PG&E's Bankruptcy and CCA

The bankruptcy of utility giant Pacific Gas & Electric should be understood in the context of decades of

More Zilla, less God

 regulatory bailouts and giveaways suffered by California ratepayers, which taken together already exceed the book value of the utility. Todays "emergency" is more of the same routine. Moreover, its cause, and its solution, should be viewed in context not of climate change (as Washington Post recently did), but of electricity industry restructuring, starting in the late 1990s.

The bankruptcy of Pacific Gas & Electric was not caused by climate change. While this notion is catchy and trending, California has been in a drought for half a century: PG&E's power transmission and gas transportation systems have been causing explosions and fires in more recent years, because its corporate leadership has neglected what should be the core of its business (wires), failing to conduct standard simple activity of trimming trees around power lines, and maintaining their pipes. Why? Because it was distracted by an irresistible opportunity to take advantage of political conditions to capture regulators, and build a new and illegal retail electricity monopoly: a strategy that backfired with bankruptcy after successfully subverting competition in 2001, and today backfires with another bankruptcy after having failed to subvert Community Choice Aggregation (CCA).

PG&E's fox needs removing the CPUC's energy henhouse. Hopefully, California's new Governor will take the lesson from Gray Davis, who was recalled for mismanaging the state's energy crisis by giving in to, and simply bailing out, the utilities in 2003, and make a point of finding opportunity in this crisis. The opportunity would be to get rid of the cause of this bankruptcy and the 2001 bankruptcy, for which the California Public Utilities Commission approved a $9B ratepayer bailout at that time. 

The cause of PG&E's distraction was politicization of its corporate leadership, based on an opportunity to subvert the legislature and corrupt state regulators. Since California's bipartisan legislature deregulated its electricity industry in 1997 and opened the state to competition in 1998, PG&E's brass, having won an equally large bailout of "uncompetitive assets" for endorsing the end of its power monopoly, nevertheless became obsessed with blocking competition, first by new suppliers entering the market, which they successfully blocked, causing a diaspora of would-be suppliers out of competing for customers. Having driven the Enrons and Reliants of the world into selling their power into  spot markets servicing utility "default service" customers, i.e. customers still "owned" by PG&E, PG&E has had a consistent strategy of rebuilding an economic, if not legal, monopoly over retail service. 

Customer ownership has been the strategic football of deregulation from the start. Subverting retail competition also resulted in the manipulation of spot markets, causing the energy crisis and the bankruptcy. At the time, one Nation writer called in an "Energy War." And, once the legislature found a new path out of the energy crisis by creating Community Choice Aggregation (Assembly Bill 117) in 2002, PG&E regarded municipalities, again, as mere competitors to body-block.  Building up to 2010, PG&E spent hundreds of millions of dollars on lobbying, lawsuits and astroturf campaigns to block early CCAs, starting in the Central Valley where it successfully killed the first CCA, and attempting to block Bay Area CCA startups, building up to Proposition 16 in 2010, which failed despite $46M in PG&E campaign spending.

Moreover, the attorneys and board of PG&E learned they could use the state regulators of a permanently weakened CPUC to subvert competition for electric supply, and made the CPUC its handmaiden. PG&E won approvals to resume monopoly-like activities as if CCA didn't exist, such as building new power plants that it would own, self-dealing and gas-for-power swaps with merchant generators, long-term power contract procurement undertaken with rubber stamp approval of contracts that are not even reviewed by commissioners, and multi-billion dollar regulatory reallocations of generation costs to transmission charges in the 2010 General Rate Case. In many of these decisions, CPUC regulators admitted that they were acting in violation of longstanding CPUC policy, and promised not to allow it again. This is widely known as bad parenting. The CPUC was training its corporate dog, Pavlovian style, that it could win by failing. Every high-cost contract would erect a new barrier to CCA. 

