JUICE: The Long Shadow of the Energy Crisis

27 Nov 2018

Massive utility liability from the recent devastating wildfires potentially sparked by electric lines puts the companies, politicians, regulators and ratepayers between a rock and a hard place.

California regulators and lawmakers are working to keep Pacific Gas & Electric and Southern California Edison from being financially overwhelmed by claims resulting from the tragic toll on lives and property.

However, public decision-makers’ efforts to keep the two companies from going into bankruptcy court face numerous challenges. Key among them is to placate investors, while avoid being seen as bailing out utilities, particularly with a new governor coming in whose seen as a utility skeptic compared to Gov. Jerry Brown. Another factor is that a new crop of lawmakers will head to Sacramento to be sworn in Dec. 3 and their position regarding utility liability is unknown.

Meanwhile, next Monday Assembly Energy & Utilities Committee Chair Chris Holden (D-Pasadena) is expected to introduce legislation that seeks to keep the necks of the two utilities above the flood of red ink. His bill, which is not yet numbered, is to ensure the enacted wildfire protective legislation, SB 901 that goes into effect on Jan.1, applies to wildfire liability this year for PG&E and Edison.

Under SB 901 by Sen. Bill Dodd (D-Napa), the California Public Utilities Commission can approve utilities’ issuance of bonds to cover wildfire liability costs not covered by insurance. The revenue bonds are to be paid back by ratepayers. The catch is that the SB 901 bond provision applies to fires in 2017, 2019 and going forward. It does not include bond recovery for liability for the 2018 fires, including the Camp Fire, which was the most destructive conflagration in the state to date.

Assuming the utilities issue bonds to cover huge wildfire claims, what kind of securitization will bond buyers demand? Will the costs be too high, thus forcing the two utilities into bankruptcy court?

In 2001, PG&E went into voluntary bankruptcy. That was after it sued the CPUC in federal court to recover a claimed $9 billion in losses from the crisis. The lawsuit, however, was a big expensive gamble. As it was, the bankruptcy ended up being a messy, protracted and costly legal and political fight. It included a struggle over the disposition of valuable utility assets.

Former corporate head Robert Glynn tried to spin off the utility’s hydropower assets and Diablo Nuclear plant into an unregulated state subsidiary. In Sacramento, a state lawmaker, former Assemblymember Fred Keeley, attempted to turn PG&E’s hydro assets into state property in return for bailing out the company.

There also was an effort to have the state buy PG&E’s and Edison’s transmission lines and use the transmission access fees to pay off the debt.

Three years after the state’s 2000-01 energy crisis, a big deal was reached between PG&E and The Utility Reform Network, which was approved by the bankruptcy judge Dennis Montali. In December 2003, a regulatory version of the reorganization plan was okayed by the CPUC. It saddled ratepayers with billions of dollars of costs, including a $2.2 billion fictitious “regulatory asset” and an 11.22 percent return on equity for PG&E for nine years, raising it more than 1 percent.

PG&E’s claim of $12 billion in debt was not challenged because of a court gag order by Judge Montali. In addition, its parent company, PG&E Corp., was allowed to keep the $5 billion the utility initially reaped at the start of deregulation.

Edison did not descend into bankruptcy after the deregulation crisis, avoiding a costly legal and public relations migraine.

Today, the utilities’ financial situation is more dire than it was during the energy crisis. Not proactively shutting off power in the high risk zones won’t help. Also back then, utilities had legal recourse and could seek to recover ill-gotten gains by firms like Enron. However, they can’t sue Mother Nature.

Holden says his bill’s aim is to prevent the utilities from going bankrupt in order to protect ratepayers. But,  it is now an open question as to whether legislation and/or regulatory efforts can prevent bankruptcy.

Liability for this year’s fires will likely be in the many billions of dollars for PG&E and Edison. To date, we know that at least 85 deaths were caused by the Camp Fire in Butte County, nearly 13,700 homes were destroyed and another 462 damaged, plus 528 businesses wrecked in PG&E territory. The Woolsey Fire in Ventura County killed three people, destroyed 1,500 homes, including those of celebrities, and another 341 structures were damaged in Edison territory.

The first round of class actions suits against the two investor-owned utilities already has landed in the courts.

The stock value of both utilities has fallen. PG&E stopped paying dividends at the end of last year after the Wine Country fires in 2017, though Edison is expected to keep paying dividends. PG&E was downgraded by Moody’s, raising its borrowing costs, which will be paid by ratepayers.

Will regulatory assurances be enough to entice investors to buy billions of dollars of ratepayer-secured bonds?

Mike Picker, the California Public Utilities Commission president, hopes so. Earlier this month, he announced two new rulemakings to bolster the utilities’ standing on Wall Street. One directs that a utility’s financial status be weighted when evaluating rate recovery requests. The other is a new phase in the CPUC’s investigation into PG&E’s safety culture. It is supposed “to determine the best path forward for Northern Californians to receive safe electrical and gas service in the future.”

Bets are that legislation will be needed to placate potential bond investors.

But will that be sufficient to keep one or both utilities from filing for bankruptcy, putting their fate in the hands of a bankruptcy judge? Probably not.

Thus, bids to gain public ownership of utility assets that weren’t ultimately pursued during the crisis may be the solution. Given the utilities’ grim prospects compared to the state’s good credit rating, financial depth and lower borrowing costs, public ownership of utility assets should be seriously re-explored.

State ownership might be the most economical means of handling what appears to be crushing liabilities for the more financially limited utilities.

Elizabeth McCarthy

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