Another Utility Is One Wildfire Away From Ruin, No Fix in Sight

(Bloomberg) -- The warning couldn’t have been clearer.

As PG&E Corp. plunged into bankruptcy last month, S&P Global Ratings slashed credit grades almost to junk status for California’s two other big electric utilities, owned by Sempra Energy and Edison International, and said they could go lower.

The reason: inverse condemnation. Under the state’s view of this legal doctrine, utilities can be held liable for any fires sparked by their equipment, even if they follow every safety rule. With deadly blazes getting bigger and more common, California’s two remaining big power companies could be just one fire away from ruin. Now they’re urging lawmakers to do something about it, and fast.

“This is a really serious issue that could absolutely impair the health of utilities in this state,” Pedro Pizarro, Edison’s chief executive officer, said in an interview. “I don’t want to speculate about bankruptcy, but this is serious. And the current approach is just not sustainable.”

So far, a fix has proved elusive. But there are potential routes out of the morass.

Legislation

California lawmakers spent much of last year hunting for a solution. In August, they passed a bill designed to help utilities cover liabilities from a wave of fires in 2017. But it doesn’t offer aid for 2018 fires, a critical issue after November’s Camp Fire, the deadliest in state history. With PG&E’s equipment seen as a possible ignition source, the company estimated it was facing $30 billion in wildfire liabilities when it filed for bankruptcy.

California’s new governor, Gavin Newsom, assembled an advisory panel and told them to fast-track their efforts; he wants a report before July. Utilities and legislators are all offering ideas, but there’s no guarantee they’ll find a solution that will help the power companies without becoming a financial burden to the state, or raise the ire of ratepayers and voters.

The inverse condemnation doctrine is rooted in California’s constitution, so any direct changes would require a constitutional amendment, according to the state’s legislative counsel office. An amendment would need to win two-thirds majorities in both the state Assembly and Senate, and then be approved by voters. Given the public anger at PG&E, that avenue is closed, legislators say.

“There’s no sense of anyone planning to do that, at least in the Democratic caucus,” said state Senator Jerry Hill.

New Standard

The utilities say another option is for the legislature to change the way inverse condemnation is applied. Instead of using a standard of strict liability, the state could instead look at whether the utility acted reasonably in running its equipment. There’s a precedent for this: a 1997 state Supreme Court ruling that used this standard in a water-district case.

“We’ve actually looked at this really closely, and we believe that under the law, yes, the legislature has the power to change that standard,” Pizarro said. “We’re not looking to get off the hook here if we’re negligent. If we’re negligent, we should be held accountable.”

However, utilities already pitched this idea to Sacramento last year, with no success. Lawmakers said electric utilities and water districts were too different to make this a plausible connection.

Compensation Fund

Some legislators are focusing on alternative ways to compensate fire victims, easing the financial pressure on utilities.

Assemblyman Chad Mayes in January introduced a bill to create a California Wildfire Catastrophe Fund. Utilities would pay into the fund annually, and a public authority would oversee it. The money would back bonds, and utilities could use the proceeds to settle wildfire claims.

Many of the details need to be worked out, Mayes said. Can utilities pass on some of the costs to customers? If so, how much? Should the state seed the fund with money from its greenhouse gas cap-and-trade program? Still, Sacramento is committed to resolving the issue, “because we’ve got to keep the lights on,” he said.

“The idea is to pre-fund the disaster, not post-fund the disaster,” said Mayes, a Republican representing desert communities around Palm Springs. With the law passed last year, “we tried to post-fund the disaster.”

No Action

Of course, there’s always the chance the state could end up doing nothing at all. Nobody knows what Newsom will do, and when PG&E said it was preparing to file for bankruptcy, he took no public steps to stop it.

But inaction would have a significant effect on the utilities and their customers. The ever-present risk of more fires means the companies’ credit ratings could be headed toward junk status, making it more expensive, or even impossible, for the companies to access capital. And higher borrowing costs would almost certainly lead to higher monthly bills.

“The rating agencies are looking at California now and saying, ‘There’s just too much risk here,’ ” Pizarro said.

To contact the reporter on this story: David R. Baker in San Francisco at dbaker116@bloomberg.net

To contact the editors responsible for this story: Lynn Doan at ldoan6@bloomberg.net, Will Wade, Margot Habiby

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