Collision of Cost of Safety and the Cost of Energy

Last December, Pacific Gas & Electric Company (PG&E) filed its cost of service and rate application for gas transportation and storage. This application was filed in the context of the California Public Utilities Commission (CPUC) being under enormous pressure to increase its safety oversight of utilities, a $14.4 million fine imposed on PG&E for failing to notify regulators about incorrect records on a natural gas pipeline and a looming $2.2 billion fine for the 2010 San Bruno explosion. In this context, it is understandable that PG&E would be very sensitive to safety concerns and would seek to make capital expenditures to improve the safety of its gas transportation system. The catch, of course, is that when a utility spends money, rates go up. For PG&E, this is complicated even further by the risk that a $2.2 billion fine could increase PG&E’s cost of raising money to pay for the capital upgrades it wants to make. When rates go up, large consumers pay attention; and when rates go up a lot, everyone pays attention.

PG&E’s application has garnered a lot of notice, with numerous parties filing protests. Industrial customers have raised concerns that their rates will increase by over 50%. Other customers (including certain natural gas fired generators) are expecting to experience a 100% increase in their rates. Small ratepayer advocates similarly are concerned over what are being called an “unprecedented” rate increases.

This type of rate impact raises a number of potential issues. It could impact the competitiveness of natural gas-fired generators vis-à-vis renewable generators, encourage fuel switching, make extraordinary energy conservation measures cost effective and potentially discourage economic development. The CPUC is in the challenging position of balancing these and other implications of significant rate increases against public safety concerns. While the amount of the rate increase is still open, large energy consumers of the PG&E system will want to carefully track the pending proceeding and assess its potential impact on the bottom line.

Documents for this proceeding can be viewed at http://delaps1.cpuc.ca.gov/CPUCProceedingLookup/f?p=401:57:14562621683110::NO