Why is it acceptable to privatize profit, but socialize risk again?
A company shouldn't have carte Blanche to pass the cos of it's incompetence and neglect on to the customer. If anything, they should have their rates frozen until such time as they have made whole all those who have been harmed.
It is okay for companies to die. It should happen.
That argument is completely misplaced here. PG&E is a rate regulated utility, which means its profit margin is based on its costs and investments. The rates are set to ensure a modest profit, generally between 5-10%. That means that to the extent PG&E underinvested in safety (lowering costs), it was ratepayers that benefited, because that kept rates low. Investors, by contrast, earned a low return on the stock, and will have their equity largely if not completely wiped out in bankruptcy.
This is a recurring story in rate-regulated utilities all over the country. Public utility commissions want to keep rates low, generally artificially low. So they set rates in a way that causes utilities to externalizations risk or pollution. For example, water rates in the US are very cheap because water utilities routinely dump untreated sewage into rivers. If you forced say DC Water to never dump into the Potomac again, it would have to invest massively in storm water management systems, which would in turn drive up rates.
Probably because the risk is such that no industry would go into that business if costs weren't socialized to a degree.
> If anything, they should have their rates frozen until such time as they have made whole all those who have been harmed.
So the fire apparently started because PG&E didn't have the resources to properly maintain rural lines. And the response is to further deprive them of funds?
This is what I'm talking about here. If PG&E is supposed to shoulder the burden of forest fires caused by downed lines, then electricity is going to get a lot more expensive. I'm not sure where this idea that utilities are supposed to take more responsibility for risk while simultaneously dropping or freezing rates. That's not how money works. More risk means higer costs.
Which is why utility companies get tax breaks, direct tax funding, and legal monopolies.
What you’re saying is the current system of zero risk, high gain, is acceptable.
In this case pg&e deliberately chose not to perform maintenance on their lines, despite turning a profit (meaning they could afford to do more) and despite receiving tax payer money specifically for the purpose of that maintenance.
Instead the issued dividends to private people and orgs, and to executive bonuses.
Those people have now have that money, a lot of which already came from taxpayersz the same tax payers that have now been left with the bill for damage caused by pg&e not doing what it had agreed to do.
That is a pretty canonical example of heads I win, tails you lose.
In fact as long as companies are allowed to behave like this (eg with no criminal liability in management), there is no downside to this kind of theft.
Utilities do not generally get tax breaks, or direct funding. What they do is endure regulated rates and low profit margins in return for a low risk business (e.g. getting a legal monopoly). Forcing them to bear massive, unlimited risk, while having their rates regulated to ensure modest profits totally breaks the model.
At the end of the day, we depend on private capital to build our electric grid. It’s not public money building power lines and transmission stations. There is a business case for investing in a utility, where you might eke out 5-10% profits, but are guaranteed that your business won’t be obsolete tomorrow or be in the hook for huge liabilities. That can be an alternative to investing in say something like Facebook where you’ve got 25% profit margins but a business that could be obsolete in face of the next new thing. Low profits and massive risk of your shares becoming worthless makes it very unattractive to investing in that infrastructure.
The "private capital" you're talking about is largely on top of the massive funds from government sources. In most countries it was entirely built out by central governments.
Re: taxes - please look at your line items and notices the various "fees" you're charged.
I think the problem here is that you believe that utilities should be generating massive profits. Given they're backed by the state - PG&E literally got laws made to retroactively reduce their liability - then any profit that they make or distribute is tax payer money.
Let's put this super simply:
Let's say the company makes $X a profit, and distributes $Y to shareholder and executive remuneration (annually).
After N years they have made N$X, given out N$Y to owners, etc, their bank balance is Z=N($X-$Y) (obviously exact amounts change year to year, but we're being simple here). If Z is less than 0 then they've been running at a loss for N years, and we'd have no problem saying they should go bankrupt - they would have long since lost the ability to get loans, etc.
Now, let's say this is a public utility, then their annual profit is made up of:
1. Revenue in the form of below market resources costs (e.g. they don't pay market rates for land)
2. Revenue from state granted fees
3. Other tax related subsidies
So lets put these altogether and say $X = (actual profit) + $T (T=tax payer).
So after N years, they've received N$T funds. So if their bank balance is below $T, and $Y is greater than zero, they have been running at a loss, and they've been paying out the owners with tax payer money. Eg. they are taking tax money that is intended to support the utility and divesting it.
This is what PG&E did.
They took fees, and they took tax payer money. Then they "reduced" their expenses by reducing maintenance. That gave them a "profit" they divested to private interests. Now, when the costs of their failure to maintain infrastructure came due they couldn't afford it. Which means they're now taking even more tax payer money. Even if the company is taken apart, that money doesn't cover the costs they have inflicted.
