Cities can cost effectively start their own utilities
95 comments
·February 7, 2025Aurornis
The author estimates that electricity prices would be reduced by up to 33% (from $0.45 blended rate to $0.30), but PG&E’s profit margins are only 11%. That’s a good hint that this hypothetical is missing some important details
The article hedges against someone pointing this out by admitting that Walnut Creek is an unusually optimistic location and that PG&E is also recognizing large expenses related to ongoing infrastructure buildouts, but no solutions are offered for these caveats.
The hidden problem with projects like this is that once you roll these utilities into the city’s budget it’s too tempting to start dipping into taxpayer funds for needed improvements rather than raising electricity rates. When problems arise, politicians try to kick it down the road so it becomes their successor’s problem, or they try to offload the expense onto a growing debt load because that delays the problem to the next generation. It becomes easier to keep the highly visible rate down, but taxes might go up to cover the infrastructure costs instead.
So I’m skeptical. If there was an analysis that showed a drop in rates that was not 3X higher than the profit margins of the private utility I’d be more open to the idea, but as presented this feels like back of the envelope math that generates savings by ignoring all the details that didn’t make their way onto the envelope.
dv_dt
Profit margins don't reflect how efficiently they manage costs. It could as easily be the case the PG&E mismanages resources and costs more to deliver the same power.
jf
The highest price that the city owned electric utility in Alameda, CA charges on the standard rate schedule is $0.29453 / kWh
https://www.alamedamp.com/DocumentCenter/View/1268/FY25-Rate...
Edit: Oh, this utility runs at a profit and has for decades. The profits have been going into undergrounding transmission lines
AnotherGoodName
Less than 20c per kWh for my local city power - https://www.cityofpaloalto.org/files/assets/public/v/5/utili...
About half the price of PG&E. This is in an otherwise PG&E area. People should be demanding their city handle power. It leads to half the price.
Aurornis
> People should be demanding their city handle power. It leads to half the price.
My power is significantly cheaper than yours but it comes from a private company.
Picking random cities doesn’t tell us anything at all about costs or efficiency. Different areas have different costs and expenses.
You have to compare apples to apples.
AnotherGoodName
This is a PG&E area as stated charging ~40c per kWh as stated by the post above?
jncfhnb
No, their argument is sound. It’s just missing the point of utilities.
They’re saying that the cost of providing electricity to the cities, where everything is densely located and there are fewer trees and fewer overhead lines needing under grounding is lower so they should charge less to city consumers.
They imply that the bulk of the cost is delivering power to the richer consumers further out because there’s a lot of line miles that need under grounding. That’s probably accurate.
But utilities are restricted from pricing like that because you don’t want utilities triaging customers that are less profitable. The article here makes the argument that the far away and expensive customers are rich, therefore fuck ‘em. I’m not familiar with California but I doubt this is true across the board. There are surely notably rich communities far from the city but surely there are also poorer areas further from the city that are relatively cheaper because the commute is worse.
jeffbee
Maybe, but it's also clear that rural electrification was a huge error. People should live in clusters of at least a handful of structures where it's practical and affordable to provision electric lines (and telecommunications), or they should be off the grid altogether. What we built in the 20th century was the worst possible thing: mile after mile of transmission and distribution equipment serving dispersed houses in forests. This should never have been built and we should not perpetuate it with subsidies: https://www.google.com/maps/@38.4638277,-120.656418,3a,75y,3...
chasd00
Who cares about the way things should be when it comes to utilities. There’s no feasible way you’re going to cut power to rural communities and people. Deal with it.
Nimitz14
Interesting perspective. I guess even in very rural areas it would have pushed people to build villages. On the other hand people already were living far apart and lack of electricity meant they had to do massively more work. LBJ's biography has a section on this, explaining that life on west texas farms was incredibly hard without electricity (and as congressman LBJ worked very hard to expand that to rural people).
hypothesis
Eh, but we should not leave people without basics of civilization. Yes, it’s a subsidy, but benefits outweigh hoarding of wealth.
shiftpgdn
What is PG&Es generation cost vs administrative and legal overhead? The 11% margin isn't a good basis number. How is other states like Texas or Colorado are delivering at 10-12c/kwh ?
