(Bloomberg Opinion) -- San Francisco works hard to shake off its stereotype of existing in a bubble. OK, not that hard.
Now it’s thinking of extending that splendid isolation to how it gets its power. Mayor London Breed said in an interview with Bloomberg News that she’s “pretty excited” at the prospect of the city taking over its local grid from bankrupt utility PG&E Corp. A feasibility study is due later this month — and it’s not the first one, either. San Francisco has been considering taking its grid out of PG&E’s hands, off and on, since at least the 1990s.
Yet, as much as taking over the grid would scratch that particular itch, forming the San Francisco Electric Co. would risk creating losers all around.
It is easy to see why San Francisco is tempted. PG&E’s reputation has been trashed; look no further than this tidbit from the recent report issued by Governor Gavin Newsom’s wildfire “strike force”:
PG&E’s decision to voluntarily seek the protection of a Chapter 11 bankruptcy court punctuates more than two decades of mismanagement, misconduct, and failed efforts to improve its safety culture.
Who wouldn’t want to get away from that? Moreover, the big question hanging over PG&E is how it will pay not only for claims arising from Northern California’s recent wildfires, but also withstand the risk of inevitable future wildfires. Musings on this occupied the bulk of the strike-force report as well as those running the math on what PG&E might be worth after it exits Chapter 11. More than half of PG&E’s vast service territory is in extreme or high fire-risk areas. But these all lie to the south, east and north of those 47-square miles perched at the top of the San Francisco peninsula. In taking over the local grid, the city would be shearing itself off from an enormous, and likely chronic, set of risks and costs.
Except would it, truly?
Newsom’s strike force wrote that all options remain on the table for PG&E, “including municipalization of all or a portion” of it. Yet it is hard to think officials would like the idea of San Francisco going its own way.
Broadly speaking, Northern California holds most of the risk but a minority of the value in PG&E’s grid. In an analysis published in December, Hugh Wynne and Eric Selmon of SSR LLC, a research firm, estimated that, based on population size, the counties north of San Francisco accounted for perhaps 20 percent of the regulated asset base in PG&E’s electricity business and perhaps 12 percent of its overall regulated asset base. But the region also contains roughly three-quarters of the communities served by PG&E that live in high fire-risk areas, the analysts wrote.
If San Francisco withdrew, it would take a chunk of value out of PG&E disproportionate to the city’s modest area. That’s not just because of the denser network there but also because it carries no risk of wildfire damage, meaning it should command a premium relative to the rest of the network. Yet under the regulatory compact between PG&E and the municipalities, it’s not clear that the city would have to pay PG&E anything more than just book value for the assets. In other words, PG&E would lose a big chunk of value and the proceeds most likely wouldn’t make much of a dent in paying wildfire victims’ claims.
The benefits for San Francisco itself are also clouded. Municipalization might offer some savings by removing the equity-financing portion of an investor-owned utility. But it would also mean taking on directly the costs and risks associated with managing the grid. Previous studies on the issue in the wake of California’s deregulation of the electricity market in 1996 and the subsequent crisis in 2000-01 urged caution.
Perhaps the biggest problem is that, robot baristas aside, San Francisco’s bubble is illusory. Its perch in the Pacific didn’t provide complete sanctuary from the worst wildfires, as smoke drifted across the bay and forced residents to don face masks. The city has a tangible stake in ensuring whatever emerges from PG&E’s bankruptcy has the wherewithal to mitigate wildfire risk.
Moreover, this current crisis has revealed that wildfires and the changing climate helping to fuel them present costs and challenges requiring a statewide approach. Newsom’s strike force may have only sketched out various proposals like a wildfire-liability fund, but the underlying message was that California as a whole will have to step up. Regardless of whether San Francisco pulled out of PG&E, those costs would find their way across the bay, one way or another.
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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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