By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street
“We want our customers and their families to know that we are here to help them make smart energy choices and save money whenever possible,” cooed Laurie Giammona, senior VP and chief customer officer of Pacific Gas and Electric, on Wednesday between Christmas and New Year’s, when no one was supposed to pay attention.
It was the propitious day when the beloved utility that distributes gas and electricity in the northern two-thirds of California announced that on January 1st it would jack up its rates.
America’s largest electric utility and the second largest gas utility by number of customers, the utility whose 2010 gas-pipeline explosion in San Bruno, just south of San Francisco, killed 8 people, injured another 66, and burned down 38 homes, the utility that is still digging in its heels after five years since the explosion and is now under investigation by the California Public Utilities Commission because it failed to deliver certain documents, the very same PUC that is being probed by a federal grand jury for potential illegal ties between the regulators and the executives of PG&E in this ballooning corruption scandal … well, this beloved utility now has announced a very special New Year’s resolution.
It will hike natural gas rates for the average residential customer by 4.0% and electricity rates by a stunning 8.5%, for a combined rate increase of 7%, the steepest since 2006.
The average small business is going to get whacked by a combined rate increase of 5.1%.
That’s on top of the 6% rate increase it had successfully inflicted on its customers a year ago.
Rate Increases, Despite a Plunge in the Price of Natural Gas
That plunge started in 2008 and has hit new lows on December 17, when the price of natural gas hit $1.68 per million Btu at the NYMEX, the lowest since March 23, 1999. When adjusted for inflation, it was below the prices tracked by NYMEX going back to 1990. This historic price collapse has been eviscerating the US natural gas industry and its investors [read… Carnage in US Natural Gas as Price Falls off the Chart.]
Much of the power PG&E distributes is generated by natural gas. And all of the natural gas it distributes is, well, the same natural gas whose price has plunged to historic lows.
In fact, in its third quarter financial statement, PG&E admits as much: its cost of electricity over the first nine months of 2015 dropped 8.8% year-over-year, and its cost of natural gas plunged 36%!
The thing is, despite the juicy rate increases imposed at the beginning of 2015, operating revenues have fallen about 1% so far in 2015, as Californians use less energy from their beloved utilities. It’s an existential struggle all utilities face.
However, the company pointed out that the rate increases won’t be used to pay for the fines and penalties associated with the San Bruno pipeline explosion.
Those will largely be covered by the proceeds from a public offering last August of 6.8 million common shares at $51.90 per share. Wells Fargo, the underwriter for the offering, got a bundle of fees. But money is fungible. It’s like water. It flows wherever gravity pulls it, and no one can separate it.
So why the rate increase? The SFGate:
The changes follow a decision by the California Public Utilities Commission in 2014 to let PG&E collect an extra $2.37 billion in revenue from its customers over three years, from the start of 2014 through the end of 2016. The additional money will pay for maintenance and upgrades to PG&E’s sprawling electricity grid and natural gas pipeline network….
What Else is PG&E Doing with this Moolah?
It is paying rich quarterly dividends of $0.455 per common share. With 489 million shares outstanding in the third quarter, dividends for a year would amount to $890 million. So for the three-year period in question (2014-2016), this would amount to, give or take, $2.7 billion, more than enough to pay for the maintenance and upgrades of its system.
If it faced real competition, or a real regulator, PG&E would be forced to pay for maintenance and upgrades with other means than rate increases when its input costs are plunging while it’s paying out a rich dividend.
And how are its customers supposed to deal with the rate increases? PG&E, according to the SFGate, “urged its customers to contact the utility for ways to save energy.” So, turn down the heater, put on another fleece, buy more efficient appliances, and hunt down subsidies for low-income households.
As Always, it’s Just the Beginning.
In September, PG&E asked the Public Utility Commission for another $2.7 billion in revenue increases for the three-year period of 2017-2019. That particular amount of money would be used ostensibly to prepare for natural disasters. Over the same period, it would still pay out $2.7 billion in dividends. The PUC, under federal grand-jury investigation for its cozy ties to PG&E, has not yet voted on this doozie.
Turns out, for utilities, the party is over, again. Read… Dear Electric Utility CEO: Merry Xmas and Cut the Dividend?
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Just like the banks on the interest-side. In keeping gross-profits intact marginals have to be raised when revenues fall(or sell more). Furthermore fixed cost are distributed on a falling volume which means falling profits.
There is no justification whatsoever for private monopolies.
Either they must be so tightly regulated they may as well just be state-owned to cut out the costs of the intermediary actors like the utility commissioners, the compliance departments in the utility itself and the resources needed to monitor and enforce the regulations or else they should be run as cooperatives by the users (who are captive) who rely on their services.
