Publisher’s View: Pacific Gas and Electric Company

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John Martin and Eugene de Sabla started out as gold miners along the Yuba River, harnessing hydroelectricity to power their excavations.  After successfully building hydro plants in Nevada City and elsewhere in Northern California, in 1900 they created the Bay Counties Power Company, constructing a 140-mile transmission line, the world’s longest at that time, to fire an electric railway in Oakland.

The pair launched the company that became Pacific Gas and Electric (PG&E) – which started out as California Gas & Electric Company (CG&E) – in 1903 as a vehicle to acquire and merge power businesses into a large electric grid that could leverage economies of scale. Over the next few years, CG&E cum PG&E bought many power concerns, including long-established utilities like Oakland Gas Light & Heat Company, United Gas & Electric Company, and, in 1905, San Francisco Gas & Electric Company.  During the first half of the 20th Century PG&E continued to gobble up power enterprises, integrating them into a consolidated grid, ultimately swallowing more than 100 individual entities.

PG&E’s consolidation scheme perfectly matched the period’s industrial arc, the dominant fuel sources available, and the new marriage between electricity and exploding plug-powered consumerism.  Generating technologies of the time – coal, oil, hydro – benefitted from being segregated from densely populated neighborhoods, because they were filthy, more cost-effectively operated at large scales, and/or the power source was far from urban centers. 

This “spokes and wheel” model of electricity production and distribution proved to be cost-effective and reliable.  Probably not coincidentally, it also lent itself to monopoly protection, offering a compelling argument that it met the downward sloping marginal cost requirements – it cost less to serve an additional unit of electricity – economists favored to endorse a single company having sole control over a sector.  When the game Monopoly was issued in 1935 “Electric Company” was one of just two utilities identified.

More than 100 years after Martin and de Sabla stitched together a bunch of smallish power companies their creation now looks more like Frankenstein than a well-oiled wheel.  Shielded for decades from competition or adequate government oversight, by the 1980s PG&E forced its captured customers to pay among the highest electricity rates in the nation, and was increasingly dogged by environmental scandals.  Without the cleansing power of rivals, the utility had become too political powerful and unpleasantly plump. 

Repeatedly poked by industrial electricity users hollering over excessively high rates, as well as citizen outrage stoked by Erin Brockovich, among others, regulators and legislators woke up from their PG&E-financed junket-induced stupors and began to push the monopoly monster around, a kind of legitimate bullying to which the utility still hasn’t figured out how to effectively respond.

In the meantime, the industrial age gave way to the information age, which, along with ever more forceful environmental mandates and subsidies, pushed out a plethora of new electricity-making possibilities.  While nuclear power floundered, dispersed wind and sun generation became cost competitive, first with coal, and now natural gas.  Batteries and other storage devices, many carried under automobile hoods, created a new ability to move and store modest bits of power.  Information and prices began to be used to tailor demand to fit “preferred” resources, which increasingly does not include spoke and wheel fossil fuel arrays. 

As a result, combined with PG&E’s ungainly size and inept management, utility costs may no longer be downward sloping.  One study, published before the emergence of electric vehicles and other innovations, found that the optimal size for a utility is a half-million customers.  PG&E has 5.4 million accounts. That is, it’s quite likely that PG&E no longer meets economic criteria to be protected as a monopoly.

PG&E could adapt to all of these forces, and even prosper, if not for its spectacular inability to shield its customers from natural gas pipeline explosions and fire-nadoes triggered by sparking power lines. Under surround-sound economic and political pressure, the utility’s institutional integrity has cracked.  The company isn’t responsible for the fierceness of the fires; that was caused by human-induced climate change, long-term woodland management practices, and the planting of increasing numbers of homes in the middle of or directly adjacent to tinder-ready forests.  But its equipment appears to have catalyzed multiple conflagrations.  If not asleep at the safety wheel, PG&E seems to have been actively texting and otherwise multi-tasking.

If Martin and de Sabla were alive today perhaps, given the dramatically changed operating environment, they’d do something equally as clever as their original consolidation scheme:  they’d break their utility back into its smaller pieces.  Being large no longer offers the same value as it did a century ago.  Today, with widescale availability of distributed energy resources, sophisticated household-level energy management devices, and a hostile political environment, the brightest and most courageous approach PG&E could take is to voluntarily decompose itself, perhaps negotiating ongoing franchise agreements with newly independent entities.  Willingly right-sizing itself would also avoid what could be a much less pleasant, more destructive, political process to address the utility’s failures.