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PG&E files for bankruptcy. Here's why that could mean bigger electricity bills
PG&E Corp., which owns California's largest electric utility, filed for bankruptcy protection Tuesday in anticipation of huge legal claims, starting an unpredictable process that could take years to resolve and is likely to result in higher energy bills for the millions of Californians who depend on Pacific Gas & Electric for power.
PG&E said a Chapter 11 bankruptcy filing, which allows the company to continue operating while it comes up with a plan to pay its debts, was the only way to deal with billions of dollars in potential liabilities from a series of deadly wildfires, many of which were sparked by the company's power grid infrastructure.
"Through this process, we will prioritize what matters most to our customers and the communities we serve — safety and reliability," interim Chief Executive John R. Simon said in a statement. "We believe that this process will make sure that we have sufficient liquidity to serve our customers and support our operations and obligations."
Energy experts say PG&E's rates probably will increase when the utility emerges from Chapter 11 protection because bankruptcy inevitably makes it more expensive for a company to borrow money and creates large legal and other bankruptcy-related costs. The utility passes such expenses along to its customers.
"It's almost impossible to see a way out of this that doesn't have some short-term cost increases," Ralph Cavanagh, co-director of the energy program at the Natural Resources Defense Council, said in a recent interview.
(Score: 5, Insightful) by Thexalon on Wednesday January 30 2019, @03:45PM (10 children)
People working at a company screw up so badly that over 80 people die and 18,000 buildings burn to the ground, equalling something like $16.5 billion in losses. As a result, those company's customers who had either nothing to do with this or were its victims have to pay a bunch of money for the mistake that the company's employees made, while the people who actually screwed things up are basically unaffected. Does that make sense to you?
And don't give me the "Well, it's so much money they can't possibly come up with the money any other way" line. If they're doing stuff that carries the risks of these kinds of losses, they should have been carrying some pretty darn hefty insurance policies, and the insurance company would be on the hook. There are companies out there that sell those kinds of insurance policies out there.
This is the classic "privatize the profits, socialize the losses" approach which worked so well for Goldman Sachs and many other major firms. And it's why any belief that capitalism always rewards good behavior and punishes bad behavior is complete hogwash.
The only thing that stops a bad guy with a compiler is a good guy with a compiler.
(Score: 2) by Non Sequor on Wednesday January 30 2019, @04:13PM (1 child)
Actually, $16.5b is a really big loss relative to insurers too. See https://www.naic.org/prod_serv/MSR-PB-18.pdf. I would imagine a contract that large would require multiple reinsurers to spread the potential losses.
It wouldn’t be cheap either. The cost of property insurance is basically the cost of a covered accident times an estimated frequency rate plus a profit/risk margin plus policy service costs. In hindsight, PG&E has racked up at least $20b over 20 years. A premium for adequate insurance coverage for this should be at least a $1b per year. That’s probably better than coming up with a bankruptcy plan that involves paying installments on the $16.5b over as long of a timeframe as they can negotiate, but it’s not an easy solution either.
The other potential hindsight solution would be mitigating the fire risk of their equipment. That’s not necessarily a bargain either. I’m guessing this might entail something like expanding the easements for the equipment that produces fire hazards to include fire breaks. That’s a lot of propert owners to negotiate with.
I wouldn’t rush to judgment too quickly in all of this. California is relatively unique in terms of its large population centers, comparatively recent development and arid conditions.
Write your congressman. Tell him he sucks.
(Score: 4, Interesting) by Thexalon on Wednesday January 30 2019, @04:58PM
I'd be more sympathetic if PG&E hadn't boosted dividends each of the previous two years, both times prompting a nice increase in their stock price. That's an indication that upper management was more interested in paying investors and probably themselves than they were in either purchasing the necessary insurance or equipment upgrades.
The problem with not punishing the people responsible for causing the problem is that it creates a substantial incentive to skimp on risk management efforts like insurance, maintenance, and equipment upgrades and instead claim higher profits in the short-term. The investors see the lowered expenses and thus higher profit margins, the managers responsible get nice big bonuses and promotions, and everybody's happy until it turns out those risks were actually a problem.
