The compounding costs of California’s year-after-year wildfires are making it increasingly difficult for any party to absorb the expenses.
So observes Mark Cooper, Yale PhD, former Yale University and Fulbright Fellow, and Senior Research Fellow for Economic Analysis at the Institute for Energy and the Environment of Vermont Law School currently working on Energy Assessment.
PG&E electrical equipment, including power lines and poles, has been found to be responsible for at least 17 of 21 major Northern California fires of autumn 2017.
While the cause of California’s Camp Fire has not yet been determined, PG&E, one of California’s largest utilities, disclosed to the SEC on 9 November that an outage and damage to a transmission tower were reported in the area shortly before the fire started.
In the SEC Form 8-K of 9 November, PG&E declared that it may face billions of dollars in potential liabilities, far more than its insurance would cover, for the wildfires of 2018.
The Form 8-K reads, in pertinent part:
On November 8, 2018, a wildfire began near the city of Paradise, Butte County, California (the “Camp Fire”), located in the service territory of the Utility. The California Department of Forestry and Fire Protection’s (“Cal Fire”) Camp Fire Incident Report dated November 13, 2018, 7:00 a.m. Pacific Time (the “incident report”), indicated that the Camp Fire had consumed 125,000 acres and was 30% contained. Cal Fire estimates in the incident report that the Camp Fire will be fully contained on November 30, 2018. In the incident report, Cal Fire reported 42 fatalities. The incident report also indicates the following: structures threatened, 15,500; single residences destroyed, 6,522; single residences damaged, 75; multiple residences destroyed, 85; commercial structures destroyed, 260; commercial structures damaged, 32; and other minor structures destroyed, 772.
The cause of the Camp Fire is under investigation. On November 8, 2018, the Utility submitted an electric incident report to the California Public Utilities Commission (the “CPUC”) indicating that “on November 8, 2018 at approximately 0615 hours, PG&E experienced an outage on the Caribou-Palermo 115 kV Transmission line in Butte County. In the afternoon of November 8, PG&E observed by aerial patrol damage to a transmission tower on the Caribou-Palermo 115 kV Transmission line, approximately one mile north-east of the town of Pulga, in the area of the Camp Fire. This information is preliminary.” Also on November 8, 2018, acting governor Gavin Newsom issued an emergency proclamation for Butte County, due to the effect of the Camp Fire.
As previously reported, during the third quarter of 2018, PG&E Corporation and the Utility renewed their liability insurance coverage for wildfire events in an aggregate amount of approximately $1.4 billion for the period from August 1, 2018 through July 31, 2019. For more information about wildfire insurance and risks associated with wildfires, see PG&E Corporation and the Utility’s quarterly report on Form 10-Q for the quarter ended September 30, 2018.
While the cause of the Camp Fire is still under investigation, if the Utility’s equipment is determined to be the cause, the Utility could be subject to significant liability in excess of insurance coverage that would be expected to have a material impact on PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, and cash flows.
United States Securities and Exchange Commission, Form 8-K, filed by PG&E on 9 November 2018
Citigroup estimates that PG&E’s exposure to liability for at least 17 of 21 major Norther California fires that took place in autumn 2017 is $15 billion. Citigroup estimates further that if it is found responsible for the Camp Fire, PG&E could face another $15 billion in claims. This number could rise, the fire is as yet only partially contained.
PG&E’s customers, both business and residential, may find themselves responsible for covering the bill for the company’s liabilities through higher costs.
California state legislators took steps 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.
California Senate Bill 901, signed into law on 21 September 2018, applies to fires beginning in 2019, and to some that occurred in 2017.
The bill enables utilities to sell bonds to cover liability costs and pay them off over time through higher rates.
(14) The existing restructuring of the electrical services industry provides for the issuance of rate reduction bonds by the California Infrastructure and Economic Development Bank for the recovery of transition costs, as defined, by electrical corporations. Existing law authorizes the PUC to issue financing orders, to support the issuance of recovery bonds, as defined, by the recovery corporation, as defined, secured by a dedicated rate component, to finance the unamortized balance of the regulatory asset awarded Pacific Gas and Electric Company in PUC Decision 03-12-035.
This bill would, under specific circumstances, authorize the PUC, upon application by an electrical corporation, to issue financing orders to support the issuance of recovery bonds to finance costs, in excess of insurance proceeds, incurred, or that are expected to be incurred, by an electrical corporation, excluding fines and penalties, related to wildfires, as provided.
PG&E’s company shares dropped by more than 20 percent yesterday (Wednesday). More than half of its market value has been lost since late last week as the fires have spread.
Shares of other investor-owned utilities in California, Edison International (operated Southern California Edison) and Sempra Energy (owns San Diego Gas and Electric), dropped earlier this week.
California’s power supply is likely not to be at risk. PG&E could face bankruptcy if it cannot cover the liabilities it faces. Such a bankruptcy would eliminate shareholders’ equity and affect bondholder investments.
See:
“California Utility Customers May Be on the Hook for Billions in Wildfire Damage,” Ivan Penn and Peter Eavis, The New York Times, 14 November 2018
SEC Form 8-K filed by PG&E, dated 9 November 2018