California's PG&E Roiled as Regulator Raises Breakup Threat

(Bloomberg) -- After years of wildfires linked to power lines, a deadly explosion and accusations of falsified safety records, California utility owner PG&E Corp. is facing a deterioration of trust among state leaders.

The California Public Utilities Commission on Friday began a formal process to evaluate whether PG&E’s Pacific Gas and Electric utility should be split into separate electric and gas companies, carved into smaller regional subsidiaries or converted into a publicly owned company. The regulator also will look into less drastic steps, such as whether PG&E needs new board members or management.

California's PG&E Roiled as Regulator Raises Breakup Threat

The step came a day after a key state senator demanded changes to the board and executive suite.

“Enough is enough,” said Senator Bill Dodd, a Democrat of Napa, who had been considered friendly to the company after writing legislation that will help it pay for lawsuits arising from last year’s wine country wildfires, many of which were tied to its power lines. “We have to have a safety culture at PG&E.”

Scrutiny of PG&E is intensifying over suspicions that one of its transmission lines may have sparked Northern California’s Camp Fire, which killed 86 people last month.

Shares Tumble

PG&E said in a statement Friday that it recognized state regulators have serious concerns and that it needed to “re-earn” the trust of its customers. The company said that while it has made progress, it has more work to do.

“The company’s board of directors and senior management team have been actively exploring additional changes beyond the corrective actions and new programs we’ve implemented at the operational level,” PG&E said.

PG&E shares have lost more than half their value since the Camp Fire’s outbreak on concern that the company may face billions of dollars in liabilities if its equipment is found to be responsible. A state lawmaker is planning a bill to be introduced in January that would extend legislation that lets PG&E issue bonds to pay off costs tied to 2017 wildfires to include this year’s blaze.

That measure wouldn’t go far enough for some lawmakers to make PG&E accountable for its actions.

Self Policing

Trust from lawmakers and regulators is key because it’s largely up to PG&E, the state’s largest utility company, to police itself on safety issues. California, like many states, relies on utilities to make sure they meet the standards set by regulators. The companies conduct their own inspections. State regulators audit the results and make spot checks in the field to ensure compliance.

While most states use one standardized set of safety rules for power lines, poles and towers, California has its own. The utilities commission even tightened some rules following last year’s wine country fires, many of which were sparked by electrical lines hit by high winds.

The utilities commission doesn’t have the manpower to take a more proactive policing role. “The expenditure and amount of human labor it would take to do that is extreme,” Commission President Michael Picker said in a July legislative hearing on wildfire safety.

Relying on utilities to police themselves is akin to allowing children to set their own rules in a family, said Robert Bea, professor emeritus at the Center for Catastrophic Risk Management at the University of California at Berkeley.

“Do you want your children telling you what to do,” Bea said. “I wouldn’t.”

California's PG&E Roiled as Regulator Raises Breakup Threat

Some states have more involvement, using their own employees to inspect power lines. Nick Wagner, president of the National Association of Regulatory Utility Commissioners, said it depends largely on the way each state funds its regulating agency, as well as how many industries that agency must oversee and the physical size of the state.

“We really do our best to make sure that with the resources we’ve got, we’re making sure safety is adhered to,” said Wagner, a member of the Iowa Utilities Board.

San Bruno

In California, the 2010 San Bruno pipeline explosion forced the state to reexamine the ties between utilities and their regulators.

Critics in Sacramento accused both PG&E and the utilities commission of having a lax attitude toward safety -- and a cozy relationship with each other. PG&E was convicted in federal court on six criminal charges of breaking pipeline safety rules and trying to impede an investigation into the blast. Both the company and the utilities commission instituted reforms.

And yet, the commission this month accused PG&E of repeatedly falsifying records related to locating and marking underground gas lines from 2012 through 2017 -- years in which the company was trying to convince the public that it had cleaned up its act.

For state senator Dodd, that was the last straw. He called for the executive shakeup and “systemic change.”

“I don’t think all 120 legislators are focused on this, but let me tell you, there are a lot of lawmakers in the Bay Area that completely share this sentiment,” Dodd said in an interview.

Camp Fire

The calls for change have also intensified after the Camp Fire. PG&E reported that a transmission line on a tower near where the fire broke out unexpectedly went dark at 6:15 a.m. on Nov. 8. Fifteen minutes later, a PG&E employee spotted flames near the tower.

An aerial patrol that afternoon found that an insulator had separated from an arm of the tower, taking an energized “jumper” line with it. Later, PG&E employees also found a broken hook that had connected the insulator to the tower, with visible wear at the connection point.

California's PG&E Roiled as Regulator Raises Breakup Threat

PG&E gave the steel tower a visual inspection in September and a more thorough examination in 2014. The company hasn’t said whether its most recent inspection found any problems. The commission, for its part, only started its transmission auditing program in 2012 and, since then, has never audited the line that the tower supports, records show.

The commission said Friday that its review into the company follows “serious safety problems” with both the company’s natural gas and electric operations. The agency said it hadn’t drawn any conclusions on how it will act, and it will seek input from the public.

“This is not a punitive exercise,” Picker said in a statement. “The keystone question is would, compared to PG&E and PG&E Corp. as presently constituted, any of the proposals provide Northern Californians with safer natural gas and electric service at just and reasonable rates?”

©2018 Bloomberg L.P.