An example of this happening in a different economic sector: Between 2000 and 2008, a division of AIG which had previously been a sleepy backwater of the company started selling insurance against losses in mortgage-backed securities. The manager of that division was lying about how risky this was to his superiors (according to my brother-in-law's dad who worked there at the time), and so upper management saw the big jump in sales but not the big risks they were taking on and gave him appropriate raises and promotions commensurate with his huge success. This was great for all involved, until everyone simultaneously realized in 2008 that the mortgage-backed securities and thus all the related derivatives were worthless, and pushed AIG beyond its ability to pay claims, and that was one of the major reasons the entire global economy tanked ruining millions of people's lives and wrecking a couple of countries in the process (Greece and Spain). Whoopsie-daisy. But in the meantime, the guy who had been in charge of this just waltzed away with his millions. And now you see the problem.
The only thing that stops a bad guy with a compiler is a good guy with a compiler.
(Score: 3, Informative) by bob_super on Wednesday January 30 2019, @06:14PM
Utilities, which are natural monopolies, should not be for-profit entities.
Basic logic.
(Score: 1) by khallow on Thursday January 31 2019, @05:22AM (6 children)
While PG&E was grossly and perhaps criminally negligent here, it doesn't absolve the many other parties responsible for this mess. There's a good chance those people would have died and those buildings burn anyway just because of the poor fire fighting response and the unsafe landscaping of the properties in question.
I doubt California with its obsession over all sorts of trivial risks would fail to pass regulations on the sort of fire hazards that PG&E is accused of having created. So why weren't those regulations enforced? "Socialize the losses" requires the collusion of a party capable of distributing such losses among a larger population. That's not capitalism.
(Score: 3, Insightful) by Thexalon on Thursday January 31 2019, @10:13PM (5 children)
PG&E's level of responsibility was determined in courts after a lot of lawsuits and such went back and forth. No fire = no deaths and no buildings burned, PG&E's mistakes caused the fire, ergo PG&E is responsible.
Like nearly all for-profit companies, PG&E's response to government regulations they think are too expensive are, in approximate order:
1. Lie to the government. This is the main function of corporate "regulatory compliance" departments, so since they're already paying people they might as well get them to lie.
2. Buy off the people responsible for creating or approving the regulations so no regulations get written that you're not already complying with. This is still usually a lot cheaper than complying with the regulations that would have been written had they not bribed anyone.
3. Buy off the people responsible for enforcing the regulations so they conveniently don't find anything wrong when they look. This bribery can range from fairly cheap (if it's slipping an inspector an extra $100 or something) to very expensive (dishing out a lot of cash to entire departments).
4. Stonewall investigations enough that law enforcement basically gives up and settles for a large-sounding-but-not-actually-that-big fine and no admission of wrongdoing.
5. Comply with the regulations enough to get the regulators off their backs, at which point you go back to step 1.
The thing is, when government regulations are necessary, the best thing for society at large is to have enforcement agencies that are ruthless enough to get through steps 1-4 relatively quickly and repeatedly until the cheapest thing the company can do is comply with the regulations.
Yes, it is. It's not the theoretical capitalism described by pro-capitalist economists, but it is how what is commonly called "capitalism" is actually working right now in lots of industries and companies. It happens because enforcement is lax enough that breaking the rules is cheaper and easier than following the rules, and thus breaking the rules is the path to maximizing shareholder value.
The only thing that stops a bad guy with a compiler is a good guy with a compiler.
(Score: 1) by khallow on Friday February 01 2019, @02:36AM (4 children)
So what? "Late capitalism" has as much relationship to "capitalism" as "fake diamonds" do to "diamonds". I'll note that a lot of other states don't have the problems that California has.
Why blame capitalism when it's flawed enforcement of regulation and a couple of decades of bad energy policies? California is notorious for failing in these things. They passed all kinds of laws to mandate fossil fuel plants move outside of the state boundary, almost bankrupted PG&E early last decade in the California electricity crisis, and then looked the other way when the crippled PG&E had to ship in massive amounts of power on shifty transmission lines in order to do its own job and deliver power to millions of California voters.
(Score: 3, Insightful) by Thexalon on Friday February 01 2019, @09:10PM (3 children)
No True Scotsmaning, I see.
The claim that other states haven't had large-scale screw-ups by power companies is demonstrably wrong.
I live in Ohio (which has been for the most part had a state government controlled by Republicans for whatever that's worth). Its largest power utility, FirstEnergy, decided to skimp on equipment upgrades, operator training, and line maintenance to increase their profit margins. One day in 2003, those risks turned into reality, blacking out approximately 55 million people in 8 states and Ontario for 2 days. About 100 people died in incidents caused in whole or in part by the outage (e.g. home medical devices not working).
