How PG&E Almost Became the Nation’s Largest Cooperative

The history of electric cooperatives is one of individuals striving to improve their local communities. Perhaps the most inspiring electric cooperative formation was initiated by Peggi Timm. Timm, whose accomplishments would fill a library, helped to create one of Oregon’s largest cooperatives, called Oregon Trail Electric Cooperative (OTEC).

In 1987, OTEC’s service territory was controlled by an investor-owned utility (IOU)—CP National Corporation. However, it was looking to unload what was a dilapidated system. It wanted out of the not-so-lucrative rural electric utility business. It tried selling to Idaho Power, but the deal never materialized. So, Peggi, along with her husband Glenn, and Dick Haynes, convinced 700 of their pals to contribute a one-cent membership fee to form a cooperative. That $7 morphed into a $33 million loan from the National Rural Utilities Cooperative Finance Corporation (CFC). There exists no bank in the FDIC family or otherwise that would loan that amount based on a scattering of pennies. Yet, that’s exactly what CFC did.

Other cooperative evangelical converts would follow. The Kauai-based Citizens Electric became Kauai Island Utility Cooperative serving some 38,000 members in 2001. Five years later, Kansas-based Aquila (now Black Hills Energy) sold 48,000 customers to six Kansas co-ops. In 2013, 12 southern Minnesota electric cooperatives added 44,000 member-owners from the Iowa-based Alliant Energy. Not long after, Michigan’s Cloverland Electric purchased 23,000 customers from Wisconsin Electric. All told, in the last 25 years, some 500,000 previous power apostates were converted to the co-ops’ rolls.

An audacious electric cooperative formation occurred in 1997 when a consortium of New York City housing cooperatives formed 1st Rochdale Cooperative. National Rural Electric Cooperative Association (NRECA) Senior Corporate Council Greg Wortham was hired as the co-op’s CEO to take advantage of New York’s open access legislation. New York’s customer choice allowed 1st Rochdale to reach an estimated 1 million customers. The 1st Rochdale effort ended five years later due to its inability to deal with the multiple state regulations imposed by the New York Independent System Operator.

PG&E’s Fire Problem

Pacific Gas and Electric (PG&E) is the nation’s largest IOU, providing natural gas and/or electric service to about 16 million people. PG&E serves cities like San Francisco, San Jose, and Santa Barbara. The Apple campus in Cupertino is also among the many zip codes covered in the company’s 70,000-square-mile service territory that abuts Plumas-Sierra Rural Electric Cooperative in the north and extends to Bakersfield in the south. The fascinating history of PG&E—and it is fascinating—was captured in a recent book written by Wall Street Journal reporter Katherine Blunt entitled California Burning: The Fall of Pacific Gas and Electric—and What It Means for America’s Power Grid.

The downfall of the San Francisco-based utility was traced to a broken hook holding a string of insulators. Records would reveal that the hook was purchased in 1919 from an Ohio brace company. Subsequent investigation would show that some 5,500 miles of the company’s transmission lines required about 250,000 repairs.

The fire started by the broken hook caused $16 billion in damage and killed 85 people. It was called the “Camp Fire,” California’s deadliest, leading to indictments and later to bankruptcy.

Fearing that PG&E’s many miles of electric lines could cause more forest fires, the company began to institute rolling interruptions. In her book, Blunt describes PG&E’s decision process and how the company shuts down large swaths of its system when weather patterns show intense windstorms likely to dislodge aged high-voltage electric infrastructure. In October 2019, for example, PG&E sent a “vague” notice of curtailment to hundreds of thousands of customers. Affected customers flocked to PG&E’s website, causing a crash, as they tried to find more information about outages. The IOU also frantically tried to contact 30,000 medically electric-dependent customers about the planned outage.

A litany of hearings ensued. Blunt wrote that one notable hearing conducted by the California Public Utility Commission (CPUC) included a presentation by Dr. David Hoffman, an expert on organizational behavior from the University of North Carolina. Hoffman cited “dynamic non-event,” as a cause for corporate breakdown when “you must spend a lot of money and do a lot of things for nothing to happen.” Spending money on maintenance does not yield a rate-on-return for an IOU. Hoffman described the profit mindset as a slow “drift into failure,” which prompted a former PG&E employee to contemplate a different course.

