As the lights went out across California this month, residents wondered if we will ever fix PG&E — the nation’s largest for-profit electric utility.
Some predictably joked that we should simply unleash the power of that mythical institution, which some economists still refer to as the “free market.” But PG&E’s latest failure illustrates that markets — and how well they work for consumers — always depend on state regulation. For this reason, California must use the crisis to deeply reform its utility regulations.
A critical regulatory choice for any market is the allowed forms of ownership for organizations that sell goods in the market. California’s courts, lawmakers and regulators are confronting this very issue as PG&E seeks to emerge from a bankruptcy that stems from its responsibility for recent wildfire catastrophes. The specific questions are: Who will own PG&E? How much control will regulators give them? And how much profit can owners extract from the utility?
Any changes to PG&E’s ownership will have big consequences for consumers and communities as California tries to transition to a carbon-neutral power grid. So, policymakers should take into consideration the latest social science on how the form of ownership will affect both consumers and society.
The first big lesson from recent research is about who should not be allowed to own PG&E – namely Wall Street. Gov. Gavin Newsom and other policy players should take every step necessary to block a consortium of 24 private equity and hedge funds that are currently attempting a hostile takeover of PG&E. Why?
The interests and track record of the investors trying to take over PG&E speak for themselves. These types of funds explicitly seek to extract windfall profits from the companies they acquire, with little concern for the long-term economic viability or social importance of the company. It is telling that PG&E’s largest current group of shareholders are Abrams Capital, Knighthead Capital and Redwood Capital — a rival alliance of hedge funds that is trying to maintain control after running PG&E into the ground just 17 years since the company’s last bankruptcy.
Private equity and hedge fund ownership is especially pernicious in sectors with large public subsidies and little competition. For example, my colleagues and I show in a forthcoming article for the Review of Financial Studies that investor ownership has had dire consequences in the for-profit college sector. When federally subsidized for-profit colleges are owned by outside investors, we find that they are more likely to increase student loan debt, cut faculty-student ratios and engage in fraudulent recruitment.
Our findings recently prompted Sen. Elizabeth Warren to launch an investigation of six private equity investors in for-profit colleges, including Apollo Global Management, one of the largest firms seeking the hostile takeover of PG&E.
If Wall Street ownership is out, what are the alternatives? Sociologists and economists have noted that consumers often rely on nonprofit enterprises in sectors where competition is limited and it is hard to evaluate the quality of what is being sold. In fact, thousands of California residents are coping with PG&E-related fire losses by filing more than $1 billion in claims with the insurance arm of AAA, a 100-year-old nonprofit organization.
Nonprofit ownership does not guarantee that a company will well serve the causes of consumers or climate justice. Nevertheless, it does obviate some of the Wall Street investor pressures and claims on resources that can work against public interests.
A third alternative is public ownership by municipalities, the state or other public agencies. Like nonprofit ownership, public ownership involves fewer pressures to extract profits for private interests. Public ownership can also involve representative democracy in organizational governance. This may help to hold utilities accountable to key stakeholders including consumers, climate change-impacted communities, taxpayers and workers.
But there are a variety of ways to arrange nonprofit, public and even investor ownership. And the details for each type of ownership arrangement can have consequences for the public interest.
For example, public officials in San Francisco want to purchase PG&E’s local operations and make them part of a municipal public utility for the city’s residents. This compelling idea could improve ties between energy services and the local polity. But municipalization of PG&E could potentially undermine energy equity, because the city is home to some of the state’s wealthiest corporations and individuals. A statewide utility could reduce energy prices for low-income residents by levying higher rates on wealthy San Franciscans – but not if they have seceded with their own utility.
Advocates for public and nonprofit alternatives have their work cut out for them if they are to overcome the hostile takeover bid by PG&E’s bond investors. It can be easier for elected officials and even residents to opt for the devil they know when they are unsure how a new alternative will work. To ease these fears, we need clear policy designs for how existing institutions could assume nonprofit or public ownership of the power grid and enhance energy and environmental equity across northern California’s disparate regions.
Otherwise, PG&E will just be handed over to a new set of Wall Street bosses who are, as the saying goes, the same as the old bosses.