Grid hardening, land-use reform, and restructuring PG&E, oh my.
Seemingly overnight, California has been forced to confront a grim new reality: Hundreds of thousands of its residents are regularly going to have their power cut off for days at a time so that their electric utilities can avoid starting wildfires.
The problem — which I described in detail last week — is intrinsic to what the state is trying to do, namely deliver electricity to millions of residents in often mountainous, forested areas growing hotter and dryer every year. There is probably no way for utilities to do that without starting some fires and/or cutting off the power to avoid them. (Southern California Edison is thinking of cutting off power this week.)
But California is doing just about everything to make the problem worse and handle it poorly. Even as global warming extends its droughts, decades of poor forest and land management have made the state a tinderbox. More and more Californians are living in the most remote, fire-prone areas in the state, doing too little to make their houses and communities resilient in the face of fire. Meanwhile, the state’s biggest utility, PG&E, is a debt-ridden, mismanaged omnishambles currently being chewed over by a bankruptcy court. Covering its enormous maintenance and fire-prevention backlog is going to cause rates to rise even as power becomes less reliable.
It is the proverbial perfect storm, a collision of nature’s wrath and human myopia. There is much blame to spread and much suffering to come.
So what can California do about it? Must it accept having the nation’s highest electricity rates and least reliable electric power? Is this, in fact, the “new normal”?
On one hand, as long as the state gets hotter and dryer and people keep pushing the boundary of wilderness, there will be wildfire risk from electricity infrastructure. No amount of forecasting or tree-trimming can eliminate the possibility of high winds blowing electrical lines into dry vegetation and starting fires, not with hundreds of thousands of miles of overhead lines to contend with. The choice between the uncertain but terrible risk of a fire and the certain but manageable risks of a deliberate blackout will likely remain a recurrent feature of electricity management in California, in perpetuity. That much is the new normal.
But California can do better or worse in these conditions. It can grow more resilient and learn to better manage risks. The state’s fate is still in its own hands.
Confronting its latest electricity crisis will require reform across a number of institutions, policies, and practices. The reforms fall into four broad categories: hardening the grid and improving the fire safety of grid infrastructure; changing housing and land-use policies that encourage people to move outward into fire-prone areas; reforming a dysfunctional and bankrupt PG&E; and making the electricity system more localized through solar panels, batteries, microgrids, and other forms of distributed energy.
That’s a lot! In this post, we’ll take a close look at the first three. The fourth, which I consider the only true long-term solution to California’s mess, we’ll save for a post of its own.
There are ways to make the grid less fire-prone, but they are expensive and slow
California’s SB 901, passed late last year, requires all state utilities to submit wildfire mitigation plans. The overwhelming focus of those plans is on reducing wildfire risks around existing grid infrastructure.
One strategy is grid hardening: replacing old transmission towers and power poles with new, stronger, more fire-resistant ones; replacing worn-out parts; updating power lines with synchrophasors and other tech that can help grid operators detect and limit faults more quickly; insulating lines; and using remote and drone sensing to identify far-off problems quickly.
Grid hardening also involves the brute-force problem of inspecting and properly trimming around the state’s 250,000 miles of overhead power lines. PG&E is responsible for 100,000 miles of those lines, and many of them go through the state’s most remote regions. It could hire every qualified tree trimmer in the country, and it would still take years to get out from under its “vegetation management” backlog. (Utility line work is not easy; among other things, it is one of the 10 most dangerous jobs in the US.)
Grid hardening can also, in some cases, involve burying power lines. However, while underground lines are certainly safer when it comes to sparking wildfire, they are not entirely safe (earthquakes, animals, and weather can get to them) nor are they suitable in every area. They are also incredibly expensive: According to PG&E, the cost of converting an overhead distribution line to an underground line is about $3 million a mile, more in dense urban areas. It’s between $1 and $3 million a mile to build them new, depending on the circumstances.
If PG&E buried all its distribution lines, it would have to recoup around $15,000 from every one of its customers. And that’s just distribution lines. Burying high-voltage transmission lines that travel hundreds of miles through forests and over mountains would be a financial (and environmental) nightmare.