The Co-op Solution

Dan Richard was the senior vice president of Government Relations for PG&E until 2006, well before the 2018 Camp Fire disaster. After leaving the utility, Richard was appointed as chairman of the California High-Speed Rail Authority. In between, Richard promoted an idea to transform PG&E that captivated the attention of the mayors of San Jose, Stockton, Oakland, Berkeley, Petaluma, Santa Cruz, Sonoma, and others. Richard suggested PG&E should be made into an electric cooperative. San Jose Mayor Sam Liccardo underscored that idea when he observed in an Oct. 21, 2019, Wall Street Journal interview: “A cooperative would create a utility better able to meet customers’ needs because it would be owned by customers—and answerable to them.”

Richard told me, “We proposed a co-op in the context of PG&E bankruptcy, being easier to form than creating a municipal-owned utility.” The opportunity to form an electric cooperative could also be left to the CPUC, which had the right to veto any bankruptcy-proposed plan that the commission deemed wasn’t in the “public interest,” as a cooperative assuredly would be.

A Nov. 5, 2019, Wall Street Journal article estimated the cooperative conversion to cost about $50 billion. To that, Richard noted, the wildfire liability would be an additional $22 billon. Richard said several banks were interested, if the nascent co-op would not be subject to CPUC rate regulation. California’s three electric cooperatives, Plumas-Sierra, Surprise Valley, and Anza Electric are member-owned and not beholden to CPUC’s rate setting authority.

Richard also observed that a co-op borrowing advantage to “harden” the IOU’s system would save upwards of $20 billion over 20 years. While the co-op would see the same “strict liability” for fires thought to be started by the utility’s vast electric grid, the capital cost to contend with fire suppression would be far less than what PG&E would eventually pay.

Washington state counts four “mutual” cooperatives called Elmhurst Mutual Power and Light, Modern Electric Water Company, Ohop Mutual Light Company, and Alder Mutual Light Company. The principal difference between a “mutual” and a “cooperative,” is the former do not pay capital credits, using margins instead to offset rates. That was the model Richard envisioned, giving this version of a co-op rate autonomy but still subject to the CPUC health, environmental, renewable, carbon reduction dictates, and most important, jurisdiction over safety and wildfire protection.

Governance of the never-named mutual was addressed in an extensive “customer-owned utility report.” The report envisioned a 13-member inaugural board representing the geographic difference for the extensive utility territory. Nominations for the co-op board valued utility expertise, safety, cybersecurity, and management, among other desirable utility traits. The initial board, and those to follow, would also place emphasis on gender and ethnic diversity. The board would represent customer class including commercial, industrial, agricultural, and residential interests. Directors would serve staggered five-year terms with a two-term limit. Compensation would be equivalent to that paid by similar size IOUs. Using PG&E as a board compensation marker would have meant this co-op board being paid between $260,000 and $439,000.

PG&E Remains Investor-Owned

But it didn’t happen. Richard said the effort to form the cooperative failed for two reasons. The first was the $5 million necessary to participate in PG&E bankruptcy. The financial involvement could have convinced the bankruptcy court to recommend a restructuring based on the co-op model. The second, and far more compelling reason, was the objection registered by Gov. Newsom, who wanted PG&E to emerge as an IOU. Richard added this observation: “The Newsom administration told us that the other California IOU’s [mainly San Diego Gas and Electric, and Southern California Edison] were freaked out about a co-op idea and how it might put public pressure on them. We were disappointed but we weren’t going to challenge the governor on his preference.”

Today, PG&E rates average between 45¢ and 54¢ per kilowatt-hour usage. For comparison, Anza Electric, a member of Arizona Electric Cooperative, charges 15¢. Plumas-Sierra to the north is 12¢/kWh. Sacramento Municipal Utility District—once a PG&E customer—provides off-peak rates at 13¢, or 72% less than PG&E, while peak rates are 32¢ (41% cheaper).

In 1932, campaigning for re-election, President Franklin D. Roosevelt addressed a crowd assembled in the Portland, Oregon, civic center. Now known as the famous “Portland Speech,” Roosevelt said that inexpensive public power would serve as a “yardstick” against which to judge private utilities’ rates and service. Three years later Roosevelt signed the Rural Electrification Act. Today, nearly 90 years later, that yardstick almost prevailed in making PG&E the nation’s largest electric cooperative. Almost.

Mark Glaess started his rural electric career in 1979 as the Legislative Director for the Nebraska Rural Electric Association. He was hired in 1985 to help form the Oregon Rural Electric Cooperative Association. Glaess became the fourth manager of the Minnesota Rural Electric Association in 1991 and retired after 22 years leading that statewide organization, whose membership includes 44 distribution co-ops and six generation and transmission cooperatives serving some 1.4 million Minnesotans. Glaess also served on the National Rural Telecommunications Cooperative from 2002 to 2011 and is the author of the book Aspire to Better: The 21st Century Electric Cooperative.

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