The economics of California power blackouts

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?

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Nope.

California is merely shutting off power in solidarity with other socialist shitholes.

Revealed preference, what MR is "for."

This is the result of greedy lawyers and ignorant jurors. What other choice does PG&E have. The fires are the result of California's unusual cyclical climate. Spring rains which cause massive growth un brushy plants, followed by long hot summers which dry out the plants, followed by dry and very high wind conditions that spread even the smallest fire. PG&E did nothing wrong. They didn't cause the winds ands they didn't create the conditions that facilitate the fires. They are simple the easiest deep pocket target.

Our political class (lawyers) have defined the Utilities as liable for what used to be claimed as "acts of God" or unavoidable accidents. They are making a killing on this open liability.

Apparently, only 10% of our wildfires have electrical sources and only a small subset of those are due to negligence or similar factors related to responsibility. Now that we have eliminated PCB's as transformer coolants (doesn't burn) when a transformer is cooked, it explodes and the question becomes did the transformer explosion caused the fire or the fire caused the transformer to explode.

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PG&E is an incompetently run company look at their track record (huge explosion in 2010, massive fire in 2017). Every other electric utility in California kept the electricity flowing. Only PG&E had "safety" blackouts.

PG&E could well be incompetent. However you seem ignorant of what causes these fires. It would be easy to blame an over loaded transformer but that didn't cause any of the fires in question. The fires in question (i.e. the ones that "may" have been caused due to PG&E lines) were from two causes: 1. transmission lines being blown (by the extreme winds) together or close enough to cause sparking. 2. Trees or other objects being blown (by the extreme winds) onto transmission lines. See the common denominator there??? The extreme winds!!! Not PG&E.

PG&E is being accused because they have deep pockets and the lawyers can get their hands into those pockets. Ironically other "utilities" that are quasi government (not public companies) cannot be sued even if their equipment or incompetence causes a fire.

The bottom line is the unintended (or maybe intended) consequence of aggressive trial lawyers and complicit judges in awarding large judgements is not the power company MUST shut down power when events beyond their control (extreme winds), put them at risk of being red meat to trial lawyers.

Bottom line is California has a choice; either stop the lawyers from setting policy through greed OR face endless blackouts as the utilities have no other choice but to protect themselves during high winds.

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"PG&E did nothing wrong. They didn't cause the winds ands they didn't create the conditions that facilitate the fires."

Installing power lines created the conditions for the fires, so yes they did and they are the responsible party. It's simple.

Sure, but-for causation, but proximate causation? That's not obvious to me.

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"California is merely shutting off power in solidarity with other socialist shitholes." --> Perhaps, but nothing quite stimulates demand for back-up generators like frequent power outages. Or (when utility power becomes horribly unreliable) unregulated, often illegal private power suppliers.

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"excessive safety" in a pge discussion
- no one, ever

The company has a rap sheet longer than Trump Resort and Casinos.

https://en.wikipedia.org/wiki/Pacific_Gas_and_Electric_Company#Disasters

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"a liability option of set of fines" is confusing; "fines" would be clearer.

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Well with all due respect, I think you are missing the main problem. In my opinion, the primary problem is that the vegetation in California is much more dense than it was in the past. I say this as a long time California resident. For example, in the medium sized town I grew up in, there were typically several fires that occurred in the hills in our town each summer during the 1970s. (Back then, the common cause was kids playing with fireworks or matches. I can still see the image of one of the kids I new running down the street in tears after he was messing with matches after having started a grass fire. Ironically, his dad was a fireman). Most of these fires were quickly put out, although some would grow to more than several acres in size. Occasionally one would get bigger than that, and the aerial tankers were called in. But that was highly unusual. It was rare that a house was lost. Today, if the same fires occurred in this same town, it would be very difficult to get the fire under control. Wilderness fires now rarely occur in this town. A homeless person allegedly started one about 10 years ago, and it took out an entire hill. Fortunately, there were no houses on this particular hill.

To give you just one example of how the cultural attitude has swung towards protecting trees, many California counties now require biological reports and what is called a Timber Harvest Plan ("THP") if you want to cut down excess trees and clear brush on a piece of land. To give you another example, it was common in decades past to to control burns to clear out excess brush. I am part owner of a piece of rural land, and we did such a burn in 1987. CAL FIRE Firefighters and Huey helicopters with water buckets were there to help out. Good luck trying that today.

The density of trees and vegetation in some communities is just extraordinary. Have you driven recently through the hills of Mill Valley in Marin County? If not, I encourage you to do so. God forbid for the day that a fire starts in Mill Valley and the wind is blowing.

Sure, you could mess around with the regulatory scheme with PG&E and arrive at some sort of solution. But, in my opinion, this would be a distant second best solution

I looked it up:
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4321274/

Declines in the number of large trees in temperate and tropical forests have attracted attention, given their disproportionate importance to forest structure, function, and carbon storage. Yet, factors responsible for these declines are unclear. By comparing historic (1930s) and contemporary (2000s) surveys of California forests, we document that across 120,000 km2, large trees have declined by up to 50%, corresponding to a 19% decline in average basal area and associated biomass, despite large increases in small tree density. Contemporary forests also exhibit increased dominance by oaks over pines. Both large tree declines and increased oak dominance were associated with increases in climatic water deficit, suggesting that water stress may be contributing to changes in forest structure and function across large areas.

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The water deficit is an unproven educated guess t the moment.

Nothing peer reviewed that is vaguely adjacent to a political issue can be believed.

It is absolutely obvious that there is a lot more wood, and a lot more dry dead wood in California today than there was twenty years ago, and anyone who denies it is just lying.

