Pussyfooting around this issue is the worst of both worlds.
Why on earth is a government-protected monopoly entitled to 10% margins? Or even 6% margins? It's risk-free money with a captive market.
What is the point of all this bullshit? Why not just call it a day, and run it as a crown corporation?
> The companies pointed to the January wildfires in Los Angeles County, saying they needed to provide their shareholders with more profit to get them to continue to invest in their stock because of the threat of utility-caused fires in California.
What utter nonsense. The shareholders need nothing. Take out a bloody loan.
The firm's entire concern, as reflected in the article - is it's stock price.
> Under the state’s system for setting electric rates, investors provide part of the money needed to build the infrastructure and then earn an annual return on that investment over the assets’ life, which can be 30 or 40 years.
Wait, why is this financed by investors and not lenders, like it is in the rest of the civilized world? Is this some kind of novel California-specific innovation, and if it is, what value has it produced for the world?
> Why on earth is a government-protected monopoly entitled to 10% margins?
Indeed, how do they pick any margin? If higher is better, why not pick 1000%? If lower is better, why not pick 0%? If we want something reasonable, why not make it market based to figure out what people think when they have to stump up real resources themselves? Once profit margins are set by committee decision there is little point trying to claim that the concern is profit motivated. The profits aren't doing much useful signalling. It just sounds stupid.
Why should shareholders be taking on the risk of a city's power grid failing? Does packaging that risk as an investment opportunity somehow produce incentives to improve grid reliability and guide resources to be used efficiently?
PG&E emerged from their most recent bankruptcy with more debt than they entered with! This was largely because of the wildfire liabilities - $30 billion. In more direct terms, the lucky Californians are paying the unlucky Californians, and it was financed by bonds which used PG&E's existing assets as collateral (which for some reason weren't already collateralized.)
The best case for Californians overall would have been PG&E's debt and equity to go as close to 0 as possible, and all that extra debt have been used to actually upgrade the aging electricity infrastructure. Instead you are paying interest on past fire damage claims.
In 2018 PG&E had about $18b of long term debt, they now have just under $59b. Their outstanding shares also quadrupled. The bankruptcy didn't wipe out the equity, but investors got f'd hard if they thought they were acting conservatively. Would you accept a 1.25%ish dividend with the prospects of the stock going to 0 higher than it doubling in the next 10 years?
For all of the whiners about how utility investors shouldn't make any money, and possibly earn below their cost of capital, -- I spent some time looking at the utility industry over the last few years (including PG&E.) These are basically money pits which more money goes in than comes out over decades.
The other layer here is if the billions of dollars being borrowed are to build new infrastructure results in billions more in future liabilities to maintain everything. The first layer looked so bad I didn't go any further.
The petty dividend payouts utilities make just keep the equity investors from examining what they really own. Higher equity valuations let utilities borrow money cheaper than they really should be able to.
Functionally the whole thing looks like a ponzi scheme that perhaps could only happen with the 40 year run of ever shrinking interest rates. If the bond bull market is over then this utility ponzi scheme is going to blow too.
Bottom line, if investors were paying attention, your utility bills would be a lot higher. If utilities ever have a big problem getting Wall Street to keep funding their debt ponzi, they will be.
The alternative is the state owns the utility. Given how ugly the math is for utilities right now, I doubt it would be cheaper.
On the other hand, if the US is going 100% EV (AI datacenters or not), then there trillions of federal dollars are inbound and maybe utilities will be ok. One thing is for certain, the utilities, their investors (debt & equity) their customers, and the US states don't have the money to pay for all that has to be built.
Except that the state of California ended up on the hook for the first bankruptcy. The shareholders were the only ones who came out fine. The customers and the state got stuck with the bill.
Exactly what risk did they take on? A few missed dividends, and two years for the stock price to recover?
As for the second bankruptcy, the main result of that was that their customers ended up paying the bill for other customers whose houses were destroyed. But you are partially correct, the shareholders did take a haircut of a few percentage points from stock dilution. I wouldn't be too upset for them, the stock's now double what it was before the bankruptcy.[1]
California's cities wanted them to take a haircut of 100 percentage points, but that clearly didn't happen.
[1] For some reason, the wise stewardship of the shareholders and the board did nothing to mitigate the crisis that caused the company to get sued for 50 billion dollars. They were too busy squeezing dividends out of it to worry about liabilities. [2]
[2] And why should they? They aren't personally liable.
Just had to look this one up. PG&E's first bankruptcy was April 6, 2001. Based on the stock price decline prior to that, it looks like their shareholders thought everything was ok in November of 2000 and the stock was $27 (it bottomed out at $8.97 in April of 2001.) As of today, the stock is worth $15.97.
If we go back 30 years to 1995 -- and you invested $10,000 in PG&E and $10,000 in the S&P500, and reinvested the dividends -- today the PG&E investment would be worth $11,708. The S&P investment would be worth $201,420.
To put it in simpler terms, the PG&E investors look like gullible fools.
1. The stock recovered within 2 years and then shot to the moon.
2. You're not counting all the dividends they've siphoned out.
3. The reason it's at $16 today is because the company destroyed its own value... By prioritizing dividends over maintenance. Which killed a lot of people, destroyed a ton of property, with the damages exceeding the value of the firm. Yet, instead of being zeroed out, the shareholders are still there, still collecting dividends, and in a few years of guaranteed 10% margins, I'm sure the stock will recover.
> As for the second bankruptcy, the main result of that was that their customers ended up paying the bill for other customers whose houses were destroyed.
There's half of the major problems. If I walked around covered in gasoline every day and eventually walked past someone smoking, not a lot of people would blame the smoker for me getting engulfed in flames.
Yet build a wood house in a forest maintained for thousands of years by American Indians with fire, require universal electricity supply, and suddenly it's not the homeowner's fault at all. Everyone else should bail them out over and over again.
Capping margins at a percentage also directly breeds inefficiencies. If you could spend $10M to fix a problem that costs you $4M/yr, you're effectively paying $10M now to lose $400k in annual profit potential.
Why on earth is a government-protected monopoly entitled to 10% margins? Or even 6% margins? It's risk-free money with a captive market.
What is the point of all this bullshit? Why not just call it a day, and run it as a crown corporation?
> The companies pointed to the January wildfires in Los Angeles County, saying they needed to provide their shareholders with more profit to get them to continue to invest in their stock because of the threat of utility-caused fires in California.
What utter nonsense. The shareholders need nothing. Take out a bloody loan.
The firm's entire concern, as reflected in the article - is it's stock price.
> Under the state’s system for setting electric rates, investors provide part of the money needed to build the infrastructure and then earn an annual return on that investment over the assets’ life, which can be 30 or 40 years.
Wait, why is this financed by investors and not lenders, like it is in the rest of the civilized world? Is this some kind of novel California-specific innovation, and if it is, what value has it produced for the world?