How Much More Can California Pay For Power?

(Bloomberg Opinion) -- Amid the many known unknowns and unknown unknowns surrounding PG&E Corp., one certainty shines through: Bills will be going up.

CALFire’s determination that PG&E’s equipment didn’t start the deadly Tubbs Fire in 2017, released Thursday, raised expectations the company could be off the hook for more than $10 billion of potential liabilities (although it is worth remembering nothing is settled so long as victims of the fires are pursuing claims). Even so, the company still faces potentially tens of billions of dollars of liabilities arising from other wildfires (see this). Plus, ratepayers or Californians in general must also grapple with the future costs of reconfiguring or strengthening the state’s grid to quickly mitigate a chronic risk of wildfires (see this).

As it is, Californians pay among the highest rates in the U.S. for their power. Residential customers paid about 18.3 cents per kilowatt-hour in 2017, the seventh highest for any state and more than 40 percent above the national average. Bump those rates by, say, 15 percent and Californians would be among the top three.

On the other hand, Californians generally use less power; about two-thirds the national average at the residential level. The moderate climate in some areas helps (like those blanket-friendly San Francisco summers). But decades of energy-efficiency policies have made the biggest difference.

How Much More Can California Pay For Power?

Average monthly bills are thus relatively low in California. At about $101 a month for residential ratepayers, the state ranked 38th in 2017; the national average was almost $112. On top of that, Californians earn more on average, so the burden of residential power bills there is much lower than in most of the U.S., at just over 0.8 percent of per capita disposable income in 2017.

How Much More Can California Pay For Power?

Altogether, this suggests there is some room to raise rates in California to deal with the crisis — but that comes with several important catches.

The crisis is, for now, centered on PG&E. Including commercial and industrial customers, the average price paid for power in its service territory was just over 20 cents per kilowatt-hour in 2017, according to the Energy Information Administration. A 15 percent increase across the board would, all else equal, raise an extra $1.9 billion of annual revenue using data for 2017 — enough to fund a $20 billion, 15-year amortizing bond at 4.5 percent. That would cover much of the immediate liabilities pertaining to previous wildfires, provided PG&E received permission to do so.

However, residential bills would rise to an average of $127 a month, putting PG&E’s service territory up there with the most expensive state averages such as Alaska and Arizona. Income differences would still make the burden lower than in those states. Meanwhile, commercial and industrial monthly bills would rise, of course, but wouldn’t shift their relative ranking much.

Such an increase could still be political dynamite. Telling people they will be paying an extra $17 a month for the same thing they got last month is never popular, especially given the anger directed toward PG&E already.

Moreover, averages are useful to mathematicians but less so to many citizens in a state where a short drive from Silicon Valley will tell you everything you need to know about income disparities. Take Butte County, home to the town of Paradise that was all but wiped out by last year’s Camp Fire. Personal income per capita there was just over $43,000 in 2017, according to the Bureau of Economic Analysis, and per-capita electricity consumption was about 3,400 kilowatt-hours. Adjusting for taxes, Butte’s electricity burden was already 2.1 percent of estimated disposable personal income, on a par with the highest state burden in the country, Alabama’s. Raise rates by 15 percent, and the burden would surpass that, at 2.4 percent of income.

These may sound like marginal amounts. But energy’s necessity and the visibility of its pricing mean even small changes in the burden can have big effects — especially for those living on the margins of prosperity. As it is, 1.4 million of PG&E’s customers are already enrolled in assistance programs that discount their energy costs. 

Beyond this, California’s zero-carbon goals are both ambitious and more important than ever given the tangible impact of climate change there already. Reaching them requires ever greater electrification of the state’s energy consumption. And few things discourage electrification like big increases in price. Even if average burdens on income don’t rise much, marginal rates for electricity are what people and businesses consider when deciding whether to switch away from a competing energy source. The two elements of the state’s strategy that would benefit from higher prices are further efforts on efficiency or moving to distributed energy resources like solar panels — creating more headwinds for investor-owned utilities.

The upshot is that while there may be some capacity to raise rates to deal with existing liabilities, this would run into existing problems of inequality quite quickly and raise doubts about state goals on clean energy. Moreover, there is the potentially substantial cost of future fires and their prevention to consider. This analysis suggests such costs may ultimately have to be handled at a state level, rather than by this or that utility. That bills are going up may be certain, but they raise their own known unknowns in the process.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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