It is also obvious that biomass world wide is increasing. Places that I walked as a lad that had barely enough forage for goats and sheep now have young forests growing over them, which personal observation is consistent with satellite images showing a world that has become substantially greener over the time that satellites have been up.
http://sites.bu.edu/cliveg/files/2013/12/Myneni_Nature.pdf

Myeni sees more leaves from space, and I see more trees from the ground.

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Repeating a point made on the general post, but again, where are insurance rates? As vegetation density increased and sentiment about clearing land shifted, why didn't insurance rages go up to establish some kind of equilibrium?

Well, California has an elected insurance commissioner. Given the state's politics, my guess is that commissioner is as interested in incentives as a cat is interested in calculus.

But risk-based ratings (assuming that have SOME incentive effect) mean lower premiums.

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As a guy who clears brush, this year is the worst in my experience. We had perhaps twice the normal dry grass left after a rainy winter.

And places I hike still have acres and acres of dried mustard standing 8 feet tall. Acres of tinder.

I get LA and OC fire alerts. I think we've had 6+ small fires in the last 3 days. All knocked down quickly, some just limited to an acre or two.

The fire departments, at least, are showing good execution.

The noxious weeds section here is the closest picture I could find, but these are "normal" pictures.

Imagine acres of dried mustard, taller than you.

Given that it's a non-native, maybe some habitat restoration is in order?

But people would have to not hate environmentalists for that to happen ...

And they'd have to want to spend money on something other than people.

I often see crews, state, utility, and more rarely prisoner work parties(*). They were all working as fast as they could this year, but with maybe 2x work, everything fell behind.

I think it would be a really massive public works project, to really do it all.

* - I once had to mtb past a prisoner with a chainsaw. This felt sketchy, but I told myself "he has to be nonviolent, right?"

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Habitat restoration sounds great, but it is not a simple matter. For starters, we don't even know what a healthy habitat would look like in lands where more and more people live in the Urban Wildland Interface (technical term), a matter of some concern. It's possible the habitat in the area described above burned often over the millennia before humans settled there.

Some years back, federal foresters decided that forest fires were a factor of life in the natural environment; they decreed that fires should be left to burn (until they got really close to houses) in order to foster natural habitat restoration.

Then, in some stands, trees got dry in the long drought years and were prey to pine beetles that munched away on bark, making the trees less healthy and more vulnerable to fire. At the same time, more annual understory plants sprang up to take advantage of newly available sunshine and soil and, after the rainy seasons ended, drier and more susceptible to burning as well. Meanwhile, logging had long been banned in publicly owned old-growth forests, which grew more dense with younger trees, older trees, and dead and dying trees. The net result has been a huge increase in the "fuels load" of western woodlands and, with it, hellacious big fire seasons. Much attention was paid to California fires last year, but more acres were burned the year earlier in Montana; Oregon, Washington, Idaho and British Columbia also have reported more and bigger fires.

California now is trying to ease the situation with modified forest management procedures, but it's difficult to explain the logic to greens who don't know plant science or the history learned from tree rings and soil studies.

Another fact is that humans interrupt nature. Northern California grasslands are full of Scotch broom and French broom that aren't supposed to be there but are happy and spreading. I used to pull broom with other nature-minded folks, but it was impossible to make enough headway to restore even a small portion of native habitat that would not be overtaken by more broom the next year.

Another transplant group that likes California are eucalyptus trees and bushes from Australia that are oily (i.e., flammable) and that also have gone native.

Many Marin County gardens are full of escargot, the descendants of French snails imported late in the gold rush days for San Francisco restaurants. Along the Mississippi, major action is underway to prevent leaping Asian carp -- imported by government experts to manage some downstream fish problem -- from penetrating the Great Lakes, which already have become home to zebra mussels carried in on the sides of cargo ships. And Texas' beautiful Caddo Lake is disappearing under a walkable carpet of Asian ornamental greens imported originally for floral arrangements.

I'm oversimplifying a lot here on the forest issue, and I could go on forever about animal habitats. The point is that habit restoration is extremely complex. That complexity is a bigger barrier by far than people who "hate environmentalists" and don't "want to spend money."

Yes, I'm very familiar with the complexity of fighting invasive species, I spend a lot of time doing it. But it's important not to give up trying to act just because the problem is complex.

I'm also aware that in some places people don't dismiss the input of environmentalists and are willing to spend funds on invasive species, though not in my state. But it's easy to bash environmentalist measures - regulation, saving trees, burning, not burning etc. etc. - and a lot of responses on this thread do so. As you point out, the real problem is that some natural landscapes are inherently incompatible with urban development.

And if exotics are the issue, well, at a start get out there and pull up the exotic mustard.

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I've often had the far-too-simplistic idea that the way to protect endangered species are to simply introduce them to a new environment, where they will quickly grow into an all-consuming threat as an introduced species.

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There is some truth here. We wanted to remove several large (like 70 ft tall) eucalyptus trees in our yard, in part, because of the fire risk. We had to pay the city for permits (several hundred dollars), pay for tree removal (many thousands of dollars), and – the kicker – pay to have 2 15-gallon trees planted for every tree we removed (a couple of thousand dollars). We already have dozens of trees on the property – no rational person would say that we were somehow lacking in trees, even after the eucalyptus were removed. It was a massively expensive hassle for something that the state should be encouraging. It took about 8 years of my wife complaining to me about the trees for us to finally get over the hump and pay for it.

Another quick anecdote: PG&E sends contract tree guys out to trim trees around power lines. They only trim the oaks and won’t touch the eucalyptus, although both are the same distance from the power lines and the eucalyptus are far more likely (genetically designed) to create fire. Some days, the tree people would simply sit in their trucks under the trees. So there’s some incentive broken there for the contract tree workers.

One more: I do see great things happening in the trees and open spaces around our area. CalFire (our forestry fire service) have been cutting tremendous amounts of underbrush in strategic locations in our open space preserves in the area. Good for them.