Where undergrounding does happen, it is slow. PG&E says it will take five years just to do it in Paradise. Fewer than 100 miles a year are undergrounded; at that rate, it will take PG&E 1,000 years to bury them all.
Undergrounding might play a limited role in select locations — probably urban locations, for safety and aesthetic reasons, and a few key high-risk long-distance lines — but it is far from a silver bullet. (People fascinated by this subject, as many seem to be, can check out this 2012 report from the Edison Electric Institute and PG&E’s factsheet on it.)
Alongside grid hardening is fire safety. In 2007, San Diego Gas & Electric (SDG&E) was blamed for wildfires in San Diego County; investigators found it hadn’t done proper vegetation management. It ultimately paid $2.4 billion to settle lawsuits related to those fires. It wanted to pass on remaining costs, some $379 million, to ratepayers in the form of higher rates, but the California Public Utility Commission (CPUC) wouldn’t let it. The case was appealed all the way up to the California Supreme Court, which found against SDG&E. Earlier this month, the US Supreme Court announced that it would not take the case, leaving SDG&E to eat the costs. (This ruling is relevant to how PG&E’s liability will ultimately be divided up.)
Since 2007, the scare of those lawsuits has prompted SDG&E to spend $1.5 billion upgrading its fire detection and response capabilities. And in its recently announced wildfire mitigation plan, it proposes spending $3 million more on such measures as aggressive grid hardening and vegetation management, improved meteorology with more weather stations, more remote, high-definition cameras for fire-detection, a multi-level community outreach and education program, and a series of community resource centers where people can go when power is shut off to receive information and basic needs. (T&D World — yes, there is a T&D world — has a great piece on ways to reduce transmission-system wildfire risk. CPUC’s Elizaveta Malashenko also has a good piece rounding up options.)
These are the same basic measures that all of California’s utilities must ultimately take, but SDG&E already has a huge head start, which is one reason its plan has a lower price tag. PG&E says its wildfire mitigation plan will cost $2.3 billion to implement, in part reflecting its much larger and more difficult territory and in part reflecting its decades of delayed upkeep. And even that plan is only a start. Speaking to the Press Democrat, Sonoma County Board of Supervisors Chairman David Rabbitt “questioned whether the new proposal went far enough, noting for example that PG&E plans to harden 150 miles of electrical wires, while Sonoma County alone has over 7,000 miles of PG&E wires.”
It will take a decade for PG&E to implement its plan to catch up with SDG&E. Meanwhile, it is less than one-third finished with its 2019 tree trimming. For it and for all California utilities, investments in grid hardening and fire safety will be an ongoing affair, not something that is ever completed.
Ultimately, no amount of grid hardening or fire safety can compensate for the fact that California’s forests are now tightly packed with dry dead trees, the result of decades of mismanagement. Cal Fire, the state agency charged with fire safety, is trying to catch up, but it has a long way to go.
Power lines strung through those forests are going to start wildfires. They can be minimized but not eliminated.
California must reverse the housing crisis that’s sending people out of cities into remote, forested areas
As I explained in the last post, some of the factors that have increased wildfire risk are out of the hands of power utilities. Most notably, the risk is increased when Californians move to fire-prone areas, receive subsidized insurance, settle in communities with insufficient fire readiness and evacuation plans, build houses from materials vulnerable to fire, and surround those houses with flammable shrubs and trees. Most of those choices are now incentivized by state law and regulation; none are particularly discouraged.
Unless it wants to become a perpetual rolling disaster, California will eventually have to address all parts of its land-use and housing crisis.
First, foremost, and above all, California must build more housing in its cities. When people come to the state, they want to live in cities, near jobs. But incumbent homeowners fight to preserve exclusionary zoning and it becomes next to impossible to build anything, so existing housing stock becomes prohibitively expensive (the median home price in San Francisco recently hit $1.7 million); new development is dominated by small, high-end units; and homelessness increases. Working-class families flee to where they can afford to live, to the suburbs, the exurbs, and eventually out into the undeveloped wilderness, where they bump up against wealthy tech execs with second homes.
