Taxpayer Owned Utilities: Restoring the Appropriate Balance Between Risk and Reward with Respect to Investor Owned Utility Companies
Arizona State University Corporate and Business Journal, Forthcoming
29 Pages Posted: 12 Nov 2019
Date Written: February 15, 2019
The concept of a public utility company is certainly nothing new. Because of the importance and unique costs associated with developing and maintaining a utility company, there have been several policy judgments made over time with respect to the regulation of the industry. One of the largest, most unique, benefits that utility companies enjoy is the ability to operate in a monopolistic form. Over time, it was realized that the economically advantageous features of a utility company made them great vehicles for investors seeking reliable, competitive dividends and modest growth targets. Now, utility company stocks trade on the major exchanges and, as with most publicly traded companies, are managed with an eye toward short term profits.
These investor owned utility companies (“IOUs”) focus on paying higher dividends, maintaining their stock price, and attracting institutional money. One unfortunate side effect of these goals is that, governance decisions became riskier, leverage ratios grow, and otherwise free cash ends up being funneled to investors. The consequence for some of these IOUs is being forced to file for bankruptcy.
The results of IOU bankruptcy proceedings have been mixed. Sometimes the reorganization process, rather than fixing the underlying problems, simply serves to shift the debt and liability incurred by the IOUs onto their local communities, rate payers, and taxpayers. Subsidization for unpaid liabilities for wildfire damage, emergency bond issuances, and government bailouts only addressed the short-term problem. More importantly, the protections of Chapter 11 were specifically intended to revive the companies that had played too fast and loose and in the case of IOUs, potentially set them up to do it again.
Part I of this article provides some background information on investor owned utilities and concepts underlying the risks and rewards of stock ownership. Part II, discusses some of the issues arising in the world of investor owned utility bankruptcies, and seeks to understand some of their potential causes. Part III examines PG&E’s general governance prior to their most recent bankruptcy filing and draws parallels between the theoretical issues in Part II and the reality of PG&E’s current situation. Part IV proposes a solution, imposing a consequence for failing utility companies that would otherwise be bailed out. When an investor owned utility becomes insolvent, there should be a forced sale of the business to the sate so that it can resume operation as a “Taxpayer Owned Utility.”
Keywords: Utility Company, PG&E, Pacific Gas, Utility Bankruptcy, Chapter 11, Chapter Eleven, Wildfire, Wildfire Liability, Business Governance
JEL Classification: k22, k23, k20, k32
Suggested Citation: Suggested Citation