The only justification for having natural monopolies like utilities in private ownership is “because markets”. Which is completely lame.
Yes, an entity is either public (in which case it does not make a profit) or it isn’t (in which case it must). If this institution is anything like the largish university where I used to work you also have an escalation in administration and a hard hierarchy. The deans had to make twice as much as the senior profs or their dignity was soiled. Same for the provost–double the deans. And, of course, topping out at $900,000 plus a mansion to live in for free, the president. Utilities still provide many middle class jobs, as we all understood that term 30 years ago. In California, that means 75-100,000 a year, I would guess. So imagine the layers of bureaucracy over those guys in the trucks with seniority and how the salaries escalate up from there.
The US has pretty straightforward anti-trust laws, but nowadays there is simply no political will to enforce them. I watched some of the senate hearings concerning the Anheuser-Busch/Miller merger, which would put all control and influence over distribution in the hands of one company, InBev. Not once were the words “monopoly” or “anti-trust” even uttered much less taken seriously. It was pretty clear from the hearing that the solution everyone had already agreed up was similar to what we saw with the break up of the Bell telephone system with the 1996 Telecommunications Act, namely, one entity retains control over the infrastructure (e.g. telephone lines, supply chains), while that party agrees in principle to allow access to infrastructure for any potential competitors (i.e. competing carriers for telephony, craft breweries for beer).
The telephone example should serve as a lesson: the competitors quickly died out due to the complications of leasing lines from another company and being entirely dependent upon them for maintenance. What actually broke this monopoly was the widespread proliferation of cell service with which people completely replaced their land lines. I imagine something similar will happen here: competitors will get squeezed out simply because of the hassle of having to deal with someone else’s distro network.
Oh, cell phones break the monoply? Pigs have wings, too.
I was wondering about the dow dupont merger. I’ve been hearing some about medical device mergers as well, and am interested what the continuing trend will leave us with. I guess since most congress criters are lawyers they know which words not to say? My basic opinion is monpolism and communism have much in common in their end result, kind of like the wheel of fortune
what did you expect from the freaks on capitol hill!?
Haven’t we seen this pony show before? When rates [for natural gas] go up, utilities say, “we have to pass the increase along to our customers.”
When rates for the same commodity go down, it’s “OMG, we’d lose money if we cut our rates, so we’ll raise them.”
Why don’t they just go straight to “we raise rates because we can.” Or “because: markets.”
Why waste time with all that verbiage? Just cut to “we raise rates.” It can be the utility equivalent of “I am Groot.”
And how are its customers supposed to deal with the rate increases? PG&E, according to the SFGate, “urged its customers to contact the utility for ways to save energy.” So, turn down the heater, put on another fleece, buy more efficient appliances [buy, buy, buy], and hunt down subsidies for low-income households.
Or, let the internet of things do it for you.
Wait until the brits come to town. National Grid.
They do their book in the UK. Between 2007-8 and say 2010, the pound lost about 25% of it’s value. Therefore, 25% more dollars were flowing over to the UK.
25% bump in revenue. They’ve also been asking for, and getting rate increases every year. They’ve also been accused to trying to brit up their operations. They needed more brits for C level work. According to one report, NG included in it’s request for an increase costs that included among other thing, moving cats and a wine collection from the UK to the US.
http://www.syracuse.com/news/index.ssf/2010/09/your_national_grid_check_helpe.html
Governor Gray Davis was ready to send the Highway Patrol to seize PGE (with compensation paid over many years) before and during the Enron rip-off but he and his groveling plutocrats chickened out; Result: An unstoppable and greedy monopoly that will always and forever victimize the people of California!
The lesson is there for all to see!
I’m pretty sure he meant: America’s Largest Utility Jacks up Rates the Most Since 2006 Because Total Collapse of Natural Gas Prices
This is a failure of regulation. Period. PG&E’s behavior is to maximise profits and shareholder value. The regulator is supposed to review rate applications and ensure no excessive profits and fair prices. That the regulator allowed these price increases shows at best incompetence and probably corruption.
The PSC in NY has legislated the inclusion of industry. A “public” service commission with huge ties to industry, representing the industry, as part of the “public”. Yeah. Weird huh?
http://www3.dps.ny.gov/W/PSCWeb.nsf/All/553FBA3F3EEF7FBD85257687006F3A6D?OpenDocument
This is just like gas prices at the pump. On the way down to $40 per barrel the price at the pump fluctuated between $0.10 and $0.40. Now that both Brent and WTI are under $38, the price of gas at the pump has risen, as if the price were again $45 to $50 per barrel. By rights it’s should be at or under $2 a gallon in our area instead of $2.25 to $2.50.