The centrifugal force pushing people out of cities must be reversed by both widespread upzoning and aggressive social housing and homelessness policies. Unfortunately, California doesn’t have a great record on this. Earlier this year, a suite of bills backed by Gov. Gavin Newsom that would have helped the housing and affordability crises died in Sacramento.
THREAD: I spoke with Gov. @GavinNewsom about his ambitious housing agenda at the end of the legislative year. Tl;dr Many of his biggest ideas stalled or failed. But there are some interesting nuggets I want to highlight from the interview/coverage https://t.co/qpYAfVCWd4 (1/6)
— Liam Dillon (@dillonliam) October 21, 2019
(More promising: a few weeks ago, Newsom signed a bill that would legalize accessory dwelling units (ADUs) on all single-family lots. In Vancouver, British Columbia, a third of single-family homes now have ADUs.)
Speaking of centrifugal force, Prop 13 needs to go. That amendment to the state constitution, passed in 1978, establishes that properties are assessed for property taxes only when they are sold (otherwise property taxes can rise just 2 percent a year). Businesses and homeowners can sit on a building for decades and pay absurdly low property taxes, depriving localities of billions in revenue and pushing them to systemically advantage new development over infill. A ballot measure to repeal the commercial half of Prop 13 is on the ballot in 2020.
Second, insurance rates must eventually be allowed to reflect the true risks of living in fire-prone areas. Already, homeowners in high-risk or fire-damaged areas are seeing their rates double or triple. This is being framed as a “crisis” because high rates can slow growth in those areas, or price people out. More and more high-risk homeowners’ insurance is being taken on by California’s FAIR Plan, an industry-funded, bare-bones insurance of last resort. The California Department of Insurance reports that FAIR policies rose by 177 percent between 2015 and 2018; more than half are now in fire-prone areas.
The unavoidable truth is that when people move to those areas, it creates risk. If insurance doesn’t fully cover the risk, someone else will. And insurance rates are beginning to fall short. “Homeowners’ coverage, an $8 billion-a-year business in California, has become an unmitigated disaster for carriers,” reports the Sacramento Bee. “For every $1 they collected in premiums from Californians last year, they paid $1.70 in claims, according to data collected by the Department of Insurance.” That might just be a one-time spike in claims, but given everything we know about California forests, probably not.
So on one side, you have homeowners angry that insurance rates are rising, and on the other, you have the economics of homeowners’ insurance turning sour for the industry. There is going to be intense pressure on California legislators to fill in this gap with some kind of public subsidy.
They should resist. Speaking to the Bee, state Insurance Commissioner Ricardo Lara said, “we need to take proactive steps to protect our consumers.” He proposes, for instance, subsidies for low-income homeowners in these areas.
There’s an equity argument for that, but state officials shouldn’t do much more. If private insurance rates don’t pay for these risks, taxpayers will. It’s unclear why a state facing intense wildfire risk should subsidize people living in fire-prone areas.
No one wants to say it out loud, but it may simply be that people shouldn’t live in tier 3, high-risk fire zones in the wildland-urban interface (WUI), and the 15 percent of Californians that live in them now will eventually have to move, just as southern Floridians will eventually have to move out of flooded coastal areas. Denser, safer areas of the state will have to make room for them.
Another route would be to simply prohibit development in some areas, but given the housing crisis, state lawmakers are leery of anything that might suppress new housing construction. Newsom says he doesn’t want to limit where people can live because it violates California’s “pioneering spirit,” but really, no one wants to confront the united might of angry state developers and homeowners.
Finally, developers and homeowners must be pushed to use fire-resistant materials and to clear their properties of flammable materials. When they don’t, they put entire communities at risk.
But this is also a political challenge. Last week, Newsom vetoed AB 1516, which would have required homeowners to clear a “defensible space” around their property, saying that it “takes a broad swath” approach that does not reflect the needs of individual communities. (He did not explain what part of neighborhood character is served by unsafe buildings.)
