The power of monopoly and regulatory capture
“We want our customers and their families to know that we are here to help them make smart energy choices and save money whenever possible,” cooed Laurie Giammona, senior VP and chief customer officer of Pacific Gas and Electric, on Wednesday between Christmas and New Year’s, when no one was supposed to pay attention.
It was the propitious day when the beloved utility that distributes gas and electricity in the northern two-thirds of California announced that on January 1st it would jack up its rates.
America’s largest electric utility and the second largest gas utility by number of customers, the utility whose 2010 gas-pipeline explosion in San Bruno, just south of San Francisco, killed 8 people, injured another 66, and burned down 38 homes, the utility that is still digging in its heels after five years since the explosion and is now under investigation by the California Public Utilities Commission because it failed to deliver certain documents, the very same PUC that is being probed by a federal grand jury for potential illegal ties between the regulators and the executives of PG&E in this ballooning corruption scandal … well, this beloved utility now has announced a very special New Year’s resolution.
It will hike natural gas rates for the average residential customer by 4.0% and electricity rates by a stunning 8.5%, for a combined rate increase of 7%, the steepest since 2006.
The average small business is going to get whacked by a combined rate increase of 5.1%.
That’s on top of the 6% rate increase it had successfully inflicted on its customers a year ago.
Rate increases, despite a plunge in the price of natural gas
That plunge started in 2008 and has hit new lows on December 17, when the price of natural gas hit $1.68 per million Btu at the NYMEX, the lowest since March 23, 1999. When adjusted for inflation, it was below the prices tracked by NYMEX going back to 1990. This historic price collapse has been eviscerating the US natural gas industry and its investors [read… Carnage in US Natural Gas as Price Falls off the Chart.]
Much of the power PG&E distributes is generated by natural gas. And all of the natural gas it distributes is, well, the same natural gas whose price has plunged to historic lows.
In fact, in its third quarter financial statement, PG&E admits as much: its cost of electricity over the first nine months of 2015 dropped 8.8% year-over-year, and its cost of natural gas plunged 36%!
The thing is, despite the juicy rate increases imposed at the beginning of 2015, operating revenues have fallen about 1% so far in 2015, as Californians use less energy from their beloved utilities. It’s an existential struggle all utilities face.
However, the company pointed out that the rate increases won’t be used to pay for the fines and penalties associated with the San Bruno pipeline explosion.
Those will largely be covered by the proceeds from a public offering last August of 6.8 million common shares at $51.90 per share. Wells Fargo, the underwriter for the offering, got a bundle of fees. But money is fungible. It’s like water. It flows wherever gravity pulls it, and no one can separate it.
So why the rate increase? The SFGate:
The changes follow a decision by the California Public Utilities Commission in 2014 to let PG&E collect an extra $2.37 billion in revenue from its customers over three years, from the start of 2014 through the end of 2016. The additional money will pay for maintenance and upgrades to PG&E’s sprawling electricity grid and natural gas pipeline network….
What else is PG&E doing with this moolah?
It is paying rich quarterly dividends of $0.455 per common share. With 489 million shares outstanding in the third quarter, dividends for a year would amount to $890 million. So for the three-year period in question (2014-2016), this would amount to, give or take, $2.7 billion, more than enough to pay for the maintenance and upgrades of its system.
If it faced real competition, or a real regulator, PG&E would be forced to pay for maintenance and upgrades with other means than rate increases when its input costs are plunging while it’s paying out a rich dividend.
And how are its customers supposed to deal with the rate increases? PG&E, according to the SFGate, “urged its customers to contact the utility for ways to save energy.” So, turn down the heater, put on another fleece, buy more efficient appliances, and hunt down subsidies for low-income households.
As always, it’s just the beginning.
In September, PG&E asked the Public Utility Commission for another $2.7 billion in revenue increases for the three-year period of 2017-2019. That particular amount of money would be used ostensibly to prepare for natural disasters. Over the same period, it would still pay out $2.7 billion in dividends. The PUC, under federal grand-jury investigation for its cozy ties to PG&E, has not yet voted on this doozie.
Turns out, for utilities, the party is over, again. Read… Dear Electric Utility CEO: Merry Xmas and Cut the Dividend?
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The people on the Public Utilities Commission need to be committed to alternative employment programs. Perhaps they would be more adept operating the road systems in California.
Actually, I say that in jest. They obviously don’t have boundaries established for what their states’ utilities are allowed to earn. But these utilities are also facing the potential for competition from other fuel sources in the future.
