Once again there is a risk of fire so they are turning off the power in many parts of dry and windy northern California, for 2.7 million people. From The New York Times:
“When you turn the lights out on 3 million people because you have to keep the power lines safe then there’s no reason you should be allowed to continue,” Mr. Court said.
Michael Lewis, PG&E’s senior vice president of electric operations, said the issue was safety.
“We would only take this decision for one reason — to help reduce catastrophic wildfire risk to our customers and communities,” Mr. Lewis said in a statement.
PG&E filed for bankruptcy in January after amassing tens of billions of dollars in liability related to two dozen wildfires in recent years. As speculation grew that its equipment might be the cause of the Kincade Fire, its stock price plummeted about 30 percent on Friday to $5.08, a small fraction of its 52-week high of $49.42.
I would think the market expectation is that if PG&E is allowed to continue, as is likely to be the case, that it slowly will claw its way back to profitability, given that this is a highly regulated sector with barriers to entry. So the company is afraid of losing its expected remaining profit from further liability, and thus it plays it safe with power, too safe because they don’t suffer so much from the power blackouts. Sadly, the retail customers do not have many other options.
One solution would be to remove the liability the company faces from the fires, or alternatively you could add a liability option of set of fines from power cuts (call them “breach of contract”). Both changes would introduce greater symmetry into the liability equation, but of course the former would eliminate the incentives for fire safety and fire reduction and the latter might bankrupt the company or create unenforceable or undefinable legal obligations. Still, it hardly seems the current arrangement can be first best.
How about raising rates? And then spending more on capital improvements? (do read the tweets behind that link):
And in those proceedings, there is an independent division of the CPUC (the ‘Office of Ratepayer Advocates’) that has typically argued against maintenance and safety expenditures, so that rates can be kept low
How about raising rates a lot? But maybe it is too late for that.
Another option, which I do not feel I have enough information to assess, is to have the state government buy out the power company. That is not usually a good idea but in this case there is at least a chance it could lead to superior incentives. The resulting company would then be geared toward pleasing voters, hardly an ideal arrangement but possibly better than the current incentives toward excess safety and massive power cuts with no real chance of consumer backlash. With government ownership, how would the state internalize the liability risk? How much would state borrowing rates rise?
Have you seen good proposals for improving the incentives in this rather disastrous matter?