PG&E Can’t Show You the Money

The Pacific Gas & Electric Company, the utility whose natural gas pipeline in San Bruno, California exploded several months ago, failed to spend $183 million on pipeline safety that it had been authorized to collect between 1987 and 1999. According to the San Francisco Chronicle, U.S. Representative Jackie Speier wants to know what PG&E did with the money. There is one thing that is absolutely clear: she will never find out.

That’s the way of utility ratemaking. A company asks today for money to spend tomorrow, and has to justify its request based on the expenses it expects to undergo. But once rates are approved, the utility can spend the money just about any way it wants. And anything that’s left over can be divvied up among shareholders, or tucked under a mattress. Any effort to track the dollars that were not spent on pipeline inspections and replacement is meaningless.

But that doesn’t mean there isn’t anything interesting to say about the matter. The Chronicle reports that most of the under-spending happened between 1987 and 1995. That is the period of time when PG&E and other utilities were anticipating and preparing for the introduction of competition in the electric generation business. PG&E established first one unregulated affiliate to build power plants around the world and then another to buy up existing plants around the country. Over the course of several years, PG&E shifted billions of dollars from the regulated to the unregulated side of the house. And when the new competitive markets began to collapse in 2000-2001, PG&E took steps to shield those shifted funds from its utility creditors. PG&E did not fare so well in the competitive marketplace, and much of that money was ultimately lost.

None of this is shocking, in light of the forward-looking way that rates are set, but the results are not inevitable. When there is something that regulators want to make sure gets done, they can order the utility to hold the funds in a special account, spend them only on the specific activity, and then refund to its customers anything left over. The California regulators have done that with funds for things like tree-trimming, or energy efficiency programs. In the future, if the Commission cares as much about pipeline safety as I am guessing that it now does, it can set up this kind of special account for pipeline inspection and replacement. I’ll bet that is just what the Commission will do.

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Reader Comments

3 Replies to “PG&E Can’t Show You the Money”

  1. Steve, I’m not doubting you for a second, but I’m wondering why an audit wouldn’t be able to trace dollars that came into PG & E to where they came out. If no audit could do that, that would seem to be the sort of thing that plaintiffs’ lawyers looking for a derivative suit would be very interested in, right?

  2. An auditor could figure out how many dollars came in and what they were spent on, but would have no way to figure out where specific unspent funds were redirected. Assume, for instance, that you gave me $100 to buy myself some groceries. You were convinced that, based on my list of expected purchases, I would probably need to spend $90 and that I ought to be able to get an extra $10 for my troubles. I will have to cover the difference if the groceries cost more than $100, and if the cost is less, I get to keep the change.

    Although I expected to spend $25 on lunch fixings, I decided to make a big pot of soup, which only cost me $10. What did I do with the extra $15? Well, oranges turned out to cost $2.50 per pound instead of $2, I bought some bulk nuts that weren’t on my original list, but I got a lot of dinner invitations and bought fewer entrees, decided to stock the freezer with extra ice cream, took in some unexpected revenue from my kid’s Kool Aid stand, had a bumper crop of yummy vegetables from my garden so I needed less produce, and I treated myself to dinner out, one night.

    So, maybe I spent the $15 on fine dining, or maybe I spent it on more expensive oranges, or maybe I spent the extra money from dinner entrees on those things, or was it for the ice cream? Did I use the Kool Aid money for bulk nuts, or did I just put it in my pocket? An auditor can count up the money in ($100 plus Kool Aid sales) and the money out in total expenses, but no one could say with confidence what happened to the particular $15 I had said I needed as lunch money.

  3. Love the analogy Steve! Should be included in “ratemaking 101.” Makes me hungry.

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About Steven

Steve established and directed the Energy Law Program at Berkeley Law. He is currently a Lecturer at the Goldman School of Public Policy.…

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About Steven

Steve established and directed the Energy Law Program at Berkeley Law. He is currently a Lecturer at the Goldman School of Public Policy.…

READ more