“The devil’s greatest trick ever played is to claim he doesn’t exist” – Charles Baudelaire
The current justification for the State of California to take over its three private investor-owned electric utilities (PG&E, SDG&E and Edison) is that public utilities do not have to pay a profit to its shareholders. This ideology devilishly misleads Californians.
After 30 years of working for county government and public utilities in California I realized that government doesn’t solve problems, it just shifts them around. Take the recently enacted policy in California to base electric rates on a combination of income and usage.
Another cost shifting area is property taxes. Pacific Gas and Electric in northern California paid $678 million in property taxes across 43 counties in 2022-2023. Where would local county governments replace those property taxes but by commensurately raising property taxes, sales taxes and/or Utility User’s Tax rates. Electric bills would be lowered but higher local tax rates would result. Everything is a seemingly invisible tradeoff.
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Moreover, in my experience, sociologically speaking, state takeover of private utilities is no assurance of lower operating costs. Politicians tend to want to create more make-work patronage jobs and bloat to increase their political power and reassure reelection. Pareto’s Law indicates 20% do 80% of the work in a bureaucracy.
One of the tricks used to persuade the public against takeover of private-regulated electric utilities might devilishly result in the opposite conclusion. California’s average electric rate of 32.47 cents per kilowatt hour is often compared to North Dakota at 10.44 cents for each kilowatt hour (1 kilowatt hour would power your stove for 30 minutes of use). Most of California’s population live along the mild climate coastal area and average 2,257-kilowatt hours of power usage per year. Conversely, North Dakotans use 6,771 kilowatt hours of electricity per year, or 3 times as much as Californians, mainly due a greater proportion of cold temperature days. Adjusting the rates for the higher proportion of cold weather days, California’s electric rate would be around 10.8 cents and North Dakota 10.4 cents per kilowatt hour, or a puny 3.7% difference, not a 300% difference. More importantly, however, neither would there be any cost saving or environmental dividend indicated because about 55 percent of the power plants in North Dakota are “dirty” coal burning socialized energy co-operatives. The devil is in the details.
Another cost shift is that for the state to take over a private utility it would have to pay just compensation under the 5th Amendment to the US Constitution and the California Eminent Domain Law. The media is under-reporting the valuation for PG&E by $89 billion at $48 billion instead of $137 billion.
Stock value plus Liabilities
Southern California Edison $82 billion
Pacific Gas and Electric (PG&E) – $48 billion reported – actual $137 billion
Total $219 billion
California’s General Fund Budget for 2023 is $225 billion. So, the cost to buy out both utilities would be nearly equivalent to one year of the state general fund budget of $219 billion for 2023.
Cost shifting might come into play if a municipal or state bond was issued to finance such risky acquisitions. PG&E is already in bankruptcy due to the extraordinary cost of property damages from forest fires allegedly due to downed wires. Due to the higher risk of bond default in California given the state is broke, the interest rate on a bond might be as high as, say, 8%, compared to the prevailing municipal bond rate of 4%. There will be the devil to pay for any eminent domain acquisition of private electric utilities from proceeds of a bond issue.
California is the Devil’s Playground
The last time California was in such a financial pickle was the so-called California Energy Crisis of 2001, which was blamed on deregulation and the greed of private energy arbitragers like Enron. For an expanded description of what really happened during the 2001 California Energy Crisis see my article “Recent Science Hoaxes Re-Runs of the 2001 California Energy Crisis”.
I served on a large water utility energy crisis task force at the time. I can state unequivocally that the California Energy Crisis was not about a lack of electricity but a dilemma of how to finance clean air mandates enacted in 1996 by Pres. Bill Clinton’s federal EPA. To meet clean air standards by 2001, the only thing California could do was shut down its then existing 19 oil burning and polluting power plants along its coastline and replace them with cleaner natural gas power plants.
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But some entity had to buy out the old power plants and pay off their mortgages (called unpaid stranded assets). Bond investors couldn’t take a loss without the bond market crashing. The existing Big Three electric utilities could not absorb that magnitude of cost as they were all bankrupt or near bankruptcy due to the so-called deregulation. State politicians were running for cover with any notion of raising taxes that might trigger another Howard Jarvis led Proposition 13 tax revolt.
Republicans devised a scheme to create an artificial electricity price bubble that would pay off the stranded debts. That scheme failed when Democrats came into power and enacted a price cap on retail power prices, but not on wholesale prices. So, wholesale power prices skyrocketed and resulted in rolling blackouts. Price caps always fail. Both Republican and Democrat schemes to fund about $42 billion in stranded asset debt failed and the state was without a solution. The cost shifting devil appeared.
The $42 billion in stranded debt on old, mothballed power plants was rolled into a water bond to be paid by electricity sales to Southern California water users. In effect, the power purchases needed to pump water from northern California over the Tehachapi Mountains to Southern California had the stranded asset costs tacked onto wholesale water rates. A court adjudicated drought was invented to blame for the higher water rates. This was euphemistically called the “wettest drought ever”.
Why am I retelling the story of what really happened with the California Energy Crisis of 2001? Because look for some new socially engineered and choreographed public spectacle or emergency to be created to pay the buyout price to acquire at least two of the three existing private electric utilities and shift the costs back onto taxpayers, water rate users, or some other tax base by invoking emergency powers. The devil’s greatest trick is to claim he doesn’t exist.