That’s all another way of saying, “We need to allow these power utilities to be granted the right to distribute other (read: alternate) power through to their current customers. After all, we can’t allow them to lose customers here.”
A state that operates on the principle of demanding ever-increasing funds be funneled to government programs is not going to allow anyone to break away from their systems. And the customers will be stuck. They might complain, but will their complaints be against the government enablers? I doubt it.
Both the utility and their captured commission need blame. And the step that follows is revolt.
Florida Power & Light is suppose to reduce rates by 10% starting this month. The email they sent me says the estimated amount of my reduction is $0. No kidding. The way I see it is they think I now pay $0, so 10% of zero is zero. You can’t make this stuff up.
I’m an FPL customer, and also got the 2016 reduction letter, but mine was calculated about right. You failed to mention FPL actually reduced your rates in 2015 as well.
Assuming you did get a $0 reduction letter(?), I’d recommend focusing on the ACTUAL 2016 reduction, not the ESTIMATED reduction.
Don’t understand your comment. I retired to FL from CA Dec 2012 & installed $34k 11kW solar PV system in 2013: got $20k FPL rebate and $10.8k Fed tax credit – net cost = $34k – 20k -10.8k = $3,2k. Over past 2 years I generate 66% of my power & save $2.5k/year.
If this is “outlawed” what does “encouraged” look like?
I’ve been in Florida much longer. Most houses are located in HOA’s and the developers were allowed by the state to forbid the installation of solar power panels on homes. This restriction was only lifted after Jeb left the state in 2008.
The best web estimate I can fin shows 20% of FL homes in HOAs (not “most homes”).
Even so, just because HOAs were allowed to forbid installation does not mean all of them did (after project completion, homeowners tend to be in charge).
There are probably at least 1,000,000 other trivial issues like this you could blame on (fill in the blank).
Wow – that is some high price for a solar system.
Huge rebates though that brought down your actual cost.
How much do you pay for electricity? Supply charge?
What do they pay for any excess electricity you produce?
Not sure how this isn’t positive for shareholders. I’m confused, how does “Dear Electric Utility CEO: Merry Xmas and Cut the Dividend?” apply here?
Hiking energy prices should help to limit carbon emissions though, thus could be considered a green policy subject to corporate tax benefit?
Well I can tell you how they benefit around here.
In my area the natural gas and water utility monopolist is mostly municipality-owned, with the major shareholders being the two largest munis in the Region.
In late November I got a letter announcing, you guessed it, a natural gas price hike. A move that apparently made zero sense, given benchmark Russian gas had dropped 42% year on year to that point.
A week before Christmas it all became clear. One the aforementioned munis announced a plan to build a new sports stadium which will be chiefly financed by, drumroll, selling a part of their utility shares.
With dividend expectations going up, share value skyrocketed from €1.20 to €1.35. Over a 10% gain in less than a month…
But as we say around here, the Devil teaches you how to make pots but not lids. In the final trading week of 2015 those same stocks plunged from €1.35 to €1.25 as retail investors cashed in their chips.
The stock exchange will re-open on Monday and a further plunge is very likely, as many retail investors bought back in 2013 days when these shares were just €1 each so there’s still a pretty (non-inflation adjusted) profit to be made.
It’s very likely when those muni-owned shares will go on sale they’ll still be standing at €1.20 or even lower, making early financial plans for the stadium obsolete. But it matters not: banks are always happy to lend to munis, even debt-ridden ones as this is.
Monopolies just push more and more people towards autonomy.
But avoiding taxes is still the tough one to escape
Number one PGE is NOT a charity.They are regulated.I will never forget when Grey Davis then gov of Calif tried with Dems to bankrupt all utilities in Northern and Southern Ca by mandating a public rate that was so ridiculously low there was little to no profit.PGE stock went through the floor.My opinion was Calif plan was to mandate rate,bankrupt utilities,then pick up utilities for nothing.Making them state run.When reporters stuck a mike in Grey Davis face when he got the news a judge was hearing PGE vs state mandate.Grey Davis said well I’ll tell that ju,he stopped himself right there as you do not tell a judge nothing.Davis was red faced mad
More ineptitude at the Gas Company.
Well, what have these idiots done recently?
Smartmeters that explode when overloaded, just like 5000 did in stockton recently, which do little more than shed jobs for meter readers who also did safety inspections, run up bills on more aggressive tiers and tariffs, and allow them to shut you off remotely and collect personal data to sell to others.
They then Burned ratepayer money for years with 50%+ subsidies for tesla and bankrupt coda batteries, and tens of millions on high cost fool cells that are dirtier and costlier than a natural gas power plant.
