Many electric utilities are struggling – will more go bankrupt?

Over the past 12 months, consumers in the U.S. have experienced the disappearance of familiar retailers, such as Toys R Us and Sears, due in part to how online shopping has changed the way consumers shop for goods.

The historically staid electricity industry is seeing its own share of changes in the form of increased wildfire risks, rising sea levels, damaging storms and changing technology. These factors have already contributed to the bankruptcy of California utility PG&E in California.

People may wonder: Will these pressures affect my own local utility? Could the lights go out as a result? The short answers to these questions are yes and no, but the longer answers are far more informative.

In my role as public utility researcher, I have the opportunity to study the effects of changes in the marketplace on utilities.

Traditional utilities do indeed face changes but they are also subject to a different business climate than retail stores and manufacturers. While some states have restructured their electricity markets to allow competitive power suppliers, the utilities that deliver power to people’s homes and businesses – the companies that own the lines and wires – have an obligation to serve all who want service.

In exchange for this obligation to serve, they have the right to collect rates for that service as determined by their state utility regulator. This relationship provides them with some protections that other businesses lack, but imposes constraints as well. To consumers, this particular regulatory and economic environment explains how many decisions that influence cost and reliability are made.

PG&E and wildfires

The principle reason for the PG&E bankruptcy is its potential liability in the California wildfires – its power lines have been blamed for sparking fires , and the wildfire threat is projected to get worse.

A safer and more reliable electricity system costs more money, which is ultimately paid by its customers. But PG&E does not manage its system autonomously. The state regulator must decide on the equitable tradeoff between safety or reliability and cost when PG&E provides electricity service.

For example, PG&E’s current public safety power cutoff program allows it to shut off power to half a million customers when environmental conditions, such as dry weather and high winds, increase the likelihood of wildfires. The company has proposed expanding that program by about 5 million customers. This could reduce wildfire risk, but could also interrupt electricity service to more people. The California state regulator is considering whether to accept that proposal.

So while the regulator decides on the proper level of investment in the system, it is still PG&E’s responsibility to operate it prudently. If PG&E recklessly maintained its power lines or is found to have violated state vegetation management laws by not removing trees from the proximity of power lines, that responsibility lies solely with them. The regulator can deny the recovery of those costs from their customers.

These types of decisions directly impact the cost and reliability of power service customers see. And as with utilities in every state, regulators must approve investment plans utilities put forward.