi-year, multi-billion dollar solution that does not seem to be on the table even though it is long over-due. 

Monopoly

What makes PG&E different from other companies is that it is a sanctioned and regulated monopoly. If you live in its service area, they are the dominant regional source of gas and electric power. There is no competition. You pay what they charge.

Public utilities are regulated. PG&E must operate within the guidelines of multiple regulators. The California Public Utilities Commission approves the rates it can charge.

At the same time, PG&E is a public company owned by its shareholders. Shareholders have expectations that management tries to satisfy. In this case, the shareholders want steady dividends.

The current problem at PG&E can be summed up in one sentence: The management deferred maintenance and new equipment costs so that they could maintain profitability and continue to pay dividends to its shareholders.

In the traditional view, power utility company shares were suitable investments for “widows and orphans” because they paid a steady dividend and because they were selling electric power which was always in demand. That traditional view may no longer be sustainable. 

The funds that PG&E had allocated for brush removal, but did not spend, went directly to its bottom line. But for its current bankruptcy status, those funds would have been available to pay shareholder dividends. In the last 10 years aggregate dividends paid out to PG&E shareholders are in the neighborhood of $7 billion.  

PG&E’s monopoly to provide power was granted by the State with the expectation that PG&E would deliver the power while at the same time taking the proper steps to do so without ruptured gas pipes or electrical fires.  When you are dealing with fires that cause death and destruction, the standard of care exercised by the management should be very high.

I can appreciate that the 85 deaths at the Camp Fire last year were on the minds of the managers who pulled the plug this year. But who has taken responsibility for those deaths?  PG&E’s response to the Camp Fire deaths and its liability from it has been to file for bankruptcy.

If that same fire had been started by an arsonist, incarceration of the arsonist would be the desired result. Who will go to jail for the Camp Fire 85?    

Law students learn that corporations are legal “fictions”; entities created by law that can own property or operate a business in its own name while shielding the shareholders from personal liability for the corporation’s acts.  But that does not free the managers of any corporation from penalties if they are grossly negligent and people get killed.  

PG&E managers know that its equipment sparks fires. They know that they can reduce the fire danger by cutting trees and clearing brush.  They failed to execute this in the year after the Camp Fire because they refused to throw enough money at it to get it done. Instead they just turned the power off.  

Forgive my choice of words, but if killing 85 people last year doesn’t light a fire under management’s ass to get it right this year, then what will?   There is no way to look at this and not understand that whatever else it has done, management has demonstrated that it lacks what it takes to run this company. 

To understand the immediacy of the problem, consider that the fire season in northern California has just begun and will run into next spring. PG&E equipment can and in all probability will spark dozens of fires in the next few months.  More lives may yet be lost this year and no one from PG&E is confident that they have a fix for the problem next year. The fix costs money and PG&E is in bankruptcy.

The massive prophylactic blackouts are certainly no long term solution. Repeated outages and business disruptions hit smaller businesses and their employees the hardest. If thousands of small businesses are repeatedly closed for a week at a time, many will not survive. Many employees taking that much unpaid time off are going to have difficulty paying their rent.

Obviously a long term solution is necessary.  The need for natural gas and electricity in California will continue to increase with its population in the next 20-30 years. However California generates electric power in the future, that power will still need to be distributed and it is the distribution system that is already over worked and failing.  

The management, the shareholders and the customers all have skin in this game. Because PG&E’s problems will be resolved in the bankruptcy court, it is logical to believe that the senior managers who are most culpable for the losses will get golden parachutes or large, unearned bonuses. The shareholders will get what is left over of the business, and the customers will get nothing and pay the costs of any restructuring. That is how bankruptcies work. Something more is needed. 

If part of the problem has been paying dividends to shareholders with money that should have been used for maintenance, then it makes sense to eliminate the shareholders. I am still a free market capitalist, but this is a monopoly, a market aberration caused by government intervention, so a free market solution is not necessarily wise. 

PG&E might come out of bankruptcy owned by the State, or as a quasi-private corporation modeled after other government owned power companies like the Tennessee Valley Authority (TVA).  The TVA is a one example of a how the government generates and sells electric power. Its business model clearly works at least to the point that it delivers power without causing massive fires in its service area.

The TVA is a product of the Great Depression. It was intended to be an integral part of the economic development of the area.  And yes, detractors claimed it was Socialism when it began.

PG&E might also emerge from bankruptcy as a co-op which would essentially be owned by its customers.  Those customers want cheap, consistent power without interruptions or fires.  They are more likely to take a longer view than any managers looking at paying a dividend to shareholders every quarter.

Both of these ownership models have been used successfully by power companies in other parts of the country.  Either would be a reasonable approach for a company that should be spending money on maintenance and infrastructure rather than dividends.

I suspect that a lot will be written about these outages and their effect on the economy and on the residents both in the fire zones and the blackout zones.  In my mind one obvious truth is that the managers of PG&E are really not up to the task. The search for their replacements should be the first order of business.

If you’d like to discuss this or anything related, then please contact me directly HERE

Or you can book a time to talk HERE

Leave a Reply