I do agree with your sentiment that city bureaucrats may be tempted to raid the energy business to pay for pet projects and other things. This can be protected against by segmenting the energy business into its own protected organization.
Aurornis
> What is PG&Es generation cost vs administrative and legal overhead? The 11% margin isn't a good basis number.
Administrative and legal costs don’t disappear when the city runs it, so why does it matter? When the city runs a utility, nearly all of the costs associated with running a utility still exist.
If your mental model of a city-owned utility is that they’re going to generate power and sell it at cost with no administrative overhead, you’re really just assuming that administrative overhead will be covered by taxpayers.
Electricity rates down, tax rates up.
> How is other states like Texas or Colorado are delivering at 10-12c/kwh ?
Texas produces the most crude oil, natural gas, and also wind generated electricity. A quarter of the entire country’s wind energy generation happens in Texas.
Comparing electricity prices across regions is meaningless. Everything is too different.
bitmasher9
I don’t think profit margin is the correct way to calculate their expenses. For one, it includes expenses outside of the municipality. For another, corporations are often okay overspending on executive compensation and other lavish business expenses for tax purposes.
Aurornis
> For one, it includes expenses outside of the municipality.
Exactly. The cherry picked example in the article was chosen to ignore areas with higher expenses.
> For another, corporations are often okay overspending on executive compensation
PG&E had $25 billion revenue last year. How much do you think they spent on lavish executive compensation? Even if you could eliminate $100 million in compensation (doubtful) that’s still less than 0.1% of revenues. People overestimate the impact of executive compensation in large companies by orders of magnitude.
> and other lavish business expenses for tax purposes.
Again, you’re not going to find dramatic savings anywhere in the budget by cutting lavish business expenses at this scale. It’s noise. There’s also a persistent myth that companies can spend their way into saving money via tax write-offs, but for some reason my accountant tells me that’s not how taxes work.
colechristensen
>The author estimates that electricity prices would be reduced by up to 33% (from $0.45 blended rate to $0.30), but PG&E’s profit margins are only 11%. That’s a good hint that this hypothetical is missing some important details
PG&E customers are paying very large amounts for the consequences of bad infrastructure causing wildfires and other legal costs which are being paid for with higher rates.
Example:
https://www.ewg.org/news-insights/news-release/2022/12/pge-a...
renewiltord
One of the things we find with cost-plus contracting is that the team providing the service somehow has a great deal of costs. Ironically, abandoning this approach leads to hiring higher margin businesses which nonetheless cost less. A confusing phenomenon when one doesn't account for the fact that people optimize to get more money ceteris paribus.
bitmasher9
This is absolutely a no-brainer for municipalities. The private companies are charging a premium that they return to shareholders and give to executives. Municipalities have excellent access to credit at rates significantly lower than the premium charged by utility companies. The residents get cheaper access and more influence in how the utility is ran.
The number of people that pay for-profit companies for natural gas (heat), electricity, and water in North America is absolutely bonkers. There is a specific concern about foreign corporations purchasing water rights in the American west.
AnotherGoodName
Yep you literally get half price power if your city does it - https://www.cityofpaloalto.org/files/assets/public/v/5/utili...
I’m lucky enough to be in such an area. Note the city takes a bit of the above as profit too. Not that that’s a bad thing but it just goes to show how beneficial it is and how much more you’re paying by not doing it. Every city should do it asap.
chasd00
City municipalities aren’t exactly staffed with the sharpest knives in the drawer. Few have the ability to manage the basics of street maintenance let alone stand something up like a utility. A fool and their money are soon separated, color me skeptical.
knappe
Boulder CO tried to do this, but failed. After a 10 year fight, Xcel's lobbying won out and the $29 million that was spent to start the process had been exhausted. We need more cities trying to do this to show how it can be done and done well.
https://www.cpr.org/2020/11/20/boulder-ends-decade-long-purs...
kelseyfrog
Of course it's cost effective for cities to start their own utilities, the economies of scale work in favor of urban and suburban electrification and maintenance.