Ultimately, if you remember, the last time California suffered rolling power blackouts, we ended up with Governor Schwarzenegger. Newsome is not an impressive character, so maybe this is an opportunity for the Rock to step into politics?

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PG&E did not want to build the power lines in those fire prone areas but were forced to. PG&E wanted to bury the lines they were forced to build but the CPUC would not fund that. It costs $8 million a mile to bury power lines in those areas and they serve only a few people.

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PG&E has had a string of seriously negligent incidents for some time and its the same story every time, cheap out on maintenance and safety to pay out large bonuses. In 2010 the San Bruno natgas explosion that leveled entire neighborhoods and killed 8 people was really the first domino to fall. Spotty welds and leaks everywhere, it's clear they took short cuts. They were found guilty on multiple accounts of violating the Natural Gas Pipeline Safety act and paid out billions in fines. In 2012, an audit found they moved $100 million from safety into executive compensation. But it didn't change their tune. In 2017, they still continued to pay out huge bonuses[1]. This is a pattern with these guys. They are sociopaths and they don't really care about the job they were paid very generously to do.

[1] https://sanfrancisco.cbslocal.com/2017/04/19/pge-executive-raises-grow-despite-criminal-negligence-ruling-soaring-rates/

Again, victory for Mlltion Friedman

"cheap out on maintenance and safety to pay out large bonuses. "

The number one priority for managers is shareholder profit.

He fought the utility regulation in place circa 1970 that would have prevented such bonuses, and further ore capped returns to shareholders to market returns to invested capital, strictly regulated at original labor costs depreciated over time, requiring workers be constantly paid to maintain capital at the same book value used to compute returns, aka business profits.

To grow profits then utilities needed to convince regulators to approve lots more capacity than needed, usually done by arguing for redundancy. Friedman argued most customers would be better off with an occasional power outage than paying hundreds more a year to reduce the number and duration of outages.

In Caligornia, most customers will not see power outages, mostly because they live in urban areas, but increasing reliability for those in urban and rural areas will increase rates for customers who probably won't lose power.

Isn't socialism evil?

Friedman argued back when the means did not really exist for customers who wanted reliable power pay extra for reliable power.

Today, Tesla offers a branded solution not covered by patent monopoly, so dozens of competitors sell commodity solar roofs or backyard generation plus battery storage which can provide as much power 34/7/365 as you are willing to pay for, with the potential to make money selling power into the grid when needed. There are experiments in local microgrids.

Individualism. Competition. Not government! are the check on the moral obligation to maximize profits, not serving the public good. Molton Friedman rules! He defeated to socialism of the FDR era and delivered the Reagan era.

Including high profit utilities with increasingly unreliable utility serrvice.

My NH neighborhood has been adapting for about 25 years. At least half the homes have generators, many fully wired and on automatic standby, with many homes around this time of year getting out the generator to check it out to start it and plug in extension cords when the power goes out from ice, wind, snow.

I hadn't known that Milton Friedman was omnipotent.

Are you one of them liberal tax refugees that wrecked NH?

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I remember reading Friedman joking about the issue of public utilities. He said that laissez-faire in public utilities was so bad that experts favor extensive regulation. And extensive regulation is so bad that experts prefer nationalization. And nationalization is so bad, the experts think even laissez-faire would be better.

MF was a subtle thinker, not an ideologue. Give him some credit, instead of teaching him like an easy target.

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>same story every time, cheap out on maintenance and safety to pay out large bonuses.

In your story, where was the state utility commission? Given that premise, can you expect different behavior in the future?

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Here is some thorough collected information about public utilities' legal liability for service failure, state-by-state: "Liability of Electric Utility in the USA for Outage or Blackout" http://www.rbs2.com/outage.pdf (PDF). Not directly applicable but of interest definitely. I highly recommend checking out the author's (homemade) website if you appreciate nerdy cataloguers with specialized interests, just remove the part after dot com.

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"Have you seen good proposals for improving the incentives in this rather disastrous matter?"

They need additional incentives? A judge in August denied them up to $16 million in bonuses. Pretty shameless. Even in the face of bankruptcy they try to fatten their pockets for a job done quite terribly. Being overpaid for underperformance is the new American exceptionalism. If Newsome doesn't get a handle on this, he will be another Gray Davis who got canned for his own electricity crisis with Enron.

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So just to provide some evidence of my claims above, see this link.

https://www.ocregister.com/2017/09/14/you-may-not-believe-it-but-the-number-of-california-wildfires-has-been-going-down/

As described at the link, the number of California wildfires has been declining for decades. The problem is that the size of the fires is increasing.

A little cart before the horse here. - The problem is that the number of California wildfires has been declining for decades. A result of that problem is that the size of the fires is increasing.

I'm not sure I follow. I'm not saying that there is a cause and effect relationship between the number of fires and the average size of each fire. What I'm saying is that the total California acreage that burns each year is tending to increase, despite the fact that the total number of fires is declining. In other words, the problem is not that too many fires are being set (by PG&E, kids playing with matches and all other causes). As Arnold Kling likes to say, you can address a problem by making a system that is "hard to break", or once broken, is "easy to fix". Much of the media discussion has been on making it hard to break, i.e., making those who start fires (e.g., PG&E) subject to more intense penalties, which will in turn hopefully motivate them to adopt better practices. What I'm saying is that much of the problem stems from it being "harder to fix" once broken. In other words, the the buildup of trees and other combustible fuel in many California locations is making it very difficult to put out the fires, once they start.

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About 15-20 years ago when Silicon Valley was plagued with frequent power outages due to a different power market failure, it helped drive a shift in office equipment was away from Desktop Computers, Desk Phones, and OnPrem Servers (all of which require consistent power to operate) to Laptops, Cell Phones (w/ VoiP Apps), and SaaS Services (all of which can continue to operate on batteries when the power is out, so long as you have a working internet connection).