I believe may be confusing investor-owned utilities like PG&E with government-owned public utilities. PG&E does not receive taxpayer money. They are a private company such that their entire revenue stream is dictated by a government commission [1]. The commision-fixed pricing benefits the consumer because we pay less than what electricity is "actually worth". The drawback is that PG&E cannot afford to mitigate risks such as forest fires. Presumably, if the "true price" of electricity included the costs required to prevent forest fires, it would be significantly higher.
As far as I can tell PG&E hasn't paid dividends since 2017. Legal monopolies also come with burdens. PG&E is disallowed to refuse service to high-risk regions. When they shut down power to places during high fire risk, the company receives penalties. It's a difficult trap. If you reduce exposure to risk, you reduce income - which further hampers ability to provide a safe service.
At the end of the day, people can't eat their cake and have it too. When delivering power to high risk areas, either of two things happen: either we accept the danger, or the utility charges higher rates to offset the risk of damage. There's no magic solution. A government take over of PG&E isn't guaranteed to change anything, other than making the taxpayers directly liable for any mishap.
That would make it a mere 7 years after the failure to maintain pipeworks results in an explosion that killed 8 people.
It also didn’t stop giving bonuses to the executive board that make the budgetary decisions.
This is also a glib dismissal of the effects of decades of under maintenance resulting in ever increasing costs to bring things back in order. Essentially deferring maintenance until the point of failure, at which point you declare bankruptcy and get bailed out by the people you defrauded.
There isn't zero risk the shareholders of PG&E lost 80% of the value of the stock since 2017.
Since I analysis systems for a living and for fun, it would be interesting to look at PG&E books. How much maintenance was deferred? It is possible to properly maintain their equipment with the current rate structure?
Maybe the company was put in an impossible situation by the Public Utilities Comission.
The shareholders made huge returns in the prior decades. So how much of that loss was a correction caused by the market realising the way historic profits were created was going to start costing shortly?
"The utility company’s stock has lost more than 80% of its value since the 2017 fires broke out, and its credit rating has been downgraded to junk status."
How was the downside risk of the shareholders socialized?
PG&E doesn't have carte blanche, it is a regulated monopoly, any changes to the rate structure has to be approved.
As for the company dying, people in California will probably prefer to continue having the electricity
"PG&E doesn't have carte blanche, it is a regulated monopoly, any changes to the rate structure has to be approved."
How often do the rate increases that they seem to announce virtually every month actually get rejected?
Do they even ever not get approved?
I have not done the comparisons myself, but I have heard that California's energy prices are some of the highest in the country. I don't understand how that can be if their prices really are held artificially low by the government.
This is critical infrastructure. The risks must be socialized IMO. That makes you wonder if power infrastructure should be left to private enterprise to the extent it now is, but frankly I doubt a state-owned company would have been better prepared, either. People want cheap energy either way. Requiring companies to be able to cover the costs of natural disasters would be politically difficult because it would raise energy prices to the consumer, regardless of ownership model.
I wonder what model of governance would properly account for rare disasters. A disaster fund? Of course, if wildfires become more common, as it seems likely, then in a sense this problem should solve itself one way or the other because it will not be possible to run a company like PG&E very long without being able to cover the costs incurred.
> Why is it acceptable to privatize profit, but socialize risk again?
We privatize profit because there would be no company if profits weren’t given.
We socialize risk because the government is permeable to manipulation, and they freely accept whatever argument that makes them pay for the risk. Govts don’t have to invest in private sectors. They don’t have to borrow in the name of their subjects. Yet they do it, without the consent of their subjects, because it is a non-working democracy, and because people accept it like business as usual. So yes, good taxpayers have to pay for badly managed private companies.
It’s not capitalism when your risks have the government as a backstop. Failure is a healthy market mechanism; socialized losses only hurt investors’ ability to make capital decisions and consumers’ ability to have agency via their individual choices.
socialized losses encourage risk taking as there’s no real cost to the people running companies (see the bank crisis), and a holy expect pg&e to survive bankruptcy without actually paying for the damage or returning any of the stolen tax dollars.
It's pretty meaningless to say that such-and-such implementation of capitalism isn't real capitalism because of a reason that a) is common to just about every implementation of capitalism, certainly every major one and every one celebrated as a success story of capitalism and b) seems basically unavoidable in the real world. This is real capitalism and we should admit that.
Reminds me of some other arguments about economic systems.
A company shouldn't have carte Blanche to pass the cos of it's incompetence and neglect on to the customer. If anything, they should have their rates frozen until such time as they have made whole all those who have been harmed.
It is okay for companies to die. It should happen.