A century ago, Governor Hiram Johnson declared that publicly-traded electric and gas utilities had taken over California state government. Today, utilities appear to have moved right into the Governor’s Office. Consumer Watchdog’s ethics complaint against the governor's chief of staff, Nancy McFadden, plucked straight from Pacific Gas & Electric where she served as Senior Vice President and Senior Advisor to the CEO and Chairman, goes to the heart of the issue.
Emails between PUC President Mike Peevey and PG&E lobbyist Brian Cherry show she was involved in the appointment of a pro-utility PUC Commissioner in 2011, shortly after her arrival at the Gov’s office, despite holding stock in PG&E. The result is that a pro-utility majority has commanded the PUC during Governor Brown's tenure. What’s the impact on consumers? Wall Street won, ratepayers lost.
PG&E’s (and McFadden’s) stock lifted when Jerry Brown appointed former Deutche Bank executive Mike Ferron a commissioner in March 2011. Wall Street, fed a steady stream of inside information on regulatory decisions in the making by Ferron, Peevey, and later Commissioner Michael Picker, went bullish on PG&E and Southern California Edison.
In a memorandum to other commissioners, Ferron wrote that he met often with Wall Street firms that had $3 trillion to invest, and he intimated that utilities should not have to fully pay for their mistakes. Otherwise, investors would consider California utilities too big a risk, jacking the cost of capital. He claimed, without a shred of evidence, that would cost ratepayers "multiple billions of dollars in added expense.” In fact, with McFadden in the Governor’s Office, ratepayers picked up more than $1 billion in PG&E expenses they never should have.
In the wake of the deadly 2010 San Bruno explosion that killed eight, the PUC ordered PG&E to submit plans to improve pipeline safety and record-keeping. That's because one of the most outrageous aspects of the San Bruno scandal is that PG&E never accounted for any of the pipe maintenance it billed ratepayers for over decades. In December 2012, the PUC authorized PG&E to spend $2.2 billion on those improvements. The Office of Ratepayer Advocates, customers’ only defense against unfair money grabs, said customers should pay none of that “given PG&E’s mismanagement of its pipeline system and that customers have already paid for the costs of such pipeline maintenance and upgrades.” Instead the PUC made customers suck up more than $1 billion.
During the Brown-McFadden PUC era, PG&E paid significantly less than the PUC staff recommended in fines for San Bruno and the PUC took five years to levy them. In May 2013, PUC staff recommended that PG&E pay $2.25 billion for failing to maintain its gas main in San Bruno. Behind the scenes, that fine was knocked down to $1.6 billion imposed on PG&E last year. Moreover, Instead of punishing the utility, the "fine" could be used to pay for the very upgrades that customers had already financed through their rates but that the PUC and PG&E had never tracked. On top of that, the utility gets to write off most of the penalty as a tax deduction thanks to the Senate’s sudden loss of interest in passing legislation that would have prevented PG&E from doing just that.
As syndicated columnist Tom Elias puts it, “The bottom line here is that PG&E collected many billions over many years for maintaining its pipelines, but federal investigators found after San Bruno that the company was criminally negligent in its maintenance practices — and that the PUC did not police it adequately. At least some of the money went to corporate executives and the fate of the rest is unknown. So PG&E now has to spend money to fix or renew its pipeline system, really an ordinary cost of doing business, one for which its customers paid long ago. How is this a fine? The answer is that it’s not....Rather, this ‘fine’ is a public relations ploy."
The Brown-McFadden PUC was so biased toward PG&E that the Commission let PG&E's lobbyist pick the judge that would decide whether rates could be increased to pay for upgrades to pipelines and storage. In December 2013, the company came in with a request to bill customers a total of $4 billion over the years 2015-2017 for those upgrades, according to filings at the PUC. The request was twice as much as the previous amount asked for pipeline and storage upgrades from 2011-2014.
Emails show that PG&E lobbyist Brian Cherry, with help from PUC Commissioners and staff, picked an administrative law judge to get the $4 billion.
When PG&E discovered that a less than favorable judge had been assigned, Cherry emailed Peevey's chief of staff asking, "Please, please check. This is a major problem for us," and in a follow up email, "This is a very important case that is now in jeopardy." He also appealed to Peevey, "This is a problem…” Commissioner Mike Florio, still on the PUC, engaged in similarly inappropriate ex-parte communiques to get a new judge. The judge PG&E wanted was assigned ten days later.
The ensuing scandal caused by the public release of 65,000 emails showing such inappropriate cozy relationships between PG&E and the PUC, which included Cherry and Peevey indulging in bottles of Pinot and vacations together, put pressure on the PUC to switch judges. The judge PG&E wanted was reassigned 18 months ago, and the outcome of the rate hike is still pending. Hence the flexbility given PG&E to use the lion's share of its San Bruno fine for pipe maintenance.
Today, Wall Street is bullish on PG&E. In February, Fitch rated PG&E’s unsecured notes an A-. A key driver of the rating, Fitch said, is “the constructive California regulatory compact, even in a highly politicized environment.” And why not when “Fitch’s projections assume reasonable outcomes” for PG&E’s pending rate hike requests for gas transmission and storage and also for higher electricity rates. It’s amazing how much Fitch seems to know about what the PUC will and won’t do as consumers get milked to cover penalties for San Bruno. PG&E must consider its less than $2 million investment into McFadden the gift that keeps on giving.