These technologies were all fairly crude by today's standards, but when the office might lose power for 2-3 hours per day for months, the cost of investing in the tech was worth it. We'd all sit in an office with no lights (or AC, but that's not unusual in Silicon Valley), but we could still work and take calls with customers and stay in business. When you're surviving on VC money and are on a short leash, you can't afford to shut down operations for little things like power outages.

Once the power supply stabilized and the brownouts ended, it was impossible to go back. The advantage of not being tethered to the power grid anymore made it possible to be significantly more mobile in your work day, moving between desk and conference rooms, or working in the kitchen, or even outside at a picnic table. (I suspect this helped make possible much of the modern hysteria for open office plans.)

Today, it's pretty typical in SV to have your office's core network be completely power independent from the building, allowing you to continue operation for hours/days even if construction accidentally cuts the main. (A large part of Fiber's allure is its lack of current -- using photons instead of electrons means you don't need to have relays every 100m to stabilize the signal, like you would with Copper. MultiMode GB can go up to 1km without needing a boost. Sometimes that's far enough to get all the way to the main relay in an urban area.)

If the PG&A power outages continue, I suspect the it will just drive further improvements in battery technology and local power generation (like Solar, etc). The outage a couple weeks back started late, undermining confidence in the announced schedule. This weekend, some of our team have announced they are shutting off their power preemptively, to avoid surges and damage to their personal equipment. I've heard more than a few engineers discussing how they plan to build their own scratch-built "Tesla" home batteries to keep essentials running for several days at a time so they can ignore PG&E's shenanigans.

Once those first working batteries are in place, the engineers won't be able to stop themselves from rapidly iterating better solutions and finding novel ways to capitalize on the excess capacity when it's not needed for the original purpose. The entrepreneurial spirit isn't something you can turn off-and-on at will, (un)fortunately.

Agreed, hopefully the best case outcome of this situation is that power generation becomes decentralized and therefore antifragile to this kind of stuff.
The last thing California needs is a state run utility. LADWP alone is a disaster.

Plenty of community owned utilities that run the show better than PG&E. The city of Santa Clara must feel pretty smug right now as their neighboring cities can only curse the darkness. PG&E is the Bear Stearns of utilities. Should have been made bankrupt sooner by the regulators.

https://www.cmua.org/members

in addition SMUD and EBMUD have not had "safety blackouts". It's a financial device to save the existing executive mamagement. Cowen is right...the State should buy it out but then redistribute assets to the MUDs...while jointly manage the current liabilities.

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"have the state government buy out the power company". Guess it's time for a new generation to learn the difference between voluntary and involuntary blackouts.

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In Israel, the Electric Company prunes the trees and sprays nearby vegetation with herbicide. Give some power to them! Trees are sacred only for savages.

There are transmission companies that don't do this? Guys... I think I've found out why you keep having all these fires...

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Call any experienced forester, they'll tell you why there are bigger fires even though there are fewer fires. Then let them do their job. Dry vegetation and power lines don't mix, and if you want people to have electricity, you're going to have to remove some vegetation, whether it offends somebody's religion or not. Being burned to death offends my religion.

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"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..."

If the overall evidence from the past 30 years indicate it's usually not a good idea I would be surprised. Of course, you could be referring to the situation in the United States which could be different from the general experience in the world.

All up I pay about 34 US cents per kilowatt-hour for grid electricity.

Average price in California is about 20 cents, but I don't know how that may vary locally, particularly in these sparsely-populated areas.

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Yeah, no thanks, Crikey, I don't want my electrical rates to more-than-double. I'll stick with my private utility in Texas charging $8.25/mo. plus 10 cents/kwh. Given the average daily high in August here in El Paso was a tad over 37 C, I need good rates for air conditioning.

If undoing our privatization doubled electricity prices I'd be paying around $1 per kilowatt-hour. (Or not paying it, since it would be time to go off-grid.)

Sorry, that's $1 Australian, which is about 68 US cents.

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Hmm, in NYC I pay 25 cents per kwh, which is broken down as 8 cents supply and 17 cents delivery.

Ouch! You are paying the Australian average for the total cost of residential grid electricity per kilowatt-hour.

You're paying even more than they do in France, which is not what I would expect.

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Decentralized power generation is long overdue. It is clear that PG&E overbuilt beyond what they can properly maintain.

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In Western Australia they have taken some remote homes and communities off grid and rolled up the transmission lines. They ddo this to save on grid maintenance costs. When the cost of fires are added in this may be worthwhile in some US locations. If not now, then in say two years after other countries such as Australia help bring down the expense.

The US also has a major Electric Vehicle (EV) manufacturer. Nissan's electric vehicles are designed with the ability to assist in providing electric power during natural disasters in mind. The US could provide incentives to it's EV manufacturers to do the same.

The gasoline in your tank still has better energy density than your EVs. And they will still run in a prolonged crisis, as opposed to the EVs.

There would be no Mad Max type of civilization without "guzzoline".

Before we disconnect communities from the grid we do install some solar panels first.

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This operational policy is the one proposed by Milton Frieedman back circa 1970.

I was a physicist, engineer, science student, who curious about economics. Reading the columns in Newsweek was my entry to advanced economics beyond public school economics describing the circular flow of money and counter flows of goods annd labor. Of Galbraith, Samuelson, and Friedman, he was the easiest to follow.

But with results that seemed counter to my limited view of reality.

Very logical and well argued so that I couldn't see the flaws.

One theme I considered serious was on utility regulation.

He argued that utilities had captured the PUC, the regulators. This was in the heyday of Ma Bell, with the Laugh In Lilly Tomlin skits, "one ringy dingy".

