California governor Gavin Newsom recently proposed to create a fund worth $21 billion that will help the state’s utilities settle claims arising from damages caused by wildfires, allegedly caused by these utilities. The catalyst behind the proposition is the crisis that renowned utility operator, PG&E Corp. (PCG - Free Report) is going through, with $30 billion in liabilities from wildfires.
Wildfire Situation in California
Wildfires in California have worsened in the past couple of years. Per a report by Reuters, since 2000, California has endured 15 of the 20 most destructive wildfires in the state’s history. The wildfire in 2018, also known as Camp Fire, was the deadliest and most destructive fire in California’s history. It killed dozens of people and burned down the town of Paradise and was the world's costliest single natural disaster in 2018.
German insurance company Munich Re said the Camp Fire alone caused losses of $16.5 billion.
Impact on Utilities
Per the doctrine of inverse condemnation, California utilities are responsible for wildfire damage caused by their equipment irrespective of whether the companies act negligently or not. This is why utilities in the Golden State have to bear the brunt of these devastating wildfires.
The state’s largest electric utility PG&E Corp. suffered the most. Cal Fire blamed the utility’s equipment for at least 17 wildfires in the state’s wine country in October 2017, including two blazes that resulted in 13 fatalities. Also, Cal Fire held PG&E’s electrical transmission lines responsible for the November 2018 Camp Fire. The company filed for bankruptcy this January, anticipating that it could face $30 billion in liabilities from the 2017 and 2018 fires.
Meanwhile, fire investigators blamed Edison International’s (EIX - Free Report) Southern California Edison (SCE) unit for the deadly Thomas Fire in Ventura and Santa Barbara counties. The unit is facing multiple lawsuits in connection with November’s Woolsey Fire, a deadly blaze, which destroyed more than 1,600 structures and damaged another 360 structures in LA and Ventura counties.
Moreover, Sempra Energy’s (SRE - Free Report) San Diego Gas and Electric (SDG&E) has been blamed for the state’s deadly wildfires in 2007. Notably, both SCE and SDG&E have seen their credit ratings being downgraded over wildfire concerns in the recent past.
Key Elements of the Plan
Per the Wall Street Journal, governor Gavin has outlined two possible models for the fund—one valued at $10.5 billion and another at $21 billion.
The $10.5 billion proposal will be structured as a revolving loan funded by extending a surcharge on electricity bills and securitizing revenues through state-issued bonds. The $21 billion proposal will include an additional insurance policy worth $10.5 billion, which needs contribution from the three major utilities of the state.
Will the Plan Aid Utilities?
Per New York Times, the governor’s proposal requires the utilities to spend $3 billion on safety improvements every three years. The improvements will include early warning and wildfire-detection systems and utility equipment upgrades to strengthen the electric grid against fires. The plan requires utilities to obtain an annual safety certification from the Public Utilities Commission.
We believe this funding, if approved, would benefit utility players in California, by protecting the companies from the sort of financial shock that resulted in PG&E filing for bankruptcy protection. Moreover, utilities will have to keep a regular tab on their grids and transmission lines, thereby lowering the chance of wildfire events on account of negligence.
However, there remain a few uncertainties related to this proposal. First, it is difficult to guarantee whether the $21 billion fund will be big enough to absorb the cost of future fires as a more devastating blaze can occur in the future. Second, the plan might put excessive burden on utility ratepayers in case utilities add too much surcharges on consumer bills.
Nevertheless, considering the fact that utilities are regulated in the United States, we can hope that the Public Utilities Commission will not allow any exorbitant imposition of surcharge. Considering the rapid climate change along with poor forest management, wildfires are inevitable. So, even if not enough, the fund, if created, would provide partial refuge to Californian utilities that are bearing huge wildfire related costs.
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