Houston — Actions taken -- or not taken -- over past decades by the California state legislature; its regulator, the Public Utilities Commission; and local communities have left investor-owned utilities operating under a flawed business model that led, at least in part, to PG&E Corp.'s recent bankruptcy and could cripple other IOUs, according to longtime analysts in the state.

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In a statement released to S&P Global Platts on Friday, San Diego Gas & Electric confirmed it is eyeing the creation of a state-owned power procurement unit in response to the rise of Community Choice Aggregators.

Several sources contacted during the run-up to PG&E Corp. and utility Pacific Gas and Electric's filing for bankruptcy on Tuesday said they would speak with S&P Global Platts only on the condition of anonymity.

"The flaw," one of the analysts said in an email on Thursday, "is that utilities are made to take risks that were never explicit and that they were never compensated to take. That is what caused the bankruptcy."

"None of the legislature, CPUC, or local communities are taking responsibility for failed regulation, failed communication with the public about utility regulation, or [public] policies that increase fire hazards," a San Francisco-based source said. "There has been a total failure to even ask, what was the fundamental cause of the horrible [Camp] fire? And how will a bankruptcy reorganization deal with that cause? By saying it will improve safety compliance? That is [nonsense]."

Bankruptcy lawyers have noted that the PG&E bankruptcy case will address claims only from "historic wildfires" of 2017 and 2018, but can do nothing to address "future fires" and claims arising from those. Only action by the state's legislature can address future fires, according to Luckey McDowell, a partner in Baker Botts' corporate restructuring group.

"The linkage of this mess to CPUC policy to keep rates down and to local community policies that allow dense housing in wooded areas is, to date, missing from the discourse," the source said. "The CPUC won't admit that they let the horses out of the barn. What has the CPUC done to communicate the tradeoff between rates and fire-related risks to the legislature and the public? Nothing," he said.

The regulated utility model is one in which rates of return and cost of capital are given to what are essentially regional monopolies.

"The fires were not included in PG&E Corp's cost of capital, and breaking up PG&E won't change anything at all," the source said.

The problem is with public policy and who exactly is responsible, the source said. "The people in Paradise, California , wanted to live in the forest--and only now is vegetation management under discussion. Is there a public policy problem here, and is there a solution? And if there is, can you get the Newsoms of the world to get behind it?"

THE SOURING OF PUBLIC SENTIMENT

California's newly installed governor, Democrat Gavin Newsom, is seen by some as out of his depth, particularly on energy policy, and appears to be following those in the state legislature who view PG&E, and utilities in general, as "evil," the San Francisco-based source said.

Credit rating agency S&P Global Ratings, like Platts a unit of S&P Global, began aggressive credit downgrades on January 7 after noticing "a decisive souring of the political and regulatory environment" surrounding PG&E Corp. in the state. S&P Global Ratings said it assumed that given California's robust renewable portfolio standards and the increasing risks of climate change, legislators and regulators would "proactively work with the utility to preserve credit quality."

However, the agency concluded a week before the bankruptcy announcement that negative public sentiment and increased political pressure would "challenge the regulators' willingness and ability to implement measures to protect credit quality over the near term."

On Tuesday, Newsom said the bankruptcy filing "was PG&E's choice but it does not change my focus, which remains protecting the best interests of the people of California. My administration will continue working to ensure that Californians have access to safe, reliable and affordable service, that victims and employees are treated fairly, and that California continues to make forward progress on our climate change goals."

Newsom's press office declined to comment beyond that statement.

BUNDLED ELECTRIC LOAD DECREASING

One of the longtime market participants said he felt the Community Choice Aggregator model, which was first passed into law in 2002 and was unsuccessfully challenged by the IOUs in 2010, is also "deeply flawed," with a problematic opt-out policy.

Calling the CPUC's support for CCAs "naive," the source predicted that "there will certainly be CCA restructurings required sometime in the next five to 10 years. For some [CCAs], difficulties are already starting to emerge," though he didn't mention any CCAs by name.

The CPUC did not return calls or emails following the bankruptcy filing.

State law requires IOU customers who are leaving to join a CCA to pay the IOUs a cost for moving to the new load serving entity.

That cost is known as the Power Charge Indifference Adjustment, or PICA, that has been hotly debated between choice advocates and the state's IOUs at the CPUC.

IOUs worry that a low opt-out fee makes CCA rates more competitive, while the CCAs worry that a high exit fee will not allow them to fulfill promises of lower customer bills.

In a filing with the bankruptcy court on Tuesday, PG&E Corp said, "In recent years there has been a significant decrease in demand for its electric supply service, which has resulted in providing less electricity to fewer customers."

There are three primary reasons for this "significant bundled electric load decrease," it said: the rapid expansion of retail choice programs available to customers in California, including Direct Access and Community Choice Aggregation; increases in distributed generation, primarily in the form of rooftop solar; and the "ongoing success" of California's energy efficiency programs.

Pacific Gas and Electric said it expects that Direct Access and CCA providers will service 55% of the bundled electric load in its service area by 2020.

SDG&E EYES STATE POWER PROCUREMENT

On Friday, San Diego Gas & Electric confirmed that it was still interested in the state legislature possibly setting up a government power procurement unit to help it out of its problem with declining demand.

In November, SDG&E's vice president of state government affairs and external affairs, Eugene Mitchell, wrote a letter to state Senator Ben Hueso saying that the city of San Diego "consumes approximately 40% of the energy supply we procure and thus when you start adding in other cities to their effort our energy supply procurement duties will shrink even further."

"With this in mind, we would like to begin discussions with you and your colleagues about introducing legislation that would allow us to begin planning a glide-path out of the energy procurement space."

The letter, which was released by SDG&E, said that signing contracts for 10 and 20 years while the cities are discussing the possibility of joining together to buy their energy from a CCA provider "will be tricky to say the least."

On Friday, the Sempra Energy-owned utility said it "recognizes that the energy market in California is changing quickly and that we must evolve as well."

"As energy procurement in California becomes increasingly decentralized, we see a future in which SDG&E focuses primarily on the safe and reliable transmission and distribution of energy to our customers."

SDG&E said that the legislation it has proposed "would lead to the formation of a task force to determine how a state-level procurement entity can be established to assume energy buying responsibilities.

-- Jeffrey Ryser, jeffrey.ryser@spglobal.com

-- Edited by Richard Rubin, newsdesk@spglobal.com