Friedman argued that the strict regulation of profits on depreciation of actual labor cost of capital meant the utilities, power and telephone, had to invest heavily to grow shareholder returns. When there was vertical integration, full accounting of labor costs prevented "value pricing". If new technology was more productive and required less labor to implement, utility rates were forced down, so the only option was to justify lots of capacity and lots more consumption.

The biggest argument for more capacity was higher reliability and rapid restoration of service.

Thus telephone systems were sized for peak demand, like black Friday for business, and Chtistmas for residential when call volumes were several times peak. For electric power, the utilities sold electric resistance heating and air conditioning and then justified generation and grid capacity for the days at 20 below zero and 120 degrees. And the utilities offered subsidies to install electric heating and A/C.

Friedman objected to the system that required paying lots of money to lots more workers to increase profits to shareholders, by charging higher and higher rates and bills for services customers, in Friedman's view, did not need.

I remember he argued that no one needed uninterrupted power, telephone, especially when it required lots of redundant capital that raised customer rates, and lots of always on call service workers who would restore service kn the dark, on weekends.

He argued the utility regulators should only allow the rates to include providing of service most of the time.

And for those who needed always on service, they play extra to get the always on service.

I understood the argument, but as an engineer I didn't see how iit could be done in 1970.

Friedman, however, convinced many to change the rules regulating utilities, especially President Cartr, Ted Kennedy, and lots of Democrats.

He also won over the anti-nuke activists, as nuclear power plants were justified as providing highly reliable and excess power to encourage lots more consumption.

Friedman made fighting utility investment public policy.

Friedman made fighting against utility reliability good public policy.

Power cuts in California are exactly the policy Friedman argued for.

And today, individuals and businesses can easily buy high reliability at slightly higher prices.

Solar roofs and battery storage allow homes to maintain power for essentials for days during a power shutdown.

Thus only those who are willing to pay extra get the unneccessary reliable power everyday, while everyone else pays lower rates and bills every day, saving lots off money.

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Throw the executives in jail and confiscate their bonuses. Deprive them of life, liberty, and property to make an example for the next set of elites that even think of corrupting our institutions.

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California is now by far the richest third-world country.
Third world countries are known for their inability, usually because of weak governments, to provide a steady supply of basic services such as water and electricity.

This is only worthwhile comment on this whole thread.

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"So the company is afraid of losing its expected remaining profit from further liability"

Can they not clear the area around their towers of potential kindling the way a normal utility does? Shutting off the power is an incredibly dumb way to reduce liabilities when a staff of gardeners will do.

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Record breaking high temperatures don't just increase fire risk, they also make power lines droop lower than they ever have before. A bit of synergy there.

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I still do not understand how fire insurance rates do not deter more people from building structures in fire prone areas. It is said that the drought is NOT fundamentally different from centuries past, so what's going on. (Same question about hurricane areas except I understand that there is subsidized insurance for some of that.)

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Bury power lines most at risk of starting fires and raise rates to cover that cost.

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I think the time has come for full nationalization of public utilities. Americans should have to be plaing hostages for a bunch of greedy fat cats.

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"given that this is a highly regulated sector with barriers to entry."
That is the problem right there. Eliminate regulatory barriers to entry, and the market will solve the problem, one way or another.

Electricity supply is what's called a natural monopoly. Where transmission is privatized there is going to be a lot of regulation in order to prevent the price of electricity rising to 50+ cents per kilowatt-hour. Being able to deal with this regulation is a barrier.

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The WSJ says the state has forced PG&E to spend money on many political projects, diverting money from maintaining the grid.

Fires and Blackouts Made in Sacramento
Wall Street Journal ^ | October 25, 2019 7:01 pm ET

After again shutting power to hundreds of thousands this week, California’s utility PG&E disclosed Thursday that it had discovered a broken jumper cable by the ignition site of a wildfire blazing across Sonoma County. The company has warned of more blackouts this weekend and perhaps for the next decade as it refurbishes its aging grid.

Gov. Gavin Newsom is trying to deflect political blame. “It’s about dog-eat-dog capitalism meeting climate change. It’s about corporate greed meeting climate change. It’s about decades of mismanagement,” Mr. Newsom declared. But Democrats for years have treated PG&E as their de facto political subsidiary. The wildfires and blackouts are the direct result of their mismanagement.

The state Public Utilities Commission is in charge of enforcing state safety laws and regulations, which can carry penalties of up to $50,000 per violation per day. Yet PG&E received no safety fines related to its power-grid management over the last several years. The commission has instead focused on enforcing the Legislature’s climate mandates.

State law mandates that utilities obtain 33% of electric generation from renewables such as wind and solar by 2020 and 60% by 2030. Utilities must spend hundreds of millions of dollars each year to reduce the cost of green energy for low-income households. PG&E has prioritized political obeisance over safety.

In 2018 PG&E spent $509 million on electric discounts for low-income customers in addition to $125 million for no-cost weatherization and efficiency upgrades for disadvantaged communities. Utilities also receive allowances from the state’s cap-and-trade program—$7.5 billion since 2012—to pay for other “ratepayer benefits” that reduce emissions.

For instance, the Legislature in 2015 mandated that utilities spend $100 million annually on solar systems in low-income communities. This is on top of the $2.2 billion in customer rebates for rooftop solar installations, which utilities charged to ratepayers

So the $16 million in rejected bonuses mentioned above are, well let’s just say << 1% of the funds politically mandated to be spent on non-safety issues, i.e. bonuses are not the problem.

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+1
The money has been redirected by the SPUC to fight climate change not on safety. This is the democrats #1 priority in California.

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Some places just aren't suitable for permanent habitation in expensive structures. River banks, swamps, avalanche prone areas, seismic fault lines, and brush-covered hills among them. Nomadic peoples didn't have a problem camping in spots like those because they could easily move when necessary. Sedentary residents get upset when the river runs through their living room and want the authorities to eliminate this possibility. Why? Just don't live in dangerous locations. Or be willing to accept the risk personally.

