Green power

How California's PG&E is transforming itself into the very model of a modern utility company.

By Katherine Ellison, Business 2.0 Magazine

(Business 2.0 Magazine) -- A 22-foot-long, neon-green banner hangs from the high-ceilinged lobby of the San Francisco headquarters of Pacific Gas & Electric, California's largest utility. "GREEN IS resisting the urge to drive to yoga," it declares. "GREEN IS saying no thanks to the daily disposable coffee cup."

Never mind that right beneath the banner a woman is selling coffee in plastic-foam cups. There's richer irony here. Why in the world, you might well ask, is a giant utility telling people not to use products that consume energy?

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Plugged in: PG&E is capitalizing on its proximity to Silicon Valley to tap new technologies.
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Contrarian view: Darbee is the rare utility executive pressing for greenhouse-gas caps on the industry.
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Wave and tidal power: The utility is planning to produce carbon-free energy from two 40-megawatt wave farms.
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Solar power: PG&E is committed to buying more than a gigawatt of energy produced by large-scale solar power plants.

The answer: This energy company has risen from bankruptcy to become one of the planet's most prestigious - and profitable - brokers in green power. Wrapped in the mantle of environmentalism and touting the virtues of saving kilowatts, planting trees, and driving electric cars, the 155-year-old, $12.5 billion behemoth these days is acting less like a robber baron than a Silicon Valley venture capitalist.

It's exploring, even incubating, cutting-edge technologies - from solar power to wave energy to biogas produced from cow manure. Along the way, it's giving other big energy firms a lesson in how to adapt to a carbon-constrained world, without - at least so far - getting burned.

In short, PG&E is turning itself into a role model for 21st-century utilities. That means making money by transmitting renewable energy wherever it may be generated - from the water flowing under the Golden Gate Bridge to the batteries of hybrid electric cars - all while managing an interactive power grid. Peter Darbee, CEO and chairman of PG&E Corp., the company that owns Pacific Gas & Electric, describes the sophisticated network that will hold it all together as the energy equivalent of the Internet.

While PG&E isn't the only American power firm that's going green, it is way ahead of the pack of investor-owned utilities in some important ways, including its connections in Silicon Valley and its willingness to use its political muscle to support environmental initiatives, such as limits on greenhouse-gas emissions.

"It's certainly a viable strategy, out West in particular," notes Morningstar analyst Travis Miller. "The regulators have given PG&E a blank checkbook to go ahead and build everything they need to expand that renewable portfolio, and that's going to give them a lot of growth."

These are nervous times for America's electric power industry. More than two dozen states have followed California's lead and now require utilities to obtain a portion of their electricity from renewable sources. (The Golden State's target is 20 percent by 2010.) In Washington, D.C., meanwhile, there's a new push to curb national greenhouse-gas emissions, about 40 percent of which come from electric utilities.

Rather than trying to hold back the tide, PG&E is surfing the green wave, throwing its weight behind Gov. Arnold Schwarzenegger's environmental initiatives and the state's landmark global-warming law as well as some congressional greenhouse-gas-cutting efforts. It's not exactly a popular position among PG&E's peers in the $387 billion segment of the industry composed of publicly traded companies, especially those in the coal-burning business. But as Darbee sees it, it's better to be at the table than on the menu. (Better still, in Darbee's case, to be splashed across the glossy pages of Vanity Fair, whose May issue hailed him as an "eco-warrior.")

"This is a defining moment for utilities," says Darbee, a golden-haired former high school wrestling champ, from his 24th-floor office with stunning views of San Francisco Bay. "Are we going to be central players in shaping the new energy economy that is now emerging, or are we going to leave these challenges to others?"

Change won't be easy for the giant utility, and PG&E is taking a big risk. It's betting heavily on technologies with little or no track record. It must also counter a growing movement among California cities and counties to abandon the investor-owned utilities and buy their own power, a trend that could leave PG&E stranded with costly new investments in technologies nobody wants.

The city furthest along on this path is PG&E's hometown of San Francisco. In June, the city's board of supervisors gave staff the go-ahead to put together a plan that advocates say could provide San Francisco with 50 percent renewable energy by 2017.

On a national level too, the stakes are high. Many observers anticipate that the United States will impose some sort of cap on greenhouse gases within the next few years. Utilities that fail to cut their emissions could end up paying heavy penalties in carbon taxes. PG&E is preparing for greenhouse-gas caps by investing in a more efficient grid and fostering innovation in renewable energy. Says Des McGinnes, business development manager at Ocean Power Delivery, a nine-year-old Scottish wave-energy firm that's in discussions with PG&E about building a wave farm off the Northern California coast, "PG&E is walking the talk."

PG&E's origins stretch back to the Gold Rush, with the company's founding in 1852 as the San Francisco Gas Co. A series of mergers produced the Pacific Gas & Electric Co. in 1905; the company survived the great earthquake one year later to grow into a powerful regulated monopoly. But a century of growth and prosperity came to an abrupt end on April 6, 2001, when PG&E filed for bankruptcy. California's three-year experiment in energy deregulation had produced not lower prices but rolling blackouts and a $7 billion utility bill.

Darbee, then CFO, had joined PG&E during the first year of deregulation after a career in telecommunications and finance, including stints at Goldman Sachs (Charts, Fortune 500) and Salomon Bros. He vowed to turn things around, and he got his chance in January 2005 when he took over as CEO. Darbee was then 51, and certainly no eco-warrior; he wasn't even convinced that climate change was real.

But as it turned out, those hard times helped free PG&E and other California utilities to adapt to the climate-change era. Forced to sell off most of its power plants during deregulation, PG&E was now a buyer of energy and could choose what kind of energy it wanted to purchase. This coincided with the greening of the Governator, who in 2006 signed a landmark law to reduce greenhouse-gas emissions 25 percent by 2020.

Watching all this transpire, Darbee asked his staff whether PG&E had a strategy to deal with climate change. To his surprise, it didn't. So, early in 2006, Darbee invited a group of experts to conduct a crash course in global warming for the company's top managers. One scientist, Stanford University climatologist Stephen Schneider, gave the executives some blunt advice: "Sooner or later, there's going to be another [Hurricane] Katrina, and you could get an irrationally high carbon tax stuffed down your throat," he said. "So why don't you stop trying to derail the train and try to drive it?"

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.