Today, PG&E plays victim, claiming that its renewable energy contracts have lowered the cost of renewables for CCAs, who have an unfair advantage now that renewables prices are lower. This is Mickey Mouse economics: PG&E didn't lower the price of renewables; China did. Moreover, CPUC regulators acknowledged that PG&E's contracts were extremely high at the time it approved them, and repeated this acknowledgement when it approved massive increases on the PCIA charge to CCA customers to pay the resulting premium. PG&E is no victim. It is a repeat offender. 

The pattern is clear, from 2004-5 during the CCA proceeding, which focused on the conflicts of interest of PG&E and the utilities in "cooperating" with CCA as required by the CCA law, while also having to maximize returns to Wall Street investors. All in all, CPUC dropped the ball. All of these monopolistic activities increased PG&E's desire to control retail energy, and made it neglect its core business of maintaining the wires and pipelines. Northern California has paid the price. 

It is indeed Groundhog day, 18 years later, and nothing has changed. So if Gavin Newsom is smart and wants to be re-elected, he will make it a point to avoid repeating Gray Davis' mistakes, by using this opportunity get PG&E out of the power business entirely, and to refocus it on its core mission: the grid. Moreover, he will move to strengthen the role of CCAs as the dominant retail power providers that they already are in California. Bailout or no bailout, this should be the "win" for California. Otherwise bailing out PG&E yet again will be merely another repeat-rinse, and California is likely to have another Republican governor in a few years.

For CCAs, CCA activists, and CCA suppliers, however, the question is, what will happen to the economics of CCA if yet another ratepayer bailout is approved by the CPUC? CCA has already been hit hard by CPUC approvals of extremely high cost PG&E power contracts (admitting at the time that they were too high, but approving them anyway), then increasing surcharges on CCAs to pay for them: the dreaded PCIA charge. We just got done paying for the last bankruptcy. All of these shrink the power portion of the bill and thus depress the competitiveness of retail supply.    

One question is how they are bailed out. This will have different impacts, obviously, but either way the overall trend is the same: competition shifting from energy rates to net utility bills: from energy to capacity. The worst case question is, assuming they are bailed out at customer expense, what is the net impact on markets and CCA. Or Assuming they are rescued, is there a different future?

Questions about impacts of the bankruptcy tend to focus on the bailout outcome, but in some ways the competitive landscape outcome is the same either way, based on the fact that bailouts have formed so much of the PG&E bill for the past two decades. One key question is will PG&E's insanely expensive power purchase agreements with renewable generators be invalidated by the bankruptcy, decreasing the extant and oppressive PCIA charge that Jerry Brown's CPUC imposed on CCAs? This is a big one, and would be appropriate, because it is the only upside we see other than getting PG&E out of the power business. However, it is not controlled by state regulators. This is a question of FERC jurisdiction vs. the bankruptcy court: and FERC recently said it can protect the holders of PG&E's high cost contracts: so don't count on it. 

All in all, the question is, if there is a bailout and a new bailout surcharge, will CCAs fold, or will they adapt? On that question, rest assured: CCAs are proven resilient public agencies, so they will adapt. There are over 1500 CCAs out there across the nation with a 20 year history, with few terminations in constantly fluctuating market conditions. CCAs in California have an unusually high level of control and resources that they have only begun to use. 

In some ways, the question is not whether CCAs will go away, but how this second crisis will influence CCA procurement activities and how it will impact California's energy markets. PG&E will either collect bailout costs from customers for the next decade or longer, or will not. Either way there will be strong pressure to get them out of the generation business entirely, and PG&E itself has made statements about some sort of "restructuring." Based on the last bankruptcy, a large surcharge will be added to already oppressive PCIA charge increases of recent years. But considering the likelihood of PG&E's days as a energy generating and procuring company will mean a drop in natural gas sales and a shift of wholesale energy markets to CCAs. Moreover, CCAs should use this opportunity to win more support from the state in their new role, such as backstopping Solar Bonds to invest in California renewables and energy efficiency.