It's also worth mentioning that incident had absolutely nothing to do with any of the specific regulations you mentioned.
Because organizing utilities as for-profit businesses gives the people in charge of making decisions an incentive to do the wrong thing by making it more profitable to do the wrong thing than the right thing. I know the concept is inconceivable to somebody who thinks Capitalism=Good and Government=Bad, but you have phenomena like this that demonstrate that capitalist organizations on average have a poor track record when it comes to managing giant risks.
Oh, and the California electricity crisis you mentioned? That was the fault of Enron, Inc [marketwatch.com] because they realized they could increase their profits by intentionally creating power shortages and blackouts, so that's exactly what they did. That's an even stronger demonstration of the problem: Enron's fundamental goal was to maximize shareholder value, not to provide reliable electrical current to residents of California, and they acted on that goal.
The only thing that stops a bad guy with a compiler is a good guy with a compiler.
(Score: 1) by khallow on Saturday February 02 2019, @02:21PM (2 children)
To the contrary, capitalism is one of those things people complain about when they deliberately break it.
Ok, how many states again is Ohio? Nor do I recall saying that every other state was perfect.
So does organizing utilities on any other principle. California, for example, didn't get in a situation where it had to import massive power from other states because of its for-profit businesses, but rather because the not-for-profit people blocked most power generation in the state for a number of decades.
A "poor track record" compared to what? Who does it better? The "too big to fail" people who keep bailing poor decision makers out? The old communist world that casually ignored massive ecological damage when it suited them (and were near completely incompetent in economic matters)? The welfare states that have near universally evolved into machines for transferring wealth from the younger (and not yet born) generations to older generations?
It's very easy to glibly go on about the "poor track record" when one doesn't have to care if anyone out there can do it better.
(Score: 2) by Thexalon on Saturday February 02 2019, @07:14PM (1 child)
When it comes specifically to electricity:
- Canadians get their power cheaper than people in the US.
- People in Europe, Japan, Singapore, and quite a few other countries have substantially fewer outages and other power problems than the US does.
- Within the US, municipal power companies are more reliable than for-profit utilities [eia.gov].
Some serious ideas that would potentially help:
1. Requirements for insurance on more of the risks businesses take. Insurance premiums are basically a charge for taking risks, and the insurance company will spend a great deal of time evaluating the risks and setting their premiums accordingly as well as making recommendations on how to lower those risks.
2. Make pay-for-performance for top management pay out several years after the relevant decisions are made. So instead of handing out big checks in 2019 for someone who got the stock price up in 2019, you hand out that check in 2024, provided their gains "stuck" for that period. This would reduce the incentive management currently has to favor short-term gains over long-term risks.
3. As many countries require, have the Board of Directors include representatives of the low-level employees, affected governments, and others who are affected by the business's decisions but aren't investors.
The only thing that stops a bad guy with a compiler is a good guy with a compiler.
(Score: 1) by khallow on Sunday February 03 2019, @02:57AM
There's a lot more hydroelectric power per capita. Same goes for Norway. Those tricks only get you so far in the US.
At higher cost and higher population density. For an extreme example, the average cost of electricity in Germany and Denmark is roughly three times higher (35 and 33 cents per KWh [wikipedia.org]) than the average rate in the US (10.48 cents per KWh [eia.gov]).
This is reasonable - or posting a bond of sufficient size.
They can do that already. I think a large part of the reason that's such a mess is that many of the decisions are done with other peoples' money. I think organizations like PIMCO or CalPERS care more if their names get into the news than if the investments perform well.
That's a terrible idea. Those people have no stake in the company. The low-level employee just sucks a pay check. The government is just looking for an excuse to extort money, and "others" could be a variety of other parasites (than the ones mentioned). And all of that creates conflicts of interest that can go the other way as well. If my too big to fail business is 25% government owned (like say Renault is, they're 25% owned by France), then that gives incentives to the government to compromise France in order to support their investment in Renault.
Anyway, going back to the original post, there's another important point that gets ignored here. Even with the supposed effects of "late capitalism", companies are fundamentally in compliance with a huge amount of regulation that didn't exist 50 years ago. There are important measures like workplace safety and pollution that are much better now than then. If companies really are bypassing regulation, then where's the evidence for it?