THREAD: CA Gov @GavinNewsom just vetoed AB 1516 – a bill that would have created new rules for defensible space. Many fire experts recommend a 5-foot ember-resistant zone around homes, which the bill would have set up. https://t.co/3RPx8yfa4m
— Lauren Sommer (@lesommer) October 15, 2019
Meanwhile, building inspections are falling woefully short. Cal Fire has inspected only a tiny fraction of buildings — just 6 percent in some fire-prone areas of northern California.
How cooperative will California homeowners be in this undertaking? Well, let’s check in on the Berkeley Hills, where city officials are trying to create a few small no-parking zones so that emergency vehicles can access the area’s narrow, winding streets. Berkeleyside reports:
Despite the program proceeding slowly on just three streets (Alvarado, Bridge, and Vicente roads) and assurances that the program would maintain “some parking for the neighborhoods,” residents are already warning Wengraf that they plan to fight.
“One woman on Tamalpais told me she’d lay down in the street and block our trucks,” said Wengraf. “Some people think they own the street in front of their houses.”
Residents in the Oakland hills are protesting the same thing. Some homeowners, resident Daniel Matthews told the East Bay Times, “have no parking, so if you say ‘no one can park in the street,’ then I don’t know what they’re doing.”
Meanwhile, over in Mill Valley, the city council passed an ordinance requiring around 75 percent of residents (the ones who live in the WUI) to remove plants and other flammable materials from the area immediately around their homes. Oops. After a homeowner revolt and a packed-to-spillover meeting in September, the Marin Independent Journal reports, “the council voted unanimously to amend the municipal law so that the hardscape would be voluntary, rather than mandatory as originally proposed.”
There is no end to local stories like this. All the while, new developments are being proposed and approved in high-risk areas, often with the complicity and encouragement of local officials.
Local officials simply don’t want to limit local growth or inconvenience local residents. It’s a collective action problem, and the answer — on building codes, zoning codes, and other issues with direct impact on the state’s collective safety — is for state lawmakers to implement equitable state-wide solutions. Local control over land-use cannot be allowed to drag the state into perpetual crisis.
What do neighborhood activists and city officials mean when they say “local control” and “neighborhood character” and what does it mean for California’s housing crisis? Find out on the latest @CAHousingPod https://t.co/R7Zyu5Vt3L
— Liam Dillon (@dillonliam) October 21, 2019
Californians, from entitled homeowners to cowardly public officials, bear plenty of responsibility for the wildfire crisis, which is not unrelated to the state’s housing crisis, for which they also bear plenty of responsibility. They can’t just blame all of this on utilities.
Nonetheless, their biggest utility, PG&E, really does suck. So let’s take a look at what to do about that.
The question of how to reform PG&E is vexed. Vexed, I tell you.
For the long-term health of the state’s electricity system, one of its most urgent, consequential, complicated, and difficult tasks is fixing PG&E. And despite what many people seem to think, there is no simple or easy answer for how to do that.
Right now, the utility is in bankruptcy court. Its fate lies in the hand of Judge Dennis Montali.
PG&E shareholders have submitted a plan for reorganization, but a few weeks ago, Montali ruled that shareholders would no longer have the exclusive right to form a plan. He opened up proceedings to a separate plan submitted by a set of bondholders allied with groups representing fire victims. The two factions are now vying in court.
It is difficult, from the outside, to assess which of the two plans is better. PG&E shareholders and their Wall Street backers want to raise money for both debts to pay off creditors and equity to invest in grid safety. They propose a cap of $18.9 billion on fire payouts, and since they agreed a few weeks ago to settle insurance claims for $11 billion, that would leave about $8 billion to compensate individual fire victims.
The plan alienated fire victims, who then allied with bondholders (who had already tried unsuccessfully to submit a plan of their own) to create a plan the judge accepted for consideration.
The bondholder plan would treat existing shareholders much more harshly, dilute the stock more, put more money toward debt, create a bigger fund to pay for fire claims, and leave bondholders and fire victims with the largest stake in the company. It would also fire PG&E’s entire board of directors, ensuring the replacements included “one seat to the company’s employees, one seat to a ratepayer advocacy group, and one seat to the state wildfire fund.”
