California Utilities Face Potential of Billion Dollar Wildfires Year After Year

By | November 13, 2018

California utilities are facing the very real possibility that billion-dollar blazes could become an annual occurrence, and they don’t know how to pay for them.

Shares of the state’s two largest utilities plummeted Monday after both PG&E Corp. and Edison International released reports suggesting their equipment may have started the deadly fires now burning at both ends of the state. PG&E was the worst-performing stock in the S&P 500 Index and trading in its shares halted briefly early in the session before closing down 17 percent. Edison slumped 12 percent.

Three of the worst fires in California history have occurred in the last 13 months. They’ve come as scientists blame global warming for altering the state’s water cycle, parching vegetation and causing hot and dry weather patterns to stall over the region, even during the state’s annual rainy season. Both PG&E and Edison are still adding up the billions of dollars in costs from deadly wildfires sparked last year by their equipment.

“What if this happens every year?” said Kit Konolige, a utilities analyst with Bloomberg Intelligence. “If you end up having to pay $15 billion a year, every year, for damages, clearly the utilities are not going to be able to deal with that.”

PG&E already faced up to $17.3 billion in potential liabilities for 2017’s Northern California wildfires, according to a JPMorgan Chase & Co. estimate. Those blazes killed 44 people. Susquehanna Financial Group estimated Monday that the Camp Fire, which wiped out the town of Paradise last week and has killed at least 29 people, could add as much as $5 billion.

A California law passed this year, known as SB901, allowed PG&E to use state-authorized bonds to pay off lawsuits from the 2017 fires and gave utilities a mechanism for recovering some wildfire costs starting next year, so long as the fires weren’t caused by company negligence. But it didn’t specifically address how to handle the costs of any fires their equipment might trigger in 2018.

The legislation also didn’t change how California applies “inverse condemnation,” a legal doctrine under which the state’s utilities can be held liable for any economic damages tied to their equipment, even if they follow all of the state’s safety rules.

This month’s fires, which chased more than a quarter-million people from their homes, may force the legislature to address that issue head on, several analysts said. The utilities pushed hard for a solution to the inverse condemnation problem during California’s last legislative session but didn’t get one.

“There is a lot of work we need to do to rebuild the regulatory compact to make sure we have financially healthy utilities,” Edison International Chief Executive Officer Pedro Pizarro, said Monday at an Edison Electric Institute financial event in San Francisco.

Should investigators determine that PG&E’s equipment triggered the Camp Fire, the utility’s actions in the days before the blaze may complicate any effort to deal with its costs.

Strong Windstorm

Last week, with a strong windstorm looming in the forecast, PG&E warned customers in the Sierra Nevada foothills that the company might need to shut off electrical lines to prevent fires. The company chose not to cut power after all, saying weather conditions didn’t warrant such a drastic step.

The Camp Fire broke out around 6:30 a.m. local time Thursday, about 15 minutes after one of PG&E’s transmission lines near the suspected ignition point experienced an outage, according to a report the utility filed with state regulators.

That could be significant, since this year’s legislation calls for letting California utilities share wildfire costs with their customers, provided the companies acted prudently in managing their systems.

For now, utility investors face the possibility of annual multibillion-dollar payouts for wildfires in a state that has spent most of this decade in a drought, with dry grasses and dead trees feeding the flames.

“These fires pose the biggest risk California utilities have ever faced — even bigger than Enron,” said Jaimin Patel, a utility analyst at Bloomberg Intelligence.

Even if regulators allow recovery for damages, they will face an increasing backlash from consumers. Damages from just one fire of $15 billion could cause a rate increase of up to 10 percent, Patel said. “With fires like this for a few more years, bankruptcy becomes a real possibility.”

Related:

Topics California Catastrophe Natural Disasters Legislation Wildfire

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