Sunday, March 7, 2010

Does PG&E Fully Understand the Recklessness of Peter Darbee's Proposition 16 Gamble?

I wrote the following "guest editorial" for the March 5 edition of the subscription newsletter, California Energy Circuit.  Their deadline requirements prevented me from including the following statement which Peter Darbee made in response to a question at the March 1, 2010 PG&E investors conference in New York:
 "There's going to be some flap.  It will take place between now and June. And then the voters will have their ability to make their case one way or another.  And then, presumably, you know, we'll mend any broken fences after that."
By John Geesman

It takes a peculiar level of recklessness to make the kind of seemingly one-sided bet which PG&E chief executive officer Peter Darbee has placed on Proposition 16 in this June’s election.

Darbee’s political consultants have convinced him that a sufficiently large campaign budget can bamboozle a majority of voters into believing that locking monopoly protection into the State Constitution is an awesome way to prevent tax increases. Depending upon your view of Republican primary voters -- who are likely to dominate turnout because of hotly contested races for governor and U.S. senator -- this may or may not be a plausible strategem.

But the likelihood of blowback from inflaming PG&E’s relations with local governments, regulators, and legislators -- not to mention customers -- has reinforced Darbee’s “doofus” image among the diaspora of talented ex-PG&E employees (and more than a few current ones) who are widely placed throughout California’s energy industry. They believe he has misunderstood the nature of the utility business, its quasi-public service nature, and its dependence upon the goodwill of powerful external stakeholders. From this perspective, even if he wins his cynical gamble, there will be lasting negative consequences for PG&E for years to come.

What would Proposition 16 actually do? Under existing law, most local governments can annex new areas for the expansion of electricity service with the approval of a simple majority of the voters in the area to be annexed. Proposition 16 would embed in the state constitution -- meaning that it can only be changed by another statewide election -- the requirement that the approval come from “two-thirds of the voters in the territory being served and two-thirds of the voters in the territory to be served.” A similar requirement would be written into the constitution for the formation of any new publicly owned electric utility.

In addition, any local government pursuing community choice aggregation -- an electricity procurement process created with PG&E’s support by statute in 2002, when the investor-owned utilities were too weak financially to procure for themselves -- would also require an election with two-thirds voter approval before proceeding. The ability of any customer to opt out of a community choice program provided by existing law would be preserved.

That’s the simple part. Sloppy drafting -- ballot initiatives aren’t vetted like bills that have to go through legislative committee hearings -- of a “grandfather clause” to exempt existing municipal utilities within their current territories relied on an outmoded “sole provider” definition. With the proliferation of third party distributed generation, solar power purchase agreements, and direct access accounts, it may be empirically impossible to qualify for that exemption. How do you prove a negative, especially in court?

That means that in the 48 communities currently served by munis, every new connection -- every new home buyer, every new business -- could be subject to an election requiring the approval of two-thirds of the voters. Unsurprisingly, the California Association of Realtors was one of the first opponents of Proposition 16.

PG&E has announced that it will spend up to $35 million in order to pass Proposition 16. To succeed, it will need to persuade voters of two preposterous suppositions:

1. Eliminating customer choice is good for you --This may prove difficult, as most Americans seem to be hardwired with the belief that more competition means lower prices. With PG&E currently seeking 10 different rate increases (totaling more than $5 billion) at the CPUC, on top of what are already some of the highest rates in the U.S., you don’t need to be an economist to be skeptical of a monopoly’s pricing claims. Given the miserable condition of the California economy, most people want to bring as much downward pressure on electricity prices as possible.

2. Skimming off ratepayer money to manipulate voters will protect taxpayers -- Of course, PG&E insists that the $35 million comes from the shareholders only. But how many of the voters are gullible enough to respond to those Nigerian email offers? The indisputable truth is that PG&E’s rates are set by the CPUC to provide capital to invest in needed infrastructure. If rates are so generous that PG&E can create a $35 million slush fund for political adventurism, something is seriously wrong.

So Darbee has made his P.T. Barnum bet, and even Abraham Lincoln spoke of the possibility that you can fool all of the people some of the time. But win or lose, Darbee is eventually going to have to face the California Senate leadership, who wrote to him last December questioning his company’s integrity and urging him to abandon the ballot measure. His less than astute silence to date makes them look like impotent blowhards, not a good thing.

His threat to cut off electricity deliveries to the Marin Energy Authority if it proceeds with community choice aggregation -- withdrawn after the gesture failed to intimidate the county supervisors -- may end up pulling the CPUC into the Proposition 16 fray. A strategy that seemed to work for Vladimir Putin in resolving gas disputes with Ukraine just doesn’t translate that well in California. It may not amuse commissioners responsible for enforcing the law.

Spending $35 million to indoctrinate voters that California needs more plebiscites around major electricity decisions may prove more than a bit shortsighted, especially for someone with as much risk exposure as Peter Darbee and PG&E. 

(Photo credit:  Darbee, Genesis Photo Agency)