Blackouts and Monopolies: Public Utilities in California

Power outages have become a way of life for Californians this fire season. Pacific Gas and Electric cut the power to nearly 3 million residents in Northern and Central California in a preemptive attempt to minimize wildfire risk during high winds and dry conditions, and the fires that erupted in Ventura, Los Angeles, Riverside, and San Bernardino counties this week prompted Southern California Edison to cut the power to tens of thousands of homes and businesses. PG&E CEO Bill Johnson drew the ire of Gov. Gavin Newsom and others when he said during a California Public Utilities Commission hearing last week that mitigation measures would take time to implement, and that we could expect similar blackouts for the next 10 years.

It is difficult to say precisely how effective the preemptive blackout policy is at preventing wildfires, or whether it is worth the costs in lost convenience and quality of life, lost business activity, and threats to vulnerable consumers who depend on electricity for medical equipment. PG&E claims that utility crew inspections found more than 100 incidents of wind damage to transmission lines that could have sparked a wildfire during the preemptive blackout that caused 738,000 households and businesses in 35 counties to lose power two weeks ago. (That is not to say that all of these cases would have resulted in fires, but they did pose significant risks.)

Yet, the utility also disclosed to the PUC that its equipment may have been the cause of the Kincade fire, which has burned nearly 78,000 acres and prompted evacuation orders to 190,000 Sonoma County residents, as well as three smaller fires in the past week.

Moreover, even if the “public safety power shutoffs” are assumed to be effective, wildfires may result from any number of other causes, such as lightning strikes, carelessly discarded cigarettes, campfires and homeless encampment fires that get out of control, car fires on the side of the road, and arson.

Some have compared PG&E unfavorably to the other regional utilities, particularly San Diego Gas and Electric (see here and here), claiming that it has not kept pace with regard to safety improvements. For example, SDG&E announced at California’s first Wildlife Innovation Technology Summit in March that its engineers had developed a technology capable of detecting a broken power line and cutting off the power before the utility pole hits the ground.

In the wake of the devastating Witch Creek, Harris, and several other fires across San Diego County in the fall of 2007, SDG&E has invested about $1.5 billion over the past decade to improve weather monitoring and forecasting, create smaller grids with alternate transmission routes so that power outages can be localized to minimize the number of people affected, and adopt effective community outreach and support programs. PG&E has taken some similar measures, but not to the same extent, and it is largely seen as playing catch-up now.

But what is the optimum amount of public safety efforts the utilities should pursue? There is no way to know in an environment where they enjoy regional government-protected monopolies and the state dictates prices and profits, micromanages business practices, and even tells the utilities how much of which sources they must rely on for their energy production.

As I discussed in a previous column, this public utility monopoly structure creates a set of warped incentives. Profit levels are guaranteed and cost increases are easily passed onto consumers, who have no choice but to pay the ever-higher rates because there is no competition. This lack of competition also means there is significantly less incentive to invest in innovation, whether for cheaper, more efficient energy production or safety measures.

In a free market, multiple firms would compete for consumers’ business based on price, service quality, and (it is safe to say, particularly given recent experience) safety records. Those companies that most effectively and efficiently serve consumers’ needs would be rewarded with larger profits.

As Mises Institute Senior Fellow (and Independent Institute research fellow) Robert P. Murphy notes in a recent column, in freer markets you do not see companies encouraging people to use less of their products, much less actively preventing them from acquiring them, as you do with government-protected utility monopolies:

Although the outrageous episode of PG&E is fresh in our minds, this is nothing unusual. Every summer, it is commonplace for utilities to urge their customers to “conserve power” by keeping their air conditioners at an uncomfortable setting, and they often impose rolling blackouts or “brownouts” in order to maintain the integrity of the grid.

Notice that you never see this type of behavior from genuinely private-sector companies? Even though people greatly increase their consumption of beer and hot dogs during July, you never see Budweiser or Oscar Mayer imposing temporary outages on their customers.

On the contrary, companies in an open market love it when the public suddenly wants to buy more of their product or service. It’s only in the realm of government-regulated utilities (or services directly provided by a government agency) where the customers are viewed as annoying nuisances, who need to be scolded to stop consuming so much.

Government interventions in other markets have played a big role in exacerbating the risk and destruction of wildfires as well. Regulations in the housing and home insurance markets have encouraged more people to move to more affordable, but also more fire-prone, areas, which have increased the damage when wildfires do occur.

For more detailed discussions of these issues, as well as the need to focus more on preventative measures such as controlled burns and fire breaks, how innovative technologies may be used to better detect and manage wildfires, and how efforts to better protect private property rights can improve land management and wildfire mitigation, see the 26 policy recommendations in our recent California Golden Fleece® Award report on the state’s wildfire (mis)management.