C'mon, Chuck.

Stop with the common sense already.

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River banks, swamps, avalanche prone areas, seismic fault lines, brush-covered hills, and all the flora and fauna that inhabit them, do not pay taxes. Governments will always sacrifice natural areas if they think they can get away with exploiting for the purpose of generating tax revenue.

Even the despotic California government can't coerce people into moving into fire prone areas. Home buyers are reluctant to move into places like Watts and Compton for social reasons but happily sign the mortgage papers for property that periodically becomes an inferno because the view is good. That's nonsense.

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PG&E is already in the bankruptcy.

Genrac (makes standby generators) commented the other day that they were gearing up for greatly expanded sales in California.

It’s an interesting test - just how bad do things have to get before in your face reality overcomes fantasy? Based on refusal to address the vagrancy/drug crisis in San Fran, I’d say pretty bad, but repeated widespread power outages may do it.

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It is time to say "no" to those fat cats. Full-scale nationalization without compensation of all public utilities is the only workable solution. It is time to take our country back.

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"For new liabilities incurred by firms operating in bankruptcy, those creditors get priority status, meaning they jump ahead of all pre-petition creditors. If PG&E continues to smolder in bankruptcy and doesn’t emerge before another catastrophic fire, there could be billions of dollars in new claims ahead of everyone." https://www.forbes.com/sites/georgeschultze/2019/07/22/equity-gets-smoked-under-bondholder-plan-even-as-pge-smolders/

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>is to have the state government buy out the power company.

So the state has to eat these losses, as opposed to the PG&E shareholders? Are you trying to bankrupt the state of California??

The right answer is to wipe out the shareholders (again) and give the bondholders a haircut (again). A new company will buy up the physical assets (again). Yes, that new company will have trouble raising money given the sad history of PG&E I and II, but that can be fixed by giving it a higher return on capitol. The utility commission can do that going forward.

Good point. A new company with improved management could solve the problem.

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I used to work with a Berkeley PhD economist who specialized in public rights of way, utilities, etc. He told me that power companies intentionally put power lines above ground because they don't last as long there. And as their profits were limited to some amount over costs, the higher their costs, the higher their profits.
Years later I talked to a traveling Linesman, a man who traveled the country fixing power lines in emergencies. He told me power companies intentionally under spent on maintenance and repairs, because then lines would fail in a storm. And repairs due to storm damage were accounted for in a more favorable way than normal maintenance. He was part of the traveling road show of people and equipment that roamed the country fixing lines after storms.
Anecdotes, I know. But they ring true.

I get all my accounting advice from traveling linesmen. Those guys know freaking everything.

Yep, just ask them about the 100 MPG carburetor...

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This piece seems sensible.

The interesting thing is that two views of the problem might be compatible. In one, PG&E is bargaining with the state. In the other, PG&E is going into fire season with the system they have. Now knowing how vulnerable and dangerous that system is, they must perform triage. Cutting off a limb, temporarily at least. If done properly, with less actual loss of life.

So the triage might be justified, but it might also be used to justify the bargaining.

I think rates have to be raised, and more spent.

I doubt support a state buyout. I don't think that or anything else could magically create a short term solution. A better grid will take years.

Related:

"More people died from higher post-Fukushima power prices than from the accident itself: power consumption was reduced in cold weather, causing higher mortality.

Be Cautious with the Precautionary Principle: Evidence from Fukushima Daiichi Nuclear Accident"

Again via @pkedrosky

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(Elective) power blackouts for some two million Californians?

"Yeah, but we're getting power to more than thirty-eight million without service disruptions!"

Are northern California's ardent secessionists enjoying any new celebrity? (California has already lost millions of residents: when was the state's population last over forty million?)

When we non-Californians reminds ourselves of the Ghost Ship warehouse fire that resulted from local failure to enforce building code restrictions, California looks all the more like a civic disaster unfolding in slow motion, with occasional jerks when the footage speeds up.

Also: with all of the tech talent California is blessed with, not one single solitary Silicon Valley firm touts its superior ability to manage a public utility economically, efficiently, and reliably to all paying customers? NOT ONE??

NO Silicon Valley firm has such an offer to make?

Why are SV firms not scrambling over each other to show just how skilled they and their systems are in managing public power consumption for all the nifty keen gadgets they want us all to buy?

This is not surprising. There are no good solutions for managing a public good like electricity, just bad ones. A grid that never fails is overcharging consumers, while keeping costs down entails at least occasional power failures. It's impossible to actually make people happy, you can only not piss them off too bad.

But we are making use of all sorts of nifty keen gadgets when it comes to electricity supply. One example, I know a guy with rooftop solar, a Tesla home battery, and Tesla electric car. He's still a net supplier of electricity to the grid, although we'll need more time to see what effect the electric car has. (Note the addition of the battery reduces the amount of energy he supplies to the grid due to charge and discharge losses.)

You call it over-charging just because you don't count the costs of blackouts.

Suggestions:
1) don't supply power to far-away places through forests, or charge them more. If there are enough people there it would distribute.
2) Copy best practices from other places with similar issues. could be in China.
3) Take indebted bankrupted company from shareholder, turn it to a state company, limit max pay.

Blackouts are a definite cost. Of course there is the matter of who pays that cost. Depending on location and length of power failure consumers can receive compensation here and fines can also apply. That's clearly an incentive to keep the power on. But there is also an incentive to restrict available generating capacity to limit supply and force up prices and it's not hard to see how this can lead to blackouts when supply is restricted too much.

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>don't supply power to far-away places through forests,

In most places in the U.S., the landowner already pays the cost to run wires to their property.

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"1) don't supply power to far-away places through forests, or charge them more. If there are enough people there it would distribute."

It's a legal requirement to provide power for all residents and generally the amount that can be charged is capped.

