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Plugged into Profits, PG&E Risks Little

A utility pole in San Bruno stands while fire from a gas pipeline explosion rages behind it
//yeti-cir-test.s3.amazonaws.com/uploaded/images/2010/9/san-bruno-fire-power-line/original/San Bruno fire power line.jpg
A utility pole in San Bruno stands while fire from a gas pipeline explosion rages behind it
The utility's status gives it a near monopoly and insulation from the costs of failure

Pacific Gas & Electric enjoys a near monopoly over 70,000 square miles of Northern and Central California, with 15 million customers. The California Public Utilities Commission allows the company to charge rates 30 percent higher than the national average. As a regulated utility, the publicly traded company's shareholders benefit from a guaranteed 11.35 percent return on equity, which is also above the industry average of about 10.5 percent.

Yet, when PG&E stumbles, the customers largely foot the bill.

PG&E's guaranteed profits have come under scrutiny following the September 9 explosion of a company gas pipeline in San Bruno. As investigators examine why the rupture occurred, PG&E's ratepayers -- including those returning to the badly damaged neighborhood -- are most likely to bear much of the cost, according to state regulators and utilities analysts.

"They get their cake and eat it, too," said Cheryl Cox, policy adviser at the Division of Ratepayer Advocates at the utilities commission. "The ratepayer is responsible at any cost to make sure the utility remains financially healthy and keeps the lights on. We watched the financial debacle with the banks, and that is basically what we have here."

PG&E is "too big to fail," she said.

Consumers were already paying for repairs that were to have been performed on a segment of the pipeline a few miles from the section that exploded, documents show. PG&E told the state utilities commission in 2007 that the section had an unacceptably high risk of failure. Those repairs have not been made.

Customers, who already bear the cost of the company's $17 million insurance premium, will also most likely bear a good portion of its $10 million insurance deductible arising from the San Bruno explosion, according to a state utilities commission attorney.

Peter A. Darbee, the company's chief executive and a former Goldman Sachs investment banker, said in an interview that he was not prepared to discuss the explosion's financial impact on PG&E.

"This has been a tragic and horrific experience for the residents of San Bruno," Darbee said. "I have been focused on that tragedy, how we can help the people of San Bruno, how to ensure the safety of our pipeline and how best to respond to the authorities involved." He added that the company has reviewed the overall system and not found anything to cause concern.

PG&E's CEO Peter Darbee
Getty Images
PG&E's CEO Peter Darbee
Getty Images

Last Monday,  Darbee and other PG&E executives appeared at a San Bruno firehouse to announce the establishment of a $100 million fund to help those affected by the explosion. That sum will not be billed to ratepayers. "We are demonstrating accountability,"  Darbee said.

PG&E was formed in 1905 as a consolidation of smaller power companies that had sprung up in the settlement boom after the gold rush. Under the regulatory compact that applies to all publicly regulated but privately owned utilities, PG&E has been granted a practical monopoly to provide a public service to any customer who wants it. In exchange, it agrees to rate regulation that includes a guaranteed rate of return.

The relationship between the utility, its regulator and customers is complex.

The arrangement essentially allows PG&E to "privatize profits and socialize costs," said Todd L. Rydstrom, chief financial officer of the San Francisco Public Utilities Commission, a public, nonprofit utility that provides water to 2.5 million customers.

That gives PG&E a guaranteed stream of profits while the company bears almost no financial risk, Rydstrom said.

PG&E has lost $1.2 billion in market value since the explosion. Hugh Wynne, a senior analyst at Bernstein Research, said he believed that the market had overreacted and that the stock would recover. He said he believed that the actual cost of the disaster would be closer to $500 million.

C. Lee Cox, PG&E's chairman, concurred that the financial impact on the company would not be severe. In an interview, Mr. Cox expressed confidence that the utilities commission, which is participating in the investigation, would not punish the company in future rate negotiations.

"I haven't ever seen this regulatory commission not do something in the long-range best interests of customers," Cox said. To punish the utility "just out of anger, it is hard for me to envision that," he added.

The next multiyear rate agreement, now being negotiated, will take effect in 2011. PG&E has requested a $1.1 billion revenue hike. In 2009, its revenues were $13.4 billion.

x1The company's ability to pass on its operating costs is "just kind of how the system is," said Julie Fitch, director of the state regulatory commission's energy division. If the regulated utility is not guaranteed an attractive-enough return, then there is a risk that it will not invest enough capital to maintain and grow the system, which is central to the health of the area's economy.

However, "if PG&E knowingly did something improper,"  Fitch said, the commission could fine the company. In the absence of that, she added, ratepayers pay for the company's costs now, and presumably in the future.

Since the explosion, much of the attention has been on the 54-year-old pipeline that ruptured beneath San Bruno. Consumer-safety advocates have raised questions about whether the pipeline's age may have played a role in its failure.

Pipeline safety has not been a primary focus for state regulators. "During the entire six years I was at the P.U.C., we talked about a lot of things, but we didn't talk, to my memory, to any extent about pipeline safety," said Geoffrey Brown, who served as a public utilities commissioner from 2001 to 2007.

Brown is a first cousin of Jerry Brown, California's attorney general and the Democratic candidate for governor.

"The type of inspections that are going to be required are going to be beyond what PG&E or any of these utilities have done in the past. The ratepayers would have to pay for that," Geoffrey Brown said, adding that ratepayers would also have to pay for accelerating replacement of pipes.

 Darbee said that given PG&E's size, with assets of $45 billion, any additional infrastructure spending precipitated by the San Bruno explosion would most likely be difficult to see. "I don't think it will be discernible to a customer in the bill that they receive," he said.

The company was already having a rough year.

It spent almost $50 million in support of Proposition 16, a June ballot measure that would have made it difficult for local governments to start or join a public power agency. Publicly owned power companies compete with PG&E for customers.

Although opponents of Proposition 16 spent barely $100,000, the measure was nonetheless defeated amid criticism that PG&E was using the ballot box to restrict competition.

"I think that mistrust of PG&E is at an all-time high," said Mindy Spatt, spokeswoman for The Utility Reform Network, an advocacy group.

State Senator Mark Leno, a Bay Area Democrat, said he planned to introduce legislation that would prevent a utility from seeking a rate increase to cover expenses incurred from a catastrophic event caused by improper maintenance.

Leno said the utility had little incentive to keep infrastructure in good repair.

"There will only be an incentive to maintain the system properly when the utility knows it may face the wrath of its shareholders if there is system failure," he said, "because shareholders rightfully expect that the rates consumers are paying are sufficient to keep the infrastructure intact."

This article also appears in the Bay Area edition of The New York Times.

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