What isn't effective is electrification and maintenance of low density regions although power monopolies like PG&E are required to provide service. The urban and suburban customers are effectively subsidizing the cost of transmission and maintenance for rural customers.
PG&E doesn't want their most profitable customer base[cities] to have public utilities because if enough do, their company becomes unprofitable and implodes.
This is exactly the reason we should do it.
UncleEntity
Sure, PG&E implodes but then who manages Diablo Canyon and who delivers electricity to the unprofitable rural areas?
I left California last century but seem to recall the PUC(?) has a pretty tight reign on what PG&E does and doesn't do.
flyinghamster
There are a number of northern Illinois cities that have their own utility grids. Off the top of my head I can think of Naperville, Princeton, Rochelle, and Peru, with the last three having their own power plants.
Rochelle's municipal utility system also provides water and sewer, and fiber-optic internet. https://www.rmu.net/
rightbyte
Social democracy in fashion again?
abeppu
The author mentions the cost of buying out the distribution network, and cites SF's failed attempt to do this. The author tries to figure out the price for Walnut Creek's grid based on inflation and population -- but the $2.5B figure this is based off was rejected by PG&E. The messed up thing is PG&E as a monopoly can set the price wherever they like -- and they can demand substantial continuing payments to connect to the grid so long as they retain it.
> PG&E continues to demand huge payments on routine power grid connections. For example, the cost to comply with PG&E’s latest requirements for the City to use public power to connect streetlights, traffic signals and other small loads would exceed $1 billion.
https://www.publicpowersf.org/en/faq
I think either we need the political will to use eminent domain to take the grid back (i.e. set the price through a legal proceeding), or we'd need to build a duplicate distribution grid and then abandon PG&E.
rsync
Why use eminent domain to seize their garbage, crumbling infrastructure?
Instead, slowly build out, in parallel, the upgraded – which is to say, underground – infrastructure that PG&E refuses to build.
A community could do this opportunistically on a schedule that tracks the normal repaving of roads.
jncfhnb
I’m not specifically familiar with PG&E but the whole point of a rare case with regulators is that they cannot set the price at whatever they want. They need regulatory approval of the rate.
kevinburke
Yes, the fact that PG&E rejected the offer is why I adjusted the figure for Walnut Creek's population and then increased it by 50%. The fact is muni borrowing is cheap - even if PG&E charged $1 billion we could finance that for about six cents per kilowatt hour.
I don't think the CPUC will let them get away with "we won't sell at any price" - I think the regulators would force them to sell at some price.
brian-armstrong
PG&E surely knows that if it lets one city do this, then more will follow quickly. It will be left with the least profitable regions and cities that can't afford to/don't have the credit for this transition. That would ultimately leave the remaining customers in an even less affordable position.
greesil
Maybe these expensive-to-serve regions need a different model of power generation.
abeppu
> I don't think the CPUC will let them get away with "we won't sell at any price" - I think the regulators would force them to sell at some price.
Has the CPUC forced such a sale before? Functionally, if PG&E can just safely gauge what's likely to be out of reach for each city, they can name a price detached from reality and be confident of maintaining their stranglehold.
shawndrost
+1 to this analysis. Urban ratepayers in CA subsidize rural and fire-prone ratepayers. (Utility rates are a stealth tax. Same story as home insurance.) The fight is ultimately political and not as one-sided as you might think. The broad regulator and politician view is that the subsidies are valid, and if the cities all leave the grid, the subsidies will wind up on the state's balance sheet. Nobody wants to see rural de-electrification. Utilities have a lot of sway with politicians for corrupt and non-corrupt reasons.
