PG&E’s New Dam Deal: Good Business Or A Date With Disaster?

Article from ShastaScout.,a%20smaller%20arm%20of%20PG%26E.

By Marc Dadigan
October 2, 2023

The state is deciding whether to approve a PG&E proposal to sell most of its hydroelectric dams, including McCloud and other non-nuclear energy facilities, to a smaller subsidiary company it controls. Environmental groups argue the transaction may slow already long-delayed repairs, increasing current flood risks.

After heavy rains in November 2018, Shasta-Trinity National Forest officials released photos of a collapsing hillside below Hawkins Creek Road, which runs adjacent to the 235-foot McCloud Dam in the remote McCloud River canyon in northern Shasta County.

However according to a 2019 letter to federal regulators, the torrential rain wasn’t really the main culprit behind the dangerous road conditions. The damage, PG&E investigators concluded, had actually been caused by heavy flows from the McCloud Dam’s spillway that rushed into its “plunge pool” and eroded the hillside in the process.

It’s part of what environmental advocates who have spent decades studying hydroelectric projects say is a significant design flaw in the McCloud Dam. Built more than fifty years ago on a bend in the river, the dam allows water to gush from the spillway directly towards the hillside below the road rather than spewing directly downstream away from the road, which would cause significantly less erosion.

“They built the dam in the wrong place,” says Dave Steindorf, California Hydropower Specialist for American Whitewater. “Every time there’s a big flood event they lose a chunk of that hillside. They need to rebuild the spillway.”

The fifty-year-old dam also has a secondary problem. Its existing spillway doesn’t have the capacity to handle historically heavy downpours, which are becoming more frequent now due to climate change. In fact, according to federal documents, the McCloud Dam can only handle about half the flow of a worst-case scenario flood. If the dam failed during such a rain event, those documents say, it would release a cascade of 2.1 million cubic feet of water per second (imagine 2 million basketballs careening down the river canyon), flooding numerous campgrounds, fishing clubs, and bridges before emptying into Shasta reservoir.

Some river and fish advocates, including Steindorf, see the McCloud Dam as a key example of how many of PG&E’s dams need significant improvements and repairs to reduce the danger of disastrous flooding to communities, infrastructure, and ecosystems.

Those concerns were the focus of Steindorf’s testimony recently in a week-long state hearing to determine whether regulators will approve PG&E’s plan to sell the ownership of its dams to Pacific Generation, a smaller company that PG&E created last fall. The controversial deal was announced by PG&E officials last fall, and approved by the Federal Electric Regulatory Commission (FERC) this June.

It would work like this. First, if approved by the state, PG&E will sell $3.5 billion of its non-nuclear power generation facilities, including 62 hydroelectric projects, to the recently created Pacific Generation, which is a subsidiary, or a smaller arm of PG&E. Then, to raise the really big bucks, Pacific Generation will sell 49.9 percent of its shares to investors, who will hold “equity” – or partial ownership – in the hydroelectric dams, reaping a portion of the profits accrued by their power generation.

Corporate officials say the deal will provide the influx of cash they need to improve safety at their power facilities, reduce the risk of PG&E-caused wildfires and invest more in green energy. But critics, like Steindorf, fear the sale will cause more delays in PG&E’s overdue maintenance of its ailing dams across the North State, including McCloud Dam, by adding even more complexity to the utility’s corporate bureaucracy.

Their concerns are driven by safety audits, such as a study of the 2017 Oroville spillway failure and a 2022 audit of PG&E’s dam safety program. In both studies, investigators determined that barriers to smooth communication among various dam operators, utilities, and governmental agencies are, as Steindorf fears, a significant detriment to dam safety.

Despite the safety concerns, PG&E is expected to find ready investors. Hydropower is a lucrative industry. The McCloud-Pit project, for example, which includes the McCloud Dam, generates about $111 million a year in profits for PG&E, which has an overall net value of around $41 billion.

Utility equity rarely becomes available, and it is assumed to provide a flow of steady profit, which is returned to shareholders through dividends. Some critics do argue that utilities should be seen as less reliable investments because of the increasingly extreme and unpredictable impacts of climate change.

