SoHum Grad Student Who Wrote Informative Piece About Power Outage Last Week, Corrects Error in New Letter to the Editor

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*Note: The following letter has been reviewed for technical accuracy by Steve Weissman, the creator and former director of UC Berkeley’s Energy Law program who currently serves as a lecturer at Berkeley’s Goldman School of Public Policy. However, the opinions expressed are solely my own.

Last Thursday, October 10, I submitted a letter in response to frustration over PG&E’s power outages due to increased risk of fire danger. This letter received significant response including two comments in particular that made me question the validity of one of my major claims—that PG&E can only receive profit from a return on infrastructure investment. I then reached out to UC Berkeley Professor, Steve Weissman, whom I had recently spoken with about similar issues. He confirmed that this claim was incorrect. I would first like to offer my sincerest apologies for this error.

I care very much about fire safety. My dad has worked in wildland fire suppression and fire hazard reduction for most of his adult life, and I have also worked with him in both of these capacities. I also care very much about functional utilities. My personal and professional aspirations are to fight climate change through clean energy, and based upon the current technological and economic benefits of the grid (that I would happy to discuss in another setting), I believe that functional utilities are a necessity in achieving this goal. I also know that many friends and family back home care deeply about these issues as well, but due to the complexity of utility operations, the mechanics of how this problem has arisen and potential solutions can be difficult to understand. As such, I wrote my initial letter with the intention of sharing some of the details that I have learned while studying the energy industry over the past few years so as to help our community develop a more complete understanding of this issue so we are better able to advocate for constructive solutions. With that end in mind, I am very sorry for misleading you and I will now correct my previous erroneous claim and offer additional perspective.

It is true that the means in which PG&E is supposed to earn profit is through receiving a percent rate of return on their infrastructure cost. It is also true that maintenance costs, like clearing trees near transmission lines to improve fire safety, are pass-through costs to us (the ratepayers). PG&E cannot make any rate of return on these costs. However, this does not mean that PG&E cannot make money by spending less on maintenance than they were funded to do so. It is true that PG&E goes to the Public Utilities Commission (PUC) every few years and essentially tells the PUC that they need to spend x dollars on infrastructure and y dollars on maintenance. The PUC either approves or rejects these costs based on whether they think these expenditures are worth the money for us (the ratepayers). The total amount of costs that the PUC approves is added up and that total value is called the Revenue Requirement (RR). This is the amount that PG&E is allowed to make in revenue each year from selling us electricity. Our rates are based on trying to recover this RR amount.

Because PG&E is what is called a “decoupled” utility, where their revenues are supposed to be decoupled from the amount of electricity they sell us, if they end up bringing in revenue that exceeds the RR, they are required to reduce our rates by that amount for the next year so they only make the RR. Likewise, if they end up bringing in less than the RR, they can increase our rates by that amount for the next year. However, while our rates will increase or decrease based on the actual revenue that PG&E brings in from electricity sales each year, and PG&E will theoretically only make the amount of money the PUC approved based on their costs and percent return on infrastructure investments, our rates do not change based on the actual costs PG&E incurs. Say, for example, the RR is $1 billion and of that $1 billion, $0.2 billion is for maintenance costs. If PG&E only ends up spending $0.15 billion on maintenance then they get to keep the extra $0.05 billion to use as they wish, which could include moving this money to meet other unforeseen costs or increasing their shareholder profits. In this way, PG&E actually does have a financial incentive to skimp on maintenance to increase profits. While they have to weigh this incentive against the financial incentive to do maintenance, so as to avoid fires and bankruptcy, the fact remains that this incentive exists and it is not outrageous to assume that this could play a significant role in our poor fire safety and the current need to shut off power to avoid starting fires.

My friend Jay Peltz, someone I have a lot of respect for, just yesterday posted a letter in which he advocates for removing all profit incentive from our utilities and turning PG&E from an investor owned utility to a publicly owned utility. This, he believes, will help solve the issue of fire danger and lower our rates. I do not claim to know enough yet about the pros and cons of investor owned versus public utilities to confidently advocate for either side, although as a matter of principle, I believe no one should be making millions of dollars per year in bonuses at ratepayers’ expense. However, whether you believe this to be a good solution or not, I would argue that in the short term at least, we have significantly more easily achievable options to eliminate PG&E’s financial incentive to skimp on maintenance. The best way that I am aware of is to advocate for the PUC to set up what is called a “one-way balancing account” for PG&E’s maintenance costs. This mechanism would effectively ensure that if PG&E did not spend all of the money it had been approved to spend on maintenance, then the extra money would be returned to the ratepayers. In this way, PG&E would have no incentive to skimp on maintenance to increase profit, and the money we pay for improving our fire protection from transmission lines would be used for exactly that.

I stand by the claim in my first letter that it is a difficult job to provide reliable power safely to people living all over while keeping costs down so that our rates are not too high, but there is no doubt it will be less difficult if 100% of the money we give PG&E for maintenance actually goes to where it belongs.

In summary, PG&E can make profit by skimping on maintenance, and a one-way balancing account is one realistically achievable way to cut this incentive for PG&E and hopefully lead to a more fire-safe system. Once again, I regret the unintentional error in my first letter, and I hope this letter is able to reach everyone the previous one did in order to correct and expand on the issue. I really do believe that our communities have the power to affect change in the areas we care about, and if we can understand the complexity of these issues, we are better positioned to create constructive change.

-Eli Kahan