When considering impacts of another bailout, it is important to remember that surcharges are volumetric charges on delivered grid power. Therefore, there are nonlinear benefits from PG&E's ever increasing "surchargization" of the power bill (in which paying a bill will be primarily to pay for surcharges, not energy). The more of the bill is a volumetric surcharge and not cost of energy, the better will look the economics of distributed energy resources that reduce the customer's use of grid power.  Increasing T&D charges will encourage CCAs to undertake a stronger adoption of a customer-ownership-of-energy model, promising an increasing turn to Community Solar, Cooperatives, Community Microgrids, and financed efficiency projects. A "CCA 2.0" focus on consumer electronics such as home area networks and IP thermostats, targeted V2B electric vehicle sharing, and generally the integration of residential and small and medium sized business customer investment in storage, onsite PV, boiler heat capture and other kilowatt-scale distributed power with onsite IP and system level networks, will prove more cost effective, being exempt (as non-consumed grid power) from volumetric surcharges, than surcharge-encumbered conventional supply with Renewable Energy Certificates, which otherwise (stupidly) remains the dominant CCA model.  

How will the utilities focus their strategy? 

PG&E is a very poorly trained dog that is fond of dragging its bottom on the Persian carpet. They have learned that they can win through over-procurement and above-cost procurement, ratepayer bailouts, and surcharge increases on departing customers. They appear to be considering an exit from the power business, speaking of "restructuring." The state and CCAs should support this move. Either way, they will seek to increase transmission and distribution charges. PG&E will continue to consolidate its position as a wires company, and a big part of this will be to get the CPUC to authorize a huge new investment and thus rate increases. One way or another it will seek increases, whether to repay a bailout or to make new customer rate-basing of  their transmission infrastructure, or both. 

How the CCAs will focus

--Turn away from increasingly expensive business model of conventional power with Renewable Energy Certificates, and toward resources that reduce consumption

--Move from in the current approach of in-state RECs and long-term PPAS with regional renewable developers to customer-owned, behind-meter, integrated Distributed Energy Resources

--Take an increasingly flexible approach to grid power procurement, shifting program emphasis towards a long-term focus on integrated DER and onsite integrated renewables development: Solar plus storage, EVs, in-city PV, and other technologies
--Deliver demand response and dispatch, load reform and peak shaving, avoided capacity charges, and lower non-supply savings to the cost of power.  

--Move into non-rate customer savings through focus on load management, and marginalization of procurement as the competitive part of the business model.

Market advice

From an investment point of view, PG&E's bankruptcy underscores the need for CCAs to get operational control over their power. Unconsumed energy cannot be surcharged. Whether a bailout follows or not, this is yet another hint for Community-scaled integrated DER to CCAs in California. Smart investors and CCA suppliers should focus on iDERs integration rather than traditional renewable PPAs, specifically automation, microgrids and flexible storage integrated with onsite renewable power generation and conservation technologies. Expansion of CCA service to heating systems and dynamic EV chargers are also highly recommended. Moreover, more innovative CCA service entities are needed that are responsible for both power and development of iDERs.

Et Tu, Jerry?

There have been some positive developments on the energy front recently. The California CCA Crimes Bill, AB976, was delayed for another year in the California legislature following vocal opposition from California municipalities and Community Choice activists at the legislative hearing. This is good news - no dirty tricks got through this year. Germany and Japan are learning the lesson of Fukushima even if President Obama cannot - that is a consolation anyway. And Jerry Brown has recently indicated that his administration will now focus its efforts on implementation of the new Governor's energy policy to bring an historic amount of renewable distributed generation to California's communities.

This is also good news. But Governor Brown III is going to need some new help, and some better advice than he has received recently based on his public remarks, if he is to pull anything off. He told the New York Times that "(W)hen local communities try to block installation of solar like they did in San Luis Obispo, we act to overcome the opposition." Jerry mischaracterizes the true opponents of renewable distributed generation - PG&E and the would-be power monopolies of California who appear to be advising him that environmentalists are actually the problem.

