Wildfire Liability Could Drive California’s Biggest Utility into Bankruptcy

California’s biggest power utility, Pacific Gas & Electric (PG&E), may be on its way to bankruptcy court as it faces billions of dollars in costs and multiple lawsuits for the role its equipment may have played in several massive wildfires in the northern part of the state.

A bankruptcy filing is one of the options PG&E is considering to avert financial ruin after its equipment “likely started several blazes,” Climate Liability News reports. The ongoing discussion raises the question “of who will ultimately pay for losses—particularly those from the recent Camp Fire,” the inferno that destroyed the town of Paradise and has now been identified by reinsurer Munich Re as the world’s costliest natural disaster of 2018, with losses above US$16.5 billion.

While the Camp Fire was raging, the New York Times reports, PG&E executives were at a resort on Maui, exhorting state legislators to allow them to pass their wildfire-related costs on to customers. “Realizing that their potential fire liability is large enough to bankrupt them, the utility companies are spending tens of millions of dollars on lobbying and campaign contributions,” the Times reports. “The utility companies acknowledge that they may bear some responsibility but say not all of it, because climate change and development in remote areas have made wildfires more destructive.” But “public interest groups say the utilities are effectively seeking a bailout for mistakes made by well-compensated executives.”

“There is not enough money in the State of California—whether it is public funds or investor-owned utility funds—to pay for the damages from wildfires of this magnitude if they continue to occur,” said UC Berkeley lecturer Steve Weissman a former administrative law judge with the state Public Utilities Commission.

In the end, “California’s utility customers may be on the hook for much of those costs” if legislators or the PUC PG&E to recover its losses with rate increases, CLN notes. “Last year, the state legislature passed a bill that permitted investor-owned utilities to pass on wildfire-related costs to consumers. The bill pertained to the 2017 wildfires and subsequent fires beginning in 2019, but it did not address fires occurring in 2018.”

PG&E could face liabilities up to $30 billion for the 2017 and 2018 wildfire seasons, not including fines, penalties, or punitive damages, with nearly two dozen lawsuits already filed against the company by Camp Fire survivors. “Insurance companies are also suing the utility, and the state’s attorney general indicated in a recent court filing that the company may be charged criminally, including for murder,” CLN states. “PG&E’s potential legal liability is heightened by the doctrine of inverse condemnation, which says a party can he held liable for property damage even if it was not negligent. Under California law, the doctrine applies to public utilities.”

Meanwhile, multiple reports have PG&E’s share value tanking, most recently after the Standard & Poors rating agency slashed its credit rating to junk status, Greentech Media reports.

Bloomberg notes the process of apportioning wildfire costs will be an earlier priority for incoming California governor Gavin Newsom as he takes office this month. “The prospect of a bankruptcy filing, even just as contingency planning, escalates the pressure on California’s politicians to make a decision on how much support to offer PG&E. There are several remedies the company could seek, ranging from a specific cap on wildfire liabilities to, at the less likely end of the scale, a change in the state’s peculiar ‘inverse condemnation’ principle.”

The dilemma for legislators is that “signaling support for PG&E carries the risk of being accused of bailing out a company whose equipment may have played a key role in fatal wildfires (investigations are ongoing),” adds opinion writer Liam Denning. “Yet letting the company slide into Chapter 11 carries its own costs and risks. One of the latter includes the possibility that PG&E’s power purchase agreements with renewable energy projects get rejected in a bankruptcy court. The falling cost of renewable power, and the desire to cut any costs as a way of mitigating the increases in power bills necessary to pay for the wildfire liabilities, could make this tempting for multiple parties in a bankruptcy situation. And that could hamper another important political goal in California: the push for zero-carbon electricity by 2045.”

The PUC has been calling for “structural reforms” to keep PG&E in operation, Denning reports, including the prospect of breaking it up into several smaller, regional entities. “Another possibility, selling off PG&E’s natural gas network, looks like a more useful outcome. This would simultaneously shrink the company’s scope and raise money to pay off its liabilities,” he writes. Greentech says the utility floated that possibility in an internal plan, titled Project Falcon, that was reported by National Public Radio last week.

“While PG&E’s gas business is also exposed to inverse condemnation, underground pipes don’t face the same wildfire-associated risks as wires do. Assuming annual earnings of about $500 million and a multiple of 20 times—at the low end of recent deals—the business could fetch at least $10 billion,” more than the company’s current market capitalization.

Ultimately, even with climate change driving up the intensity and frequency of wildfires, Weissman said California will have to get better at managing the risk. “Utility ratepayers cannot continue to cover these liabilities. Neither can utility shareholders. The only answer is to undertake an exhaustive effort to reduce the intensity of future wildfires by managing vegetation more effectively,” he told Climate Liability News. “We may need an agency to protect forested lands just like California has an agency to protect coastal resources. The state needs to make this a top priority.”