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CA has never had a population over 40 million and has had steadily rising population pretty much always

https://www.statista.com/statistics/206097/resident-population-in-california/

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Cuomo and NY are following down this same perditious road. Ban the sensible and cheaper energy sources (fracking and nat gas pipelines) in the name of virtue signaling. Prediction: if current policies continue, some number of New Yorkers will be freezing in the dark within five years.

The two nuke plants at Indian Point, about 30 miles from NYC, produce about 2GWs of power, about 25% of NYC’s needs. They are scheduled to be shut down in 2020 and 2021. Replacement capacity seems uncertain; some environmental groups have reportedly suggested reduced power consumption. Perhaps PG&E is demonstrating how that works.

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PG&E’s CEO has been on the job for only 6 months. He came from TVA to take on this job. The people I know in the power industry have tremendous respect for him. Most are puzzled why he took on this thankless task of cleaning up his predecessors’ mess.

Governor Newsom is already undercutting him with useless pronouncements about things he has no clue about. PG&E was mismanaged for decades and it will take at least a decade to fix their antiquated grid. The way their grid is set up necessitates large power outages in times like this; they have no means to do “micro-cutoffs”. They need to hire hundreds of engineers and make billions in upgrades- there is no quick fix- to fix this and replace antiquated transmission lines.

As a longtime observer of California politics I can assure you having the State take over the utility would be an unmitigated disaster. If you think the perverse incentives facing PG&E were bad consider for a moment what a utility with tens of thousand public union employees would be like. Think of slots set aside for transgender operators and engineering positions allocated by race. Not too mention another massive CalPERs liability.

Another disaster facing the State and PG&E is the decommissioning of the State’s last remaining nuclear power plant at Diablo Canyon in 2024. This facility supplies 10% of the California’s power. All carbon free and it works at night.

Tyler is an ardent supporter of transgender operators. He considers it the number one moral and political issue of our times. He has no sympathy for transphobic bigots like you.

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“keep rates low”

CA rates are already among the highest in the USA at about 50% above the national average. This is largely due to contracts paying above market rates for so-called “green “ energy. With any luck bankruptcy will free Californians of those burdens. In the meantime, purchasing inverter generators is just going to be one of the costs of CA homeownership.

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Attempt this?:

1. Dispose of any command-and-control regulation which inhibits the removal of trees. Instead, place an excise on tree removal.

2. Alter the regulatory regime applicable to utilities. Have a revised regulatory scheme work as follows:

a. Remove compensation as an issue subject to collective bargaining. Compensation determined by the company. Period.

b. Require that compensation per worker at the company not exceed x% of compensation per worker in the economy as a whole. (Currently, compensation per worker for public utilities exceed those of the generic worker by 90%).

c. Require that no single employee of a public utility (nor any two residing in the same household) may receive compensation in excess of an amount determined by formula absent the express permission of the state utilities commission after a public hearing. The formula would have among it's arguments the company's FTE, mean compensation per worker at incorporated enterprises in the state, and mean FTE per private corporation in the state.

d. Limit the quantum of the company's retained income to a particular % of the sum retained income among enterprises in the state as a whole. The % would be a function of a ratio of the company's workforce to the total number of employed person's in the state.

e. Limit dividends paid to shareholders to a partlcular % of permissible retained income.

f. Require that excess retained income be remitted to customers at the close of the company's fiscal year. The excess would be divided into two piles, one for residential customers and one for commercial-institutional customers. The excess in each pile would be then divided evenly among those in the customer sets. Everyone gets their $20 check.

g. Remove price controls on electric rates. Let their board set prices according to a four fold rate structure (residential v. commercial institutional, standard v. peak), requiring only that they give due notice to customers for rate increases.

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The company has been unable to keep up with tree trimming as it did in the years before so-called deregulation because it's no longer being allowed to have the funds to hire the needed personnel. This is a case of regulators shooting themselves in the foot. Blaming the company for it is just plain thick.

The last time California lawmakers caused blackouts, "Grayout" Davis got recalled by voters. It's time for that to happen to Gavin Newsom.

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Re: 'One solution would be to remove the liability the company faces from the fires,"

This is a case of the optimum solution being that the utility bear the costs of the externality it created, because it will be incented to reduce risk by redesigning its grid so that the largest (large transmission lines) are not central to delivery, and that nodes of the network can be shut down if they impose a risk without setting down the entire system. It's also a reason why PG&E would incorporate solar, wind, and batteries and water storage options to create a more secure and less risky system.

Giving a pass on liability for avoidable injury is a bad and non-optimizing solution.

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What we should expect to see is more fires started by homeowners screwing up their generator hookups during a planned outage. They will be too small to be worth suing, so liability will be effectively relaxed without any politician having to take responsibility for doing so.

But the fascinating problem here is not the privatization of PG&E. The ecological problem is that the only viable means of large-scale vegetation clearing is controlled burns, but there is no way to do that without generating smoke. So we have to wait for an uncontrolled burn where nobody can be held liable. Some sort of liability shield for controlled burns could tilt the incentives in the right direction, but it's not clear by how much.

I expect you could put the right set of 10 guys in a conference room for a long weekend and produce a plan that would be an 80% optimum technical/economic solution.

The problem is that such a solution would not be politically acceptable. It’s quite possible that the political constraints - many of which have already been mentioned here - leave a null solution set.

This is not the only important systems failure facing California, it’s just the most difficult to pretend is not happening.

I dunno, most of the commenters above seem to think there is some magic way out of this, either by punishing trees or by punishing a corporation for failing to do the impossible.
Your suggestion of an 80% technical/economic solution notably doesn't include ecology. Can we agree that part of this mess is due to the failure of European and Eastern US forestry practices in California ecosystems? Despite California's failures, DC can easily make things worse.