It might be easy to see the shareholders as the bad guys in this fight, since they’re mostly the ones who mismanaged PG&E for so long, but it’s not that simple.
For one thing, it seems relevant that the bondholders in question are dominated by Elliott Management, which is run by Paul Singer, a longtime GOP mega-donor who recently warned that “socialism is on the march again.” Singer is chair of the board of trustees for the libertarian Manhattan Institute, which frequently argues against renewable energy.
Elliott is widely known for its adversarial approach, buying up stock in companies, firing boards and CEOs, investing heavily in bankruptcy lawyers, and stripping companies back to core functions that provide reliable shareholder returns. It is the largest investor in serially bankrupt coal giant Peabody Energy. It’s a big investor in FirstEnergy, which is also in bankruptcy and has a long record of seeking and receiving bailouts. (The utility will profit from Ohio’s terrible recent energy bill.)
Singer is known for pushing utilities to adopt a “back to basics” approach, which among other things tends to mean ditching renewable energy. In 2017, Elliott invested heavily in NRG Energy, which shortly thereafter announced a “transformation plan” that would “raise $2.5 to $4 billion by divesting 50 to 100 percent of its NRG Yield renewable energy business and some of its conventional energy assets.” Last year, Elliott and Bluescape Resources called for an overhaul of Sempra Energy, in which they shared a 5 percent stake. Among their recommendations was that Sempra sell its renewables division. (The company ultimately didn’t, though it did “streamline” in a number of ways.)
The hedge fund business model is to focus on immediate returns to shareholders at the expense of diversification and long-term investing. That model might benefit PG&E investors more in the near term — it might even benefit existing wildfire victims more in the near term — but what the state needs now more than ever is some long-term thinking.
PG&E couldn’t just ditch renewables in California as Singer has counseled utilities elsewhere. The CPUC and legislators will force it to obey existing clean-energy mandates. And the sheer size and significance of PG&E give it some stability. But having Singer involved in shaping the company’s future is, at the very least, of dubious value in a state committed to decarbonization.
So for now it’s hedge fund versus hedge fund, with Californians pinning their hopes on a bankruptcy judge to ensure that they see some of the proceeds and that PG&E starts doing what’s right.
Another wrinkle: Through a quirk of bankruptcy law, any new wildfire-damage claimants that come along during bankruptcy are automatically put in line for payment ahead of “pre-bankruptcy creditors,” including pre-bankruptcy fire victims. Yet those pre-bankruptcy creditors must be paid in full before PG&E can exit bankruptcy. So additional wildfires this season or next could delay PG&E’s exit and drive up its liabilities, possibly to the point that it will be difficult to attract private investment at all. It’s a ticking time bomb.
Very few bankruptcy proceedings deal with an entity this large and this connected to the public welfare, with such giant, unpredictable, ongoing liabilities. It’s a bit of a nightmare.
Some on the left advocate for making PG&E a public utility, having California buy it outright and possibly break it up into smaller municipal utilities. But these arguments rarely grapple with the trade-offs; they proceed directly from “PG&E is guilty of criminal mismanagement,” which is indisputably true, to “PG&E should be public,” skipping several important steps in between. (Note: The restructuring plan put forward by bondholders and wildfire victims explicitly disavows municipalization, mainly because the utility union opposes it.)
For one thing, PG&E being so big has the effect of socializing costs among its 5.4 million electricity accounts. As places like San Francisco municipalize, the wealthiest ratepayers with the cheapest electricity will peel off, leaving (often poorer) residents of more sparsely populated areas facing ever-rising costs, further accelerated by wildfires. Whatever you think of rural residents paying more for electricity, it raises serious equity issues and promises political blowback.
Regardless, municipalization could take years, a decade or more, as it did in Sacramento, especially if PG&E fights it, as it likely will. San Francisco is attempting it now and San Jose is considering it, but it’s still too early to know if the process has gotten any easier. It is unlikely to prove a short-term solution in either case.
