Power Grab: How PG&E Killed Its Profit Machine With Its Own $46M Campaign

(MoneyWatch)  PG&E, California's largest utility, looked at the $46 million it spent backing Proposition 16 as a worthwhile investment in its future. If voters had approved the initiative, PG&E would've successfully used a ballot initiative to lock up local-power monopolies for itself. Instead, the aggressive campaign -- not to mention the fact that Prop 16 went down in flames --has backfired and will hurt PG&E in the long term.

For one, it destroyed PG&E's reputation as an environmental utility that enjoyed loads of green street cred on a national scale. More importantly, PG&E's aspirations for a monopoly blinded management, who underestimated the fallout from their effort. Now, much to the chagrin of its shareholders, PG&E will have an increasingly hard time raising rates, something it relies heavily on to support its infrastructure and its well-heeled CEO Peter Darbee. Now PG&E will need those extra funds to ward off competition that promises to invade its territory.

Prop 16 would have required a two-thirds majority voter referendum before local governments could create or even expand any municipally-owned utility. And surprise, guess which major company (ahem, PG&E) would either lose market share or be forced to directly compete with these municipally-owned utilities? PG&E tried to frame Prop 16 as a protection for the taxpayer. But many saw it for what it was: a naked power grab by PG&E that would've killed the roll out of renewable energy-powered utilities.

It wasn't that PG&E just wanted to dominate the industry; it already does in northern California. PG&E desperately needs to push up rates to generate roughly $4 billion for upgrades to its ailing infrastructure. That doesn't include the actual cost of power, which means PG&E could very well ask the California Public Utility Commission to approve additional rate hikes in 2011.

PG&E will face increased competition as more local governments turn to public power -- so-called community choice aggregation (CCA), which allows cities and counties to pool their purchasing power to buy electricity. CCAs generally use more renewable energy and can undercut PG&E's rates by up to 20 percent. San Francisco's newly formed CCA Cleanpower SF will provide 51 percent of its power from renewable energy from 2017, if approved by state regulators. PG&E, meanwhile, falls short of the state's Renewable Portfolio Standard, which requires utilities to use 20 percent renewable energy by the end of this year.

That's the good news in all of this: Prop 16's failure is a big win for clean energy innovation in the state. PG&E already had a lock on northern California and had little to no incentive to use renewable energy. The only pressure it felt was from the state Renewable Portfolio Standard, not from customers who wanted a more diversified offering.

PG&E isn't going to give up market share or its ability to generate more profits willingly. Which means the fight will continue. Residents and businesses in cities with public-power utilities can opt out and get their power from PG&E, according to state law. For PG&E shareholders, that means the utility will be spending more to hold onto the customers it already has.

Photo from flickr user lazio, CC 2.0