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The Bleeding Hearts Dry Up 6 - Regulatory Purgatory

Sunny California ignores the lessons taught by dark New York City subways.

By Will Offensicht  |  January 14, 2020

California, the Golden State, lives in legend as a glorious middle-class paradise on earth of surfboards, bikinis, open freeways to natural wonders, and of course Hollywood glamour.  All this was indeed true... many decades ago, when Ronald Reagan walked the earth.

The previous article in this series showed how bleeding-heart crusades to "Save the Planet" by making energy more expensive have let to a situation where the state of California, perhaps the best-endowed state of all with respect to climate, resident billionaires, and overall livability, is becoming increasingly uninhabitable.  Pacific Gas and Electric, the embattled California utility, has been hit with so much liability for fires caused by their equipment - estimates range from $20 billion to $50 billion - that the utility has had to cut off power to large parts of the state in order to reduce its fire risk.

Estimates of economic losses due to food spoilage during the blackouts range into hundreds of millions of dollars, to say nothing of the myriad other consequences of being plunged abruptly into the Third World for days on end.  This has led coalitions of mayors to propose that PG&E be converted into a customer owned cooperative which would be run by cities and towns throughout the state.

The theory is that this will cause the utility to be more responsive to voters, because after all, don't politicians have to be re-elected?  Unfortunately, this sort of discussion has nothing to do with facts, because politics is not about facts.  It is about what politicians can get people to believe.

Thanks to our debauched education system and its intentional refusal to teach history, Californian voters are not aware of the well-documented utter folly of having the state or cities take over utilities.  This was demonstrated long before they or any of their teachers were even born, and on the other side of the continent, by Mayor LaGuardia's municipal takeover of the failing New York subway lines and other transit utilities.

Subway Regulatory Purgatory

Despite constant propaganda from the Left, history shows that government-owned service organizations are rarely cost-effective, and never so when alternative measures like quality-of-service are considered.  City Lab shows how government ownership worked out for the New York subway.  It's a long article, but well worth reading in detail.

The city originally had two privately-owned chartered mass-transit companies.  The Interborough Rapid Transit company opened its line from West Harlem to Grand Central in 1904.  It had a near-monopoly on Manhattan transit and in the Bronx.  Brooklyn Rapid Transit dominated transit in Brooklyn and its connections to Manhattan.

Real estate speculators urged both transit systems to run lines to vacant land, reaping profits from building in places which were suddenly more accessible.  As with rental property, riders pressured the city to keep fares low, and fares stayed at a nickel for decades.  Inflation meant that 1948 riders paid less than half what had been paid in 1904 in constant-value terms.

That bargain wasn't good enough: in 1922 the city administration decided to build subways in parallel with the existing routes to compete with them.  The new lines didn't create new opportunities for land speculation.  This broke down the relationship between transit and real estate investment, which previously had both increased property tax revenue and provided new riders so the transit companies could recoup their costs.

After a few years of this, the subway companies were hardly breaking even, and as with PG&E, maintenance suffered.  The decaying, unprofitable "capitalist" subway lines were already in bad shape when the stock market crashed and the Depression began.

A few years into the Depression, Mayor Fiorello LaGuardia took over the private lines at their depressed, bankrupt valuation.  Buying out the private companies and building their own subways meant that the city owned the entire transit system, which remains the case to this day.

But because the subways were a subsidiary of the city government, there was no longer any reason or incentive to operate them efficiently or cost-effectively.  Instead, subways became a tax burden whose operation was driven more by politics than by economic efficiency.  After the 6th Avenue line opened in 1940, for example, there was no further major expansion for 70 years, partly because the city's per-mile construction costs were 2 to 4 times the costs incurred by the private companies.

As with any government-supplied "service," municipal unions have driven up costs.  Interest in keeping fares low has deferred billions of dollars worth of maintenance, ultimately resulting in what Governor Cuomo called the "Summer of Hell," an apt phrase which became one of the most viral memes the Governor ever created in his long career as a politician.