Zaheer
Santa Clara's utility rates are also cheaper because there's a bunch of data centers that are the bulk of consumption and subsidize rates for residents. That said, I'm all for getting rid of PG&E
xrd
These formerly "public utilities" are now often owned by PE or Berkshire Hathaway. Whenever I see the folky wisdom of Charlie Munger or Warren Buffer posted on HN, I can't help but think about their firm's work in transforming State Farm insurance, GEICO and this gem I posted earlier today on HN:
"PacifiCorp Was Grossly Negligent in Oregon’s 2020 Wildfires. Now It’s Asking Lawmakers for Protection."
https://news.ycombinator.com/item?id=42971311
Because of regulation, they can gouge consumers who are captive to the damage, literally and financially.
dragonwriter
None of the things you list are former public utilities of any kind, much less the specific kind under discussion (California public utility districts providing electricity and similar services.) PacifiCorp is a private utility company like PGE, formed from the merger of other (then- troubled), also private, utilities in 1910, and the other things aren't even utilities.
Are there any germane examples of your “These formerly ‘public utilities’ are now often owned by PE or Berkshire Hathaway” claim or is it just a complete non-sequitur?
xrd
I do think you make valid points and I'm wrong about the way I categorized them.
And, I did put public in quotes because these utilities, while privately owned, do benefit from regulatory capture that seems out of place with a privately held company. And they often operate on or over public lands.
And, having lived through the fires in Oregon and seeing the trauma first hand, I'm still angry.
That's my takeaway from the article but I'm willing to listen and learn. Your points are valid and show how mistaken some (or all) of my conclusions are based on false connections.
nonplus
I believe Berkshire bought (or agreed to buy) part of dominion (a public utility delivering power) on the east coast, I don't know any particulars of how it was run or if the deal even closed. Thats the only related example I know of (non exhaustive).
1970-01-01
>>they are also undertaking a massive project to underground utility lines in fire-prone areas.
Seems like they're actively trying to fix it.
xrd
I'm glad you stated that. It certainly wasn't my takeaway of the way they handled it, however. By my reading it seems like the local officials begged them to turn off the lines when they saw what was coming. And, that the executives at the utility didn't take action and then denied that this meeting occurred seems damning to the people who lost everything.
lotsofpulp
I don’t see anything in State Farm’s history that indicates Berkshire Hathaway had anything to do with the company. It has always been a mutual insurance company, owned by its policyholders.
xrd
You are right. I'm confusing State Farm with Allstate, via McKinsey (I'm reading the book "When McKinsey comes to town"). Berkshire Hathaway owns Geico and has taken a similar path, however. But, this Oregon utility has BH ownership.
payne92
> It costs a lot of money to deliver power to rural customers
Utilities (generally) have a universal service obligation.
If someone can cherry-pick just the denser areas with lower distribution costs, of course they could "undercut" the utility with the requirement to serve everyone.
(I'm not saying that PG&E couldn't be better managed. I'm saying that there's a much, much deeper policy issue at stake here.)
aqueueaqueue
They made the point that this is the plan. Encourage people to live in cities.
UncleEntity
The more people that leave the rural areas for the cities makes it less profitable to serve the existing rural folks.
I grew up in the Bay Area, lived in 'rural' Humboldt and Placer counties, and can say I would never move back to the bay no matter how much the technocrats would desire it.
Pretty happy with my ~30k town nowhere near California TBH...
I used to live in a small town in Michigan which had city provided power using a dam. It was inexpensive and highly reliable. But every couple of years the big power company in the state would try and get the city to sell them the utility.
After I moved a city council for whatever reason ended up selling. As a result the cost of electricity immediately doubled and power outages occurred regularly due to reduced maintenance. I don't know what they spent the money on that they received but it was a very poor decision that I have to believe they regret.