Sound new and smart to you? I remain concerned. Meanwhile, Governor Brown has remained studiously silent on Community Choice programs in Marin, San Francisco, and Sonoma, where real efforts are underway to bring real, scaled renewable distributed generation to California in a big way. There is much of Northern California looking to implement energy localization with CCA but Jerry's silence is reminiscent of former Governor Schwarzenegger, who liked to get along and go along with the big boys, make a nice speech, hang out with celebrities and super-rich, while having all the right opinions. It is political fence-sitting. Unfortunately, the governor appears to be taking a "Lite Green" approach reminiscent of former Governor (and Brown aide) Gray Davis, with an Obamasque absence of coherence that distinctly smells of PG&E, dissembling, and misdirected hubris.

Bad news started shortly after Brown's election when he hired former Number 2 at PG&E Nancy McFadden as the Number 3 in his new administration (Former PG&E Number One Peter Darbee then shortly thereafter resigned from PG&E in disgrace - largely for what he did with Ms. McFadden on Prop 16). Considering that Ms. McFadden's $46M corporate anti-CCA missile was the ultimate threat to renewable distributed generation in California last year, I could not help feel provoked by this apparent indifference to the actual outcome in California's infamous, prolonged energy policy crisis. It reeks of America's chronic political problems with corporate domination of government, and  I cannot help but think that a contradiction has begun to appear putting Brown at variance with his ambitious campaign materials on energy policy.

Having written Jerry's mayoral platform when he first ran for mayor of Oakland in 1998, I am familiar with the dynamics of forgetting campaign promises, and the Governor's saber-rattling talk about crushing environmentalists like those on the Mexican border who opposed the Sunrise Powerlink, or San Luis Obispo, where activists opposed a huge solar power plant but are actively proposing local distributed renewable generation to actually serve San Luis Obispo communities, which my company Local Power is now in fact helping San Luis Obispo County to analyze. To discuss NIMBYism out of context is dangerously misleading, because Jerry is blaming environmentalists for blocking green power when in fact his friends at PG&E are blocking it with everything they've got. This behavior is not good news for solar in California.

PG&E crushed and marginalized energy efficiency and blocked greener competition ruthlessly while Brown was Attorney General in recent years. The governor knows all about PG&E's corporate governance problem, deregulation, utility gaming and market manipulation, the bankruptcy bailouts, Prop 16 and abuse of the political process, San Bruno, and the rest. But today he shows not a sign of genuflection. He should know how to judge whether to place hope in California's mega-utilities to deliver energy decentralization in California - or to focus his mental laser beam attack on actual market barriers like PG&E that sling multi-million dollar budgets like a six-shooter, not Sierra Club volunteers defending their land.

There is scent of a bully here - and inside every bully is the heart of a coward.  If Jerry chickens out and pretends he can patsy-cake PG&E, Edison and Sempra into doing the right thing, while being tough on environmentalists! Alas, he is sadly mistaken. Gray Davis failed and was recalled because he was bullied by PG&E and the utilities, and didn't have the courage to confront bad actors and use the power he had to force real change on an industry that has totally succeeded in blocking change for decades. Instead Governor Davis tried to do a deal and fake it to the public, and got wiped off the map - will Jerry learn from Gray's Christmas Past?

Ground Dog Day, Again - And a Day Late

Nancy McFadden, author of PG&E's Proposition 16, is now going to become the Executive Secretary to the State's new Governor - for policy, appointments and scheduling. Having fought off Proposition 16 against the $50 Million that PG&E put down to block Community Choice (CCA) in California just six months ago, and having worked closely with Jerry when he ran for Mayor of Oakland and created a strong mayor system there, I could not help be feel a sense of paranoid alarm that Jerry had hired this PARTICULAR woman into his fold. This particular elf for past failed Democratic Presidential and Governorship candidates? What would make you want this? Friend of a friend? Is this another case of inviting the U.S. Military to practice invasions in East Oakland after being elected mayor - suiting the Governor's contrarian humor, a desire to outrage his old base for a good chuckle?