Electric Regulation

The detailed effects of regulation on PG&E are different in detail from the regulatory failures in the New York and DC transit systems, but the root causes are all too familiar - politicians want to keep unions happy with high-paying jobs, keep voters happy with low prices, and keep single-issue activists happy by making energy use more expensive.  The vast transit-riding public has other things to worry about, and when the subway becomes too unreliable, simply drives to work instead.

This approach defers maintenance until things fall apart.  New York City subways still use signaling systems that were put in during the 1930s.  Signaling problems contributed to its underground "Summer of Hell;" California's summers of hell are above ground and spectacular enough to be seen from outer space.

PG&E suffers from an additional cost disadvantage in that California is the most woke state in the union with respect to fighting global warming.  Anti-pollution regulations and high taxes give the state the highest gasoline costs anywhere west of Europe.  On top of that, the government has required that all electric utilities produce 33% of their power with renewable sources by 2020.

In his [2011] signing comments, Governor Brown noted that "This bill will bring many important benefits to California, including stimulating investment in green technologies in the state, creating tens of thousands of new jobs, improving local air quality, promoting energy independence, and reducing greenhouse gas emissions."

He somehow neglected to observe that the salaries paid to holders of these "tens of thousands of new jobs" would all have to be paid by energy users, that renewable electricity costs three to five times as much as fossil-produced power, that conventional power plants would be needed to fill in when the sun wasn't shining, and that electric rates would go up to cover the added costs of green virtue signaling.  Opposition to these rate increases made it even more politically desirable to postpone maintenance while requirements for environmental impact statements, lawsuits, and other delays made maintenance more expensive.

What's truly unfortunate is that all these high prices and eco-wokeness will have no effect on Saving the Planet.  California emits roughly 1% of worldwide CO2.  Even if California stopped letting any people exhale CO2, The Planet wouldn't feel much difference.

Indeed, MIT's Technology Review published "California is on track to miss its climate targets—by a century" which explains that the state has realized the cheapest environmental savings and that it's going to be a lot more expensive to cut emissions any further.

The state's climate pollution declined by just 1.15% in 2017, according to the latest California Green Innovation Index. At that rate, California won't reach its 2030 decarbonization goals (cutting emissions to 40% below 1990 levels) until 2061-and wouldn't hit its 2050 targets (80% below 1990 levels) until 2157. ...

But energy observers stress that deeper, systemic problems are building: the state's utilities are losing loads of customers to community choice aggregators. These programs allow local communities, like Marin and Berkeley, to buy electricity from in-state or out-of-state sources on behalf of their residents and businesses, but still lean on the utility's transmission and distribution infrastructure.

That's left utilities with more power plants than they need, and thus no reason to enter into additional deals with developers to build renewable facilities.

MIT didn't bother to point out that having more generation facilities than needed means that their unneeded generators aren't generating the revenue expected when the utility borrowed money to build them.  Utilities are generally permitted to set rates at a level that gives them a specified "return on investment" which is enough higher than the utility's cost of funds to make it worthwhile for investors to put up the money.

PG&E has been roundly criticized for paying dividends instead of maintaining its power distribution network, but not paying would have violated their understanding with their investors.  How will utilities get the money for more infrastructure without paying either dividends or interest on their bonds?  How will potential investors react now that customers are permitted to buy power outside PG&E's network?

We've shown how activists destroyed thousands of logging jobs without saving the spotted owl, and how the increases in the minimum wage have meant that people who receive the minimum wage take home fewer actual dollars because their hours are cut.  We've seen how justice "reform" has led to increased crime rates and how green virtue-signaling coupled with anti-logging activists has led to California having both the highest electric rates in the nation and a bankrupt electric utility.

How can activists be so stupid?  How can voters be so obtuse?  In the final article in this series, we'll explore the fundamental flaw common to all forms of activism.