For another thing, PG&E doesn’t just come with assets. It comes with $30 billion in debt and virtually unlimited liabilities.
Now that lots of Californians are calling for a public takeover of PG&E, as the public, let’s do what any investor would do before buying a company – review its financial statements. https://t.co/DFLAOTOyoQ Thread 1/
— Alfred Twu (@alfred_twu) October 11, 2019
The problem isn’t just existing debt. If California took over PG&E, all those decisions about whether or not to shut down the electricity grid to avoid wildfires would be made by public officials. All responsibility for raising electricity rates to invest in grid hardening (while regularly cutting off electricity) would fall to public officials. All the liability for wildfire damages caused by power lines would be born by Californian taxpayers. The state would effectively be inheriting a shitshow of private capital’s making, allowing private capital to escape paying for it.
Given how little the state has been able to do to solve the housing crisis, it is at the very least not obvious that it would do a better job handling this adjacent crisis.
PG&E’s profits need to be tied to doing a good job
Ultimately, the question of public versus private is somewhat orthogonal to the quality of utility service — there are dirtier and cleaner municipal utilities, dirtier and cleaner IOUs, good and bad actors in both categories. A better lens through which to view the debate is one that is virtually absent from the conversation around PG&E: the incentive structure in which utilities operate.
As a fully regulated, investor-owned utility, PG&E does not make profits for its investors through the sale of electricity. It only recoups costs on power sales. (It is a monopoly, and no monopoly can be allowed to set the price of its own product.)
Rather, investors make money through a guaranteed rate of return on investments approved by the CPUC, generally investments in building and maintaining grid infrastructure. Naturally, this gives PG&E great incentive to pitch the CPUC on new investments. Getting new ones approved — “rate basing” them (i.e., raising customer rates to pay for them) — is how the company best serves shareholders.
Actually making those investments, ensuring quality service, is largely left in the utility’s hands. That creates an incentive to keep returns high for shareholders by skimping on implementation, which PG&E did repeatedly.
It also creates an incentive to avoid anything that might lead customers to need less utility infrastructure, like energy efficiency, batteries, or microgrids. All those things are against shareholders’ interests. That’s why IOUs tend to invest only as much in them as required by law, and no more. They want to build more stuff, not less stuff.
The problem here is not so much the profit motive as what makes profits. The incentive structure is completely wrong.
That can be fixed. Regulated monopoly utilities are not operating in free markets; they are operating in environments built entirely by law and regulation. The fact that they make profits solely through big capital investments is an artifact of that regulatory environment. The environment could be designed to produce other results.
This is not the place to get into utility regulatory design (I recommend the Regulatory Assistance Project for a deeper dive), but the key concept to understand is “performance-based regulation.” The goal is to reduce the amount of IOU shareholder compensation that comes from fixed returns on investments and increase the amount that comes from variable returns on performance-based metrics.
In plain English, that means reforming regulations so that utilities make more money if they achieve particular outcomes. Those outcomes can be determined by legislators and PUCs, ranging from service uptime (minimizing blackouts) to customer satisfaction, renewable-energy penetration, electrification, efficiency, or resiliency.
Other, incremental efforts to adjust PG&E’s incentives are forlorn. Earlier this year, California state Sen. Scott Wiener introduced a bill that would fine PG&E for planned blackouts. His reasoning was that the utility now has enormous financial incentive to avoid wildfires but very little incentive to avoid blackouts. And that is true, as far as it goes, but it is an incredibly crude instrument for balancing PG&E’s incentives. It would make more sense to simply tie PG&E’s profits to reliable power delivery.
Another necessary regulatory reform is to break up governance of the electricity transmission and distribution systems. Local electricity distribution systems need to get smarter, able to generate, store, and manage more of their own power, and they need to be run by local entities.
In other words, California needs a more distributed energy system. That is the only true long-term solution to the wildfire mess. It’s going to happen one way or another, so the state ought to do it deliberately and equitably, with some foresight (as much as that might break precedent).
The question of how to properly distribute power — the electrical kind and the political kind — is a complicated subject in its own right. I will dive into that in my next post.
Author: David Roberts