Utilities: How Big is Too Big?
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As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe NowOver the last several years, California has experienced deadly and damaging wildfires, many sparked by electrical lines blown into contact with each other by the annual Santa Ana winds, creating sparks that cause underlying vegetation to ignite.
Pacific Gas and Electric Co. (PG&E), which provides natural gas and electricity to about 5.2 million households over a broad swath of California, was forced to seek bankruptcy protection last year, citing an estimated $30 billion in fire-related liabilities from 2017 and 2018. It’s believed that PG&E facilities sparked 19 fires in 2017 and 2018, killing more than 100 people.
As the utility works its way out of bankruptcy, many are wondering how the company can be structured to ensure the safe and economical delivery of electricity to its customers, and to provide a reliable and needed infrastructure for economic development.
The answer may be right here in Indiana. Indiana has more than 38 individual electric cooperatives providing service to more than 1.3 million Hoosiers throughout the state. Utility co-ops began springing up 90 years ago as a means of electrifying rural communities that were ignored by larger utilities unable to make a business case for running electrical lines to sparsely populated areas.
The Investor-Owned Model
The dry Santa Ana winds are not new to California, but catastrophic wild fires seem to be on the rise. One reason is that PG&E hasn’t been able to keep up with the maintenance needs of its infrastructure. Taxed by buffeting winds, the electrical lines are sparking and igniting the dry vegetation around them.
As an investor-owned utility, PG&E is bound by rate limits set by California regulators. At the same time, the utility’s shareholders and bondholders expect a certain rate of return on their investments. Dividends are paid first—to the tune of $1 billion in 2017 alone—and what’s left over is sometimes insufficient for critical things like system maintenance and tree trimming.
Over time, this makes an impact. In 2019 state regulators ordered PG&E to begin accelerated inspections of all of its power lines, towers and substations. More than 1,200 immediate safety risks were identified and repaired, and another 10,000 “less urgent” needed repairs were found.
Electric co-ops, on the other hand, operate as nonprofit entities. They pay property tax and payroll tax, but not federal income tax. Any profits that these organizations generate are returned back to their members (customers) in the form of capital credits.
NineStar Connect, a smart cooperative utility in Hancock County, has returned nearly $5 million to members over last nine years, while simultaneously investing almost $80 million in infrastructure improvements. If NineStar Connect were an investor-owned utility, the money available to invest in its infrastructure would have been just one-third of that. That lack of investment would have resulted in less reliable service as well as decreased expansion. Both would have negatively impacted economic growth in the area.
A Community Utility
Because co-ops are member-owned by those who use their services, regulators don’t set their rates in many states. Instead of a profit incentive, electric co-ops are motivated to reliably keep the lights on. Therefore, repairs and maintenance are not a “nice to have,” but rather a “must have” to maintain quality service. Removing the burden of providing an income stream to shareholders allows co-ops to focus on quality service.
It’s hard to imagine a co-op ever having to shut off the power to its customers to avoid the risk of wild fires, as has happened to California residents and businesses. Co-op members would gladly pay a little more to ensure the lights stay on, and co-ops have the flexibility to set reasonable rates to ensure this happens.
What’s more, as a local entity, co-ops have residents serve on their governing boards and executives live in the cities where they provide service. There is a high level of accountability when members also are your neighbors.
Is Larger Better?
Some can argue that larger utilities benefit from economies of scale that smaller co-ops can’t possibility achieve. This is only partly true. Many co-op utilities offer multiple services, including high speed fiber, water, sewer and natural gas. By doing this, co-ops can gain economies of scale by having just one management team, billing system, office, etc.
In fact, Dr. Keith Taylor, an economic development specialist at University of California-Davis and proponent of the co-op structure for PG&E, is studying NineStar Connect and other utility co-ops to learn more about the potential efficiencies inherent in the co-op structure.
Finally, at first glance it seems that Indiana and California have little in common. When we think of California, we often have images of dense urban areas and beaches. Yet California produces more than one-third of the country’s vegetables and two-thirds of the nation’s fruits and nuts. More than half of the state is considered rural.
With that in mind, an electric co-op structure for PG&E is an idea that’s already supported by more than 20 California mayors. A cooperative business model should be considered as a possible solution to what ails the state’s electrical grid.
Michael R. Burrow is president and CEO of NineStar Connect, a smart cooperative utility that delivers fiber optic, electric, water and sewer utility infrastructure for homes and business in east central Indiana.