There is something postmodern, even decadent, about McFadden's move from PG&E Headquarters to the Governor's front office. It is like being in a vaguely bad dream. On the one hand, the Governor promised that base that he would revolutionize California with local power - the very kind of change we have always championed - with some 20 GigaWatts (GW) of renewable distributed generation throughout California. California is collapsing back to the counties, "devolving" power by default. On (or with) the other he hires a woman more responsible than any other person (alleges PG&E CEO Peter Darbee) for PG&E's most notorious strategem to block any such effort by San Francisco, Marin, Sonoma County, San Luis Obispo.

For the author of perhaps the most reviled attack on local government in California in recent memory to be hired by the same Governor who will devolve power to local government, how is this ostensibly praetorian secretary to be regarded by those who would approach the Governor concerning policy, appointments or the Governor's schedule? I know how powerful a "scheduler" can be for a politician - even for a gifted one like Jerry Brown. His decision to give McFadden the keys to his office is indeed troubling, even haunting.

So what is Governor Brown 3.0 thinking? I can only guess. Jerry has a scholarly mind that is not well adapted to the platitudes of State of the State speeches. He can make a campaign interesting, and managed to not kill a few good ideas in his first round as governor, but is not a natural executive in character, ability or disposition. So in other words, it matters who his head staffers are and what they are up to. Having McFadden in there is frightening.

Some people put hope in Brown's appointments of Mike Florio, formerly the head attorney at The Utility Reform Network, one of the major pro-consumer law firms at the CPUC.  I have known Mike for many years and think him a very smart, able attorney who is well-intentioned. But what is the program? Does anyone have any ideas what to do in California's energy market, other than blocking PG&E from destroying Community Choice, or otherwise mis-investing in the ongoing overbuilding of PG&E and the other utilities (e.g. PG&E's new Oakley Power Plant) or shift costs onto transmission ratemaking as in the current CPUC proceeding, so as to erect a wall of ratepayer debt, penalties, charges and other shenanigans, and thus kill all that local power stands for? Platitudes or lofty goals aside, where is there sign of a determination like Franklin Roosevelt's when he defied the utility industry players in the region like Duke Power and built the Tennessee Valley Authority? Clear lines must be drawn between aggressive incumbents that have prevented any real change for half a century, and those individuals who are determined that change must come in this administration. This is leadership in a crisis - not revolving-door opportunists.

The Collapse phenomenon is highlighted by the the decadent actions of powerful people, who display their contempt for the public. It is a kind of epiphany, the boredom of Caligula as he destroyed Rome. Sustaining this attack but damaged by Chevron's "Copycat" Prop 26 (which did pass) the local governments of California swoon before the spectre of Brown's devolution in unprecedented mega-deficits brought about by an economy that has substantially collapsed at the real level of small businesses, which employ most people - and President Obama announces in his State of the Union that the economy is coming back because of the Stock Market. Financialization has reduced national debate to cheerleading when a serious rethinking of the American economy is desperately needed. It is a time for clear leadership to force change on an industry that has not merely resisted but subverted California's mandates for years, reducing its global reputation from leader to loser. Can Brown do better?

I was called yesterday by a journalist who said there were rumors that Nancy McFadden is an "environmentalist." I said this was funny, or alarming, considering who she is - undeniably the "idea person" beyond Proposition 16. Peter Darbee hired her to do it just after failed Governor Gray Davis had hired her to handle his disaster of an administration during the energy crisis...that PG&E more than any other caused. To me this sounds like a classic power player, this circassian horsewoman jumping from Governor to energy megacorp to Governor. Were will she jump next? Moreover, what was the Governor thinking?

The reduction of Obama from leader to cheerleader has illustrated the importance of having actual ideas, not just brilliantly crafted slogans and winning smiles. You cannot stop the Great Recession by announcing that the economy is coming back. That was Herbert Hoover, not Roosevelt. You cannot bring the change that America needs by waxing poetic (however polished, thank you Geroge Lakoff) while ignoring basic matters of trade policy or actual infrastructure. The Shuck and Jive has got to stop, and Revolving Door Blues ain't the way to start either, Mr. Governor.