Then they encourage wasting still more money on even more batteries with the 2016 corrupted SGIP incentives program, which is now dedicated predominantly to inefficient! intermittent, short duration non-generation assets.
Nothing they have done has lowered energy costs for ratepayers, as most of the ratepayer sourced monopoly money has gone to high cost Silicon Valley interests who could care less about reliable affordable power and wealth redistribution.
I am on my third smart meter in 24 months.
I left CA for Montana in 2013. Our middle of winter energy bill for an equivalent house in Montana (think lots of heating) was the same as our lowest PG&E bills (no heating, no A/C). Now, we are still in Montana, but 10 miles from the nearest power lines. Being off-grid has its limitations, but they are offset by not being beholden to utility companies!
Blackrock is the 5th largest stock holder in PCG. Blackrock is the top five stock holder of every large utility company , every large water company and every large defense contractor. Blackrock is the world’s largest rent seeker and tax money seeker. Larry Fink, Blackrock CEO, pushes the prices to end users as high as he can. Larry Fink can’t have enough war profits. If Hillary becomes the next President, Larry Fink will probably be her Secretary of the Treasury.
Don’t for get about Carlyle Group…another that loves to “participate” in the same type of holdings.
That’s one of the reasons we installed Solar over a year ago. Our rates are now much lower and they only adjust upward a very miniscule amount as compared to what PG&E can do to their customers. Just more fraud perpetrated by a corrupt government. Not a surprise at all. But at least we’re helping ourselves by not letting the bastards rape us anymore on electricity rates. I honestly don’t understand why everyone in CA doesn’t install solar. It’s a win-win. Ask anyone like us whose has it.
Jeb Bush practically outlawed solar power in the Sunshine State. This is only one of the reasons he is not well remembered in Florida. I recently saw a bus stop kiosk using solar panels, so it is slowly coming back.
Everyone in CA can’t install solar for a few basic reasons. The current electrical grid can not sustain more than 5% or so of the population going solar because balancing the load becomes erratic. So either a brand new electrical grid would be required for everyone to go solar or they would all need to install their own independent systems including a generator, fuel, wiring, charge controllers, batteries, inverters, maintenance, and more. Both of those “solutions” are extremely time, resource, and money intensive.
I have my own independent solar system that is far beyond the affordability options of almost all Americans. Ignorant people will be excited that I only pay $16.00 a month for fuel while completely ignoring the tens of thousands of dollars that went into the system. We’re at $50,000 invested so far and that’s not including the small excavator we have.
Good heavens! What did you install? Our off-grid system will, with the addition of 4 more batteries, be fine for the needs of our family of 5, and we’ll total out at about $10K
Go East, young man…California is a money pit in all aspects of life.
And Big Energy wonder why real demand is slackening despite rockbottom raw energy prices.
Also, it speaks volumes of the state of our real economy when the most profitable industry are almost filled by rent seeking parasites.
Oh i just love how they word those polite “You’re screwed” letters to the ratepayers. LOL
Erin Brockovich to the rescue again?
Lately, when power companies have merged, they cut their work forces and raises rates. In particular, they cut the number of linemen, which means they will have to borrow linemen from other utilities to deal with storm damage, prolonging the outages.
Now they are pushing for the “smart grid” for reasons Tesla_X has stated but primarily more aggressive billing and easier, more comprehensive data collection.
Where I live BC Hydro is a monopoly in almost all electrical production and distribution. Their office operation was ‘privatised’ by our right wing Provincial Govt 12 years ago, at greater expense than keeping services in-house. They tried to privatise the remainder of the Crown Corporation, but people went nuts. They did pass a law that requires BC Hydro to purchase some private electricity production, which is basically a cash giveaway to friends and supporters, as a few run-of-the-river projects receive over .40 (40 cents) per KwH.
Our basic residential rate is .0797 per KwH. (8 cents). Monopolies can be very good institutions as long as politicians are kept from meddling with them and looting their surplus for general revenues. The same goes for all Crown Corporations, (public business services, BC Ferry Corp etc).
I am not too sure that Private operates better than public in select cases. Examples: private military contractors are more expensive than state armies, private health care is more more expensive than our public system with worse outcomes, and private power production is more also more expensive than out BC Hydro monopoly.
If you give the bank safe combination to political corporate friends, and compel citizens to pay into it, how on earth can this be for public good? Clearly, it isn’t. Subject the public to non-stop propaganda that everything Private is good and better, after awhile it is too late to turn the ship around.
Good luck fixing it 2016.
