For a Look at PG&E's Fate After Fires, Watch San Diego Case

(Bloomberg) -- California regulators are about to vote on whether a utility can claw back costs related to wildfires in 2007. Their decision may set a precedent for PG&E Corp., which could face billions in dollars of potential damages from last month’s deadly wine country fires.

The California Public Utilities Commission will vote as early as Thursday on San Diego Gas & Electric’s request to recoup $379 million in costs from Southern California wildfires. Two judges have recommended rejecting the request by the Sempra Energy unit to pass along some costs to customers, saying the company didn’t properly manage its facilities.

The outcome could have repercussions for PG&E, which has seen its market value plummet by more than $7 billion since fire investigators said they were looking at its equipment as a possible cause of fires that tore through California’s wine country. Maximum total liabilities for those fires could reach $13 billion, according to JPMorgan Chase & Co.

“Given the recent, catastrophic wildfires, what happens with San Diego Gas & Electric may be seen as a precedent,” said Paul Patterson, an analyst for Glenrock Associates.

Under the California constitution, private utilities can be held legally responsible for damages from wildfires sparked by their equipment - even if they did everything by the book. The concept - known as "inverse condemnation" - is grounded in the idea that utilities can eventually pass along liability costs to its customers as part of the overall expense of providing electricity service.

State officials have yet to determine what sparked the Northern California fires and PG&E says it’s too early to speculate on the cause.

PG&E Chief Executive Officer Geisha Williams told investors earlier this month that if probes tie the wildfires to PG&E, the company would contest an effort to use inverse condemnation in courts to make it pay. If PG&E is found legally liable, regulators should allow it to bill customers for costs above its insurance coverage, she said. PG&E says 32 lawsuits related to the wildfires have been filed against the company, according to a filing Monday.

Too Early

PG&E has wildfire insurance of about $800 million. The utility referred questions about the SDG&E case and the issue of inverse condemnation to Williams’s comments.

PG&E and the state’s other big utility, Southern California Edison have lobbied regulators in support of SDG&E in its case. SDG&E says it disagrees with the proposed decision to block it from collecting costs. The utility said the fires in Southern California were due to circumstances beyond its control including extreme winds and objects such a cable wire coming into contact with its power lines.

The regulatory judges also failed to recognize that SDG&E incurred costs because of the application by the California courts of inverse condemnation, which assumes the utility can pass along liability costs through rates, said Colleen Windsor, a spokeswoman for SDG&E. Sempra took a $208 million after-tax charge in the third quarter due to the proposed decision.

Waking Up

Investors now are waking up to the realization that utilities in California may end up footing the bill for wildfire damages even if they aren’t negligent, said Jonathan Arnold, an analyst at Deutsche Bank AG. “It’s one of the things that has weighed on PG&E’s stock,” he said.

At a recent community meeting in Santa Rosa for wildfire victims, attendees weren’t sure whether PG&E was to blame for the fires and thus whether the company should be made to pay up. 

“It was the winds,” said Toni Tarabbia, a 64-year-old nurse whose house of 15 years was demolished. “It was a freak thing of nature.”

Halbert Stone, 62, a software test engineer whose house burned in a Santa Rosa subdivision, said it wouldn’t surprise him if PG&E was found to have played a role. Given PG&E’s duty as a publicly traded company to maximize profit for shareholders, “they’re going to cut corners,” Stone said.

PG&E says its doubled its tree trimming budget to about $400 million last year and the utility clears or removes 1.4 million trees a year to reduce fire risk.

Meanwhile, four state lawmakers say they’re concerned PG&E may try to get off the hook. They plan to introduce a bill in January that forbids California utilities from passing on wildfire costs not covered by insurance to customers if the companies were negligent in maintaining power lines.

California Governor Jerry Brown has said it’s too early to pin liability on any one party. If PG&E is found liable, Brown said during a Nov. 17 interview, “then the question is who’s paying for it? The shareholders or the ratepayers? That’ll be the story.”

--With assistance from Jeffrey Taylor

To contact the reporters on this story: Mark Chediak in San Francisco at mchediak@bloomberg.net, Esmé E. Deprez in Santa Barbara at edeprez@bloomberg.net.

To contact the editors responsible for this story: Lynn Doan at ldoan6@bloomberg.net, Stephen Cunningham, Jim Efstathiou Jr.

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