I’d agree pragmatic forestry practices - whatever those might best be - would definitely be one part of the solution. That’s one or maybe two of the 10 guys; I think there are multiple areas to address.

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And is it ironic that with governments considering ways to force more people to electric cars, further burdening the grid, that people will be forced to buy gas generators to supply power for them?

Particularly since solar cells aren't the answer. They provide power to the grid, not the home owner who paid for them. When the grid is shut down, the solar cells be shut off, too.

Rooftop solar is connected before the home electricity meter, not after. This means it reduces (or often eliminates) grid electricity consumption during the day. Solar electrical energy that is not used by the home is sent into the grid and normally receives a payment. Here it's typically equal to around the wholesale electricity price plus the avoided local distribution charges. In one Australian state they include a small amount for environmental benefit and avoided grid costs.

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>only viable means of large-scale vegetation clearing is controlled burns,

Around here, the utility mows under the lines every 5 or so years. And we're not even in fire country.

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This what happens you you don't produce local power. You have long transmission lines through the wilderness that cause fires. Stupid California policies are literally backfiring.

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Regulation

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Just to be clear, there is no ideal solution for supplying a public good like electricity. All that can be done is to reduce inefficiencies. With state ownership there will be inefficiencies and with private ownership there will be inefficiencies. From my experience state ownership or close state control seems better, as they have an incentive to reduce inefficiencies while privatized systems often have incentives to increase inefficiencies as they find a way to make money from them.

Personally, I would think developed democracies should lean towards state control, since it's more democratic. And the government is going to be blamed for blackouts and price rises not matter who owns the poles and wires and generating capacity.

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Unlike before, there is increasingly a competitor to PG&E and that's home solar and battery, which undoubtedly is getting a huge boost from this mess. Now as it happens that is a net win also for the transmission safety issue, so maybe that's the long-term primary solution.

And over time I think that's generally how monopolies fall, not by clever incentive mechanics, but by innovation that removes the "natural monopoly" of the previous technology. In fact one could argue that regulating monopolies to reduce their profits reduces the incentive to innovate in exchange for increased short-term efficiency. And it is easy to imagine that this reduces consumer utility over time.

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A year ago, there were horrendous wildfires in Greece. The post-fire analysis yielded some responsibility in poor development decisions: houses in the forest for people not related to farming, forestry or tourism. You could read about this on many newspapers.

One year later in California, all blame goes to the electricity company. Perhaps it's time to take a little break and think about living in the forest. Nature wants to kill us, that's why we loved cities for centuries. Idealizing nature is a trend less than a century old.

Freedom to live wherever you want makes California and the US great, but that freedom also includes the responsibility to take care for yourself in the middle of nowhere. Want to leave alone in the forest? Learn to survive alone and stop asking help from the people you're running from.

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--"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"--

No sorry this is not correct. A government owned entity does now have an incentive to please the voters, at least not *ALL* of the voters. California is already a one party state and there is a stark political divide between the areas where both the fire risk is highest and the blackouts are happening and the areas where the highest population and power consumption is.

A government run entity in California would have absolutely no incentive to behave any differently that PG&E is doing now.

Skimp on rural maintenance and black out people in rural areas where Republicans live so you can optimize your power delivery to meet the needs and desires of the Democratic urban dwellers you need to get reelected.

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The direct cause of the blackouts is the law the California legislature passed to make the utility companies liable for fire damage even when it was not due to negligence. The utility companies were always liable for negligence--for example, not maintaining the power lines. Now, however, a untrimmed tree on private property can blow over in a high wind, take out the power line, and the utility is responsible. In a passive-aggressive move, they have simply started shutting off the power so that any damage to their lines cannot cause a fire. Eventually, the legislature will figure out that the economic damage from frequent shutdowns is larger than the economic damage from most of the fires. But not before lots of lawyers get rich. I'm sure there will be years of litigation.

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I have a damaged car that hardly works. So the government will force me to see it the car, and as soon as ownership is transferred, the car will work just fine.

Sounds silly? It is. So is the idea that nationalizing PG&E will fix anything. The State of California government is inept, and it will fix nothing, except that the state will declare itself having no liability for any damage down by its state-owned electricity company.

I live in Masssachusetts. We had a "northeaster" two weeks ago. People in Cape Ann lost power for almost a week. High winds took down power lines. As if strong winds never appear in New England.

As if strong winds and dry conditions never happen in California.

We need to bury power lines and be done with it. Yes, it costs money. So does losing power, so does large fires. Rates will have to rise to compensate. Tough. It is the price of insurance. Seat belts cost money too. Smoke detectors cost money too.

BTW, California electricity costs far more than in Oregon or Nevada. Do those two states get loss of power on a regular basis? Do they get large fires caused by the electrical company?

The fault, dear Brutus, is not in the stars but in ourselves.

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Distributed generation is the answer...power consumed close to the source of generation, with production more narrowly tailored to local demand.  

Distributed generation would be the 'marginal revolution' to the energy grid.

Utilities oppose any steps that even inch toward distributed generation because it undercuts their reasonable rate of profit from the capital base.  Distributed generation is cheaper, so it's bad for the utility.  

The CPUC, like many public power commissions, has an administrative judiciary panel that has a right of access directly to the California Supreme Court.  Utility lawyers have successfully captured both institutions and written their profits, based upon their capital base, into the constitutional law of California.

Asking for new regulation is like asking to be half-pregnant.  California needs to scrap the entire body of law enshrined by utilities and the bit players who've opposed them over the years.  The utilities have nakedly written their interests into the law, and their opposition has been forced to fight them on their terms rather than draft a real alternative.  The whole edifice is rotten.

Californians need to pass a constitutional amendment that wipes out utility law in California, places the CPUC at the bottom of the judiciary rather than the top, and allows policymakers to start over from scratch in the legislature.

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