Utility customers may be on the hook for billions in damage
Pacific Gas and Electric Co. could face bankruptcy in aftermath of California wildfires
As wildfires ravage large swaths of California for a second year, one of the state’s biggest utilities has declared that it faces billions of dollars in potential liability — far more than its insurance would cover.
The potential losses could leave the company’s customers on the hook to pay the bill, exposing businesses and consumers to higher costs. The utility, Pacific Gas and Electric Co., could even face bankruptcy, putting pressure on the state for a bailout.
With its financial liabilities mounting, the company’s shares dropped by more than 20 per cent Wednesday.
More than half its market value has been wiped out since late last week as the fires have spread.
Investigators have yet to determine the cause of the deadliest of the current blazes, known as the Camp Fire, which has killed at least 56 people and destroyed virtually the entire town of Paradise, about 145 kilometres north of Sacramento.
PG&E disclosed in a regulatory filing Tuesday that an outage and damage to a transmission tower were reported in the area shortly before the fire started last week.
Many fires in recent years have been caused by downed power lines serving California’s utilities. State officials have determined that electrical equipment owned by PG&E, including power lines and poles, was responsible for at least 17 of 21 major fires in Northern California last fall. In eight of those cases, they referred the findings to prosecutors over possible violations of state law.
Citigroup estimates that PG&E’s exposure to liability for those fires is $15 billion (U.S.) — and it could face another $15 billion in claims if it is found responsible for the Camp Fire, a number that could rise because the fire is only a third contained.
“The damages, if you add 2017 and 2018, obviously are going to be really significant,” said Praful Mehta, a Citigroup analyst.
The compounding costs of the year-after-year wildfires are making it increasingly difficult for any party to absorb the expenses, said Mark Cooper, senior research fellow for economic analysis at the Institute for Energy and the Environment at Vermont Law School.
If the utility is forced to increase rates sharply, the costs may take an economic toll. Manufacturing companies could choose to move their businesses out of the service area or even the state. Residential customers within the utility’s territory then could be left to cover the costs.
“This becomes a humongous challenge,” Cooper said. “If they try and raise the prices, they may not be able to get them. Should they even be allowed to recover all the cost, if they were guilty of imprudent behaviour?”
PG&E said its liability insurance for the year that began Aug. 1 amounted to $1.4 billion.
Lynsey Paulo, a spokesperson for PG&E, said the utility was focused on helping fight the current wildfires rather than the company’s economics. The company has set up a base camp with 800 employees in the area of the Camp Fire, she said, a figure that is expected to grow to 1,000 by the end of the week and could reach 3,000.
“We’re not going to speculate on what may or may not be impacting the stock market,” Paulo said.
Critics of the utilities say poor maintenance of power poles and failure to trim vegetation around power lines is a major cause of fires.
On a walking tour last spring in San Jose, Calif., a former state regulator showed overloaded poles bending under the weight of wires and cables, as well as power lines running through tree foliage.
PG&E’s “safety culture” has been the subject of a three-year investigation by the state’s Public Utilities Commission.
The agency is expected to act on the inquiry’s findings as early as this month.
Legislators intervened this year to shield PG&E and the state’s other investor-owned utilities from overwhelming legal claims, allowing them to pass the expense on to ratepayers. But the law, Senate Bill 901, applies to fires beginning in 2019, and in some of last year’s incidents — not to this year’s fires.
Paul Payne, a spokesperson for state Sen. Bill Dodd, who sponsored the measure, said the bill was a response to the potential costs PG&E and its customers were already facing.
“We were focused on 2017 and protecting the ratepayers from that fire,” he said.
Some analysts say California’s regulators and lawmakers could take steps to extend similar protection in this year’s blazes.
“It is our expectation that regulators will utilize the tools or framework outlined in SB 901 to address any potential 2018 wildfire-related costs,” Jeffrey Cassella, an analyst at Moody’s Investors Service, wrote in an email.
Under the bill, utilities could sell bonds to cover their liability costs and pay them off over time through higher rates. PG&E estimates the cost to the average consumer could be $5 a year for every $1billion in bonds issued.
But Mehta of Citigroup said there were questions about a second intervention.
“It is unclear whether the political will exists because it might be seen as a bailout,” he said. “That is why the stock is reacting the way it is.”
Investors have been scrambling to assess the size of the financial hit that PG&E might suffer and whether the company had enough money to make it through the turbulence.
The company said it had exhausted its revolving credit and raised concern about liquidity and cash flow.
Some prominent investors may have been hit. Baupost Group, run by Seth Klarman, an investor with a reputation for spotting undervalued stocks, added more than 14 million PG&E shares to its holdings in the third quarter, according to securities filings, while Viking Global, the hedge fund of O. Andreas Halvorsen, bought 5.7 million shares.
Baupost and Viking declined to comment.