Thanks for this. They have a monopoly, PUC and local papers are in their pocket so it’s rare to see them called out for small infractions like blowing up a neighborhood.
Just one minor quibble with Mr. Richter. He suggests using the utility’s hefty dividend as a source of funding for its extensive capital program. In our article at the end that he generously cites, we suggested something based on a possibly more dire outcome. We believe that many of our existing electric utilities may simply disappear. Think Kodak or Polaroid–once household names that completely missed a technological transition–with severe consequences for shareholders and bond holders alike. Therefore, we suggested the complete elimination of common stock dividends and that they be used to retire corporate debt as quickly as possible. This would diminish the likelihood of bankruptcy should genuine competition emerge sooner than expected and large percentages of anticipated revenues simply take flight.
And this is why here in DC nobody with a brain in their head wants to see the Exelon-Pepco merger go through. But Exelon’s already ill-gotten gains are being used to buy petition signatures and stadium deals.
It all reminds me of those scenes in ‘Blade Runner’, where everywhere you look, it’s all dark, grimy, with the plebs just trying to survive,…… all the while the corp titans have full run of society……. what a great fictional future huh! Oh wait…. the ttp &tipp
In my little town, the city council recently had a confab w/ all the department supers, to determine how best be more efficient & save the city revenue. Someone asked the head of city services why our city electric rates were projected to rise……… he said, and I quote: “We have to raise rates because our union member’s health care continue to go up.” now, aside from the fact that approx. 1/3rd of the pop. of this community cannot afford to pay their monthly utility bill in full each month, this guy has the gall to state what he did while the less fortunate deal w/out, or, to try and navigate the monstrosity that is the ACA!!! There’s the Public Union mentality in a nutshell……Fuck em! It’s not at all about the greater good.
Yeah, hate on them public employee unions, do a Wisconsin Walker or Full Christie on ’em, and do not for any reason go through your little town’s budget docs to see where the tax and fee revenue comes from and goes to… All union power MUST BE DESTROYED! Those evil unions bribe politicians and take money out of our pockets!
Drag them down to our level, uppity barstids. Gotta make the way plain for privatizing and the corruption I’m sure you could readily find in that small town…
You cannot continue to raise utility fees, service fees, property taxes ad infinitum, allowing said public employees to live in comparative comfort, when the greater community is struggling to pay for basic existence, while our local economy keels into the ditch!….and I will state once again: Public unions today, serve to enhance their employment, with its’ perks & benefits, without consideration of the plight affecting most constituents to which they’er supposed to serve!
From GMIAnalyst:
PG&E does not currently report on its sustainability policies and practices via the Global Reporting Initiative, a commonly used and highly effective standard for such reporting, nor has it become a voluntary signatory of the UN Global Compact, yet another commonly employed global standard for achieving and maintaining more effective sustainability practices. In the area of workplace safety this company has not yet implemented OHSAS 18001 as its occupational health and safety management system, nor does it actively disclose its workplace safety record in its annual report or other reporting vehicle.”
“The company has not disclosed specific, quantifiable performance target objectives for the CEO… The company pays long-term incentives to executives without requiring the company to perform above the median of its peer group.”
Anthony F. Earley, Jr., Chairman, Chief Executive Officer, and President earned $11,627,216 in 2014, according to the company proxy. That’s more than the median for large-cap CEOs.
Not “earned,” should be “took in,” or “was voted…”
One’s first thought, upon reviewing the facts presented by Wolf, might be to hedge by going long the stock (symbol PCG). All them pornographic profits ought to at least benefit shareholders, while soaking the ratepayers.
Strangely, though, a long PCG hedge hasn’t worked all that good: the stock price is only modestly higher than in mid-2007. Chart:
http://tinyurl.com/hr3rf2a
It would take more analysis of PCG’s cash flow statement to identify how a company with falling input costs is failing to generate a corresponding profit bonanza (an exercise which I leave to Wolf). But as a wild guess, PCG’s profitless prosperity probably owes to the crushing regulatory overheads of Californication.
Disclaimer: this post contains chemicals known to the State of California to be carcinogenic. /sarc
A California Gas Leak Is the Biggest Environmental Disaster Since the BP Oil Spill
“For two months the leak has been spewing natural gas into the atmosphere at up to 110,000 pounds per hour. Why is it such a big deal? Although natural gas is a better energy source than coal when it comes to emissions, in its raw form this is the same climate-destroying gas that 195 countries have been trying so hard to keep out of the atmosphere, according to a report by the Environmental Defense Fund, which is tracking the amount of gas leaked in real time…..”
