As Wildfire Season Nears, California Power Companies Get a Warning
After PG&E's bankruptcy and downgrades, S&P says more could follow if the state doesn't reform utility regulations.
After two devastating wildfire seasons, California’s largest utility is bankrupt -- and it might not be the last.
Faced with as much as $30 billion in liabilities for its equipment allegedly sparking wildfires in 2017 and 2018, Pacific Gas & Electric (PG&E) filed for bankruptcy protection last month. Now, S&P Global Ratings is warning that, thanks to extreme weather and weak protections for power companies in the state, more utility upheaval could follow.
“Without any regulatory reform, we view it as entirely possible that another electric utility could face a devastating wildfire during the 2019 wildfire season," wrote analysts Gabe Grosberg and Rebecca Ai. "Depending on the magnitude and severity, its board of directors could similarly determine that the best course of action would be to file for a voluntary bankruptcy before year-end 2019."
Grosberg and Ai went on to warn that, absent regulatory changes, S&P could downgrade the investor-owned utilities of Edison, Southern California Edison and San Diego Gas & Electric to junk status before the wildfire season starts this summer.
The regulation at issue is a California law known as inverse condemnation, which essentially holds utilities responsible for wildfire damage caused by their equipment -- whether the companies acted negligently or not. S&P says the law "creates new risks that were never envisioned when investor-owned utilities were established.”
State investigators are looking into whether PG&E equipment ignited the Camp Fire in 2018, the deadliest blaze in state history. The company is also being sued by victims of that fire and of other Northern California fires in 2017. A recent state report found PG&E's equipment was not involved in the deadly 2017 Tubbs Fire. But the state has previously concluded that PG&E did start 18 other, less destructive wildfires that year. As a result, S&P slashed the utility’s credit rating in January to junk status.
Utilities in California have been talking to state legislators about amending the law, says Barry Moline, executive director of the California Municipal Utilities Association. But lawmakers are unlikely to change it. “They recognize the conundrum that if you’ve done everything right, you still get blamed,” he says. “The concern they have is if they change law, then their constituents who may be damaged won’t be made whole after a disaster. And that probably is a stronger driver than the idea of sticking the payments to a utility.”
Adding to the financial liability pressure is climate change, which scientists say is creating hotter, drier conditions that fuel larger wildfires. For utilities, the risk is that their power cables and other equipment could inadvertently spark a fire. “What climate change