California has public agencies like the PUC and quasi-public ones like CalPERS (public employee retirement system) and CalSTRS (for teachers) that make news when reporters act in the public’s interest.
The PUC exemplifies regulatory capture and disregard for citizens and ratepayers.
The retirement system boards and staffs protect their own fiefdoms at the expense of their beneficiaries. See the articles at Naked Capitalism by Yves Smith about those ongoing issues. Sunlight is the best disinfectant, so the Golden State needs to push for more sunshine.
Be glad if you don’t live in California. Change here seems to come seismically, with disruption all around except where it is needed.
“But money is fungible. It’s like water. It flows wherever gravity pulls it, and no one can separate it.”
Water flows downhill.
Money flows uphill.
That’s why Wall St. is flooded and the rest of the country is in an eight-year drought.
“Money flows uphill” very nice.
Hold on for a minute and look at what happened in the electricity sector in California. There are two major drivers which necessitate a rate hike and are the result of policy at the Federal and State levels. I’m not being an apologist for PG&E. I’m just stating the price rise is a result of poor policy. Here are the two factors.
1. The NRC made it very difficult for PG&E to operate SONGS at a reduced power where vibration in the steam generator tube sheet were not an issue. PG&E took the easier and softer way and shut the reactor down. In my professional opinion, the NRC was being pig headed and foolish. Their narrow interpretation was driven by political pressure from the administration. After Jaczko, the NRC lost almost all claim to being a technical agency and are now almost entirely political. One can argue it was like this before, but the complete transition was affected by Jaczko.
2. California has one of the largest RES mandates of any state. As a result of this mandate, all dispatchable generating assets must act as rolling reserve for the RE that must be taken on demand. To account for this reserve status the dispatchable generators get paid to not generate power. Their sole purpose in life is to balance all of the RE in the state. This payment is the opportunity cost of the capital investment and contains all of the fixed and variable O&M costs, sans fuel. All of this cheap RE is actually a cheap inferior product that destabilizes the grid.
All I can say is, California is getting what they deserve. The higher price is due to tremendously poor policy decisions made at the federal, state and utility level. I’m just waiting for the lights to go out… Keep in mind, California deregulated and has a “market” that is manipulated e.g. charges against JP Morgan in March 2015. I could write volumes on the how poorly executed and planned the deregulation is, but I would be just noise to the already voluminous critiques lobbed against California’s electricity regulations.
California, the next time you try and design an electricity system, try not to rely on unicorns. Thermodynamics doesn’t give a crap what you believe.
Cut the frigging dividend! Fire a bunch of PG&E executives! Replace the entire PUC – and indict a bunch of them! Clean house, so to speak.
Either competition or effective regulation. We have neither. We have a monopoly with toothless (or worse, conniving) regulators that allow or even encourage this monopoly to go haywire, for the benefit of all concerned, except the ratepayer.
Lots of companies have to eliminate their dividend if they run of room to maneuver. PG&E just lobbies for whatever insane rate increase, even as its input costs plunge, and gets it. It should set off ALL alarm bells.
What’s your take on MCE (Marin Clean Energy) and the diversification away from PG&E? I haven’t kept up on this lately but I remember being awfully excited about the idea when it was first announced a while back. In some sense, PG&E continually slits their own corrupt throats by colluding with the PUC and shamelessly raising rates. Eventually it will obvious to everyone that there are viable alternatives, at least for residential customers.
SONGS is run by SoCal Edison, not PG&E. Nice use of jargon to make yourself sound informed though.
Cal Abel, thanks for that comment. I don’t think most people appreciate how utilities work or the issues they face. Typically folks just complain about rates, regardless.
As I understand it, a utility is REGULATED and is only allowed a certain percentage return on its capital base. That rate of return is established by the regulating agency.
If the capital base is not allowed to operate efficiently (which you described) then the inefficiency passes through to the customer. Fuel is only one aspect of the cost to operate a utility – and it matters – but there are plenty of other factors.
It wasn’t clear to me the regulating agency allowed a change in ROR.
A smart investor does not want a dividend anyway. He wants the value of the company to increase over time through smart re-investment by conscientious mangers.
The comment earlier about rent seeking by Blackrock type investors is on target. “Activist” investors don’t give a damn about any public good or even good business.
Assuming USA arrangements for solar similar to those in UK, the question is why should the tax payer be expected/ required to subsidise owners of solar. The power companies don’t want the solar householders excess, they are obliged to take and pay for it. By all means let people install solar if they wish but they should keep all the power. As it is non solar domestic and business users are having to pay more to enable the power companies to maintain their operating costs and profits.