http://gizmodo.com/a-california-gas-leak-is-the-biggest-environmental-disa-1749958081
http://www.dailynews.com/opinion/20151228/could-porter-ranch-be-the-new-san-bruno-thomas-elias
Macondo blowout without the corexit “breath the fresh air again”……’ccccccccccccccccccccough, Cough, coughhhhhhh’
I thought about this too, apparently it’s an sd,g&e well, they’re owned by sempra and I couldn’t connect the two issues, if sd,g&e raises rates there’ll have to be some ‘splainin, pge had some pipeline blast in san bruno as mentioned but porter ranch looks like heavy claims already just for relocations, add that they’re being helpful which probably translates into trying to shore up some goodwill…if someone can find a connection that would be interesting news. Not that spewing methane for a few months isn’t interesting, just not out of region rate hike interesting. Maybe someone could translate that into cow flatulence volumes? As polecat says a macondo but at least no corexit? As an aside,NPR tonight listed all the benes the gulf states are getting from BP 20 billion fine, from their tone it almost makes you want a man made disaster so things can get fixed up! Look! New boat ramps! Now you can fish for pre blackened snapper…
Naomi Klein: “Shock Doctrine”
@Jim Haygood:
As a Californian, based on this news I’m seriously considering a big chunk of my currently ZIRP-challenged all-cash investable monies into PCG … If ya can’t beat ’em, might as well sign up for a partial-rebate program via this route.
ewmayer, er, “Luke!…..Donnnn’t give in to the… Dark Side!”
If there were 5 year puts, that would be a better deal because PG&E is likely to file bankruptcy again. At the very least, they will just be a distribution and transmission company and serve small towns in California. Their distribution system is ancient junk at least 50 years old; you should see the power poles across from my house and the 4-5 outages per year.
Wolf misses three things that are occurring:
1) The rate increases to pay dividends are nothing new. The South San Joaquin Irrigation district has been trying to get out under PG&E for over six years because they own their own dam. Read this 2010 article to see how things have stayed the same: http://www.mantecabulletin.com/archives/14720/
http://www.tridamproject.com/
The money need for maintenance (ie San Bruno) isn’t spent and goes to stockholders and executive bonuses.
2) PG&E isn’t moving fast enough for CA citizens on renewables, and state law allows local entities to form Community Choice Aggregation to buy power and have PG&E deliver it on its obsolete distribution system.
Marin, Sonoma, and San Francisco counties have formed CCA’s and buy power for their citizens and deliver it cheaper than PG&E. Alameda, San Mateo, Lake, Mendicino, Solano, Monterey counties are in the process of forming CCA’s as well as Napa Cities and Davis CA. PG&E will only have small rural cities where they deliver power. All of the big cities will have public power (SMUD) or CCA’s.
3) All electric utilities (both public and IOU’s) are facing customers installing their own PV projects. Over the next 15-20 years, probably 30-40% of customer will generate some of their electricity. As the cost of storage drops, this will make rooftop PV more viable. Public utilities will be able to adjust to this change because their motive is serving their customer, but the private utilities have to pay dividends, have higher borrowing costs, and executives bonuses. Even though Warren Buffet (Pacificorp in OR & NV and Utah Power) thinks the monopoly is the future, only public power will be able to keep the lights on.
On it goes…
PG&E executives reap pay raises despite scandal, indictment
http://www.santacruzsentinel.com/article/NE/20150325/BUSINESS/150329804
Funds for safety went to utility execs’ pay instead, PUC president says
http://www.latimes.com/business/la-fi-puc-hearing-20150325-story.html
$10 Million To Upgrade San Bruno Pipeline Diverted While PG&E Execs Got Bonuses Before Deadly Explosion Says PUC Chief
http://sanfrancisco.cbslocal.com/2015/03/27/10-million-to-upgrade-san-bruno-pipeline-diverted-while-pge-execs-got-bonuses-before-deadly-explosion-says-puc-chief/
3 words……Heads…On…Pike
Because they can?
When enough people do enough “I-phone faceplants” and wake up that they are getting shystered, then, maybe, just maybe there will be a revolt…..but not until…….
We are allowing corporations dictate when we can breath clean air, drink clean water, eat clean healthy food, enjoy a healthy clean environment like clean creeks, streams, rivers etc…….strong public education…preservation of the public commons….etc……
Only a gross people movement can clean up this mess…….
The corporations (et al) and their enabling politicians will continue down the path of crucifying all of us on a cross of fiat dollars until like someone else said, “……their heads are on pikes.”
Companies and corporations are not democracies…..
They are DICTATORSHIPS!!
Capitalism is like any game…..
It needs REFEREES!!
Too many of the referees (regulatory agencies) have been and are being starved into submission……
The plan of the “free market capitalists” and their other handmaidens, the neo(crapsters) are running the game……..
Until their heads end up on pikes!
That is the story of his/herstory……