PG&E’s operating agreement will allow it to own a majority stake, just over 50 percent, of the subsidiary company, and retain control over Pacific Generation’s board. PG&E staff would continue to operate the hydroelectric dams and other power facilities under Pacific Generation’s ownership, according to PG&E’s proposal.

Although the operations at the dam would remain the same, the sale could shield PG&E from facing full responsibility for the impacts of a dam or spillway failure. A common motivation for creating subsidiaries is to shield the parent company from risk by placing the liability onto a smaller corporation with less money, assets, and other resources. In this case even though Pacific Generation’s new investors would have a limited say in how the hydroelectric dams are run, the subsidiary would likely assume much of the risk if a disaster at one of the facilities did occur.

“Pacific Generation would assume all those liabilities for dam safety even though it’s basically a nameplate and a board,” said Shutes of the California Hydropower Reform Coalition. “Will that entity have enough money to compensate victims if there’s a disaster?”

Some critics argue selling stock to raise funds for PG&E’s needs would be preferable to bringing in outside investors into the fold, whose primary motivation might be to extract higher profits, according to the Energy Producers and Users Coalition. However, PG&E  frames the transfer as more of a rearranging of business structures than a sale, adding the extra cash from the sale will also help them meet their commitment to compensate victims of catastrophic wildfires they caused.

Ultimately, it will be state regulators who will decide whether the transfer should be approved or canceled. The California Public Utilities Commission, which regulates and monitors PG&E as well as other utilities, is assessing the transaction based on whether it will benefit the public good, which includes whether it could affect victims of future PG&E-caused disasters. The agency will issue an initial decision by the end of November, according to a scoping document. CPUC officials declined to answer questions from Shasta Scout.

Responding to questions from Shasta Scout about the liability issue, PG&E’s spokesperson Paul Moreno said that Pacific Generation will be subject to state regulation, which will require they be adequately funded to address dam safety issues. Generally, PG&E argues in its rebuttal to environmentalists that concerns about dam safety and liability aren’t relevant because Pacific Generation will be subject to the same federal and state oversight, which the utility touts as rigorous and effective. These agencies require PG&E to follow intensive programs to evaluate dam safety and conduct necessary repairs, and include annual inspections for high risk dams.

According to documents submitted to the state, PG&E is also working with FERC on a program to improve and refurbish the spillways of their dams, and they have developed a plan to reduce the risk of dam failures based on an comprehensive 2020 report. They also announced they have a $100 million fund allocated for capital improvements, including work on the McCloud Dam, which would continue under Pacific Generation’s ownership.

But environmental advocates argue that the current condition of dams throughout the state is evidence the current practice of dam safety regulation is inadequate. The next PG&E disaster, they say, could be a dam failure rather than a wildfire.

They contend, for example, that the Oroville spillway failure in 2017 was evidence that the current status quo of dam safety inspections needs improvement. An independent investigation of the spillway failure concluded one root cause of the near disaster was the California Department of Water Resources staff’s “overconfidence and complacency” in the integrity of their dams

In addition to federal regulators, the DWR agency is also responsible for assessing the safety of PG&E’s dams. They have made several changes in response to the Oroville report, including expanding the size of their dam safety organization, said Jason Ince, DWR spokesperson.

But Shutes of the California Hydropower Reform Coalition said the testimony during the CPUC hearings should encourage the state to intervene to speed up the work on rundown dams.

“Even if they approve the transfer, it would be a really good outcome if the state had specific requirements that dam safety is properly maintained and PG&E’s meets better performance goals,” Shutes said. “They have the leverage to make (PG&E) finally make some moves.”

As for Shasta County’s McCloud Dam, PG&E seems ready to invest in refurbishing the structure. It received authorization this spring to conduct exploratory drilling as part of a spillway replacement investigation, according to a PG&E letter to federal authorities.

The exploration in advance of possible repairs will come three decades after the first washout of Hawkins Creek Road occurred. Since then, PG&E has kept the McCloud reservoir unusually low because of concerns about the spillway being unable to handle heavy rains, another way the McCloud Dam as an example the CPUC must prioritize dam safety as they make their decision.

“I’m not saying these events are going to happen or likely to happen,” Steindorf said. “But if you know about the risk, it has to be buttoned up.

To submit a public comment about the proposed PG&E transaction, visit the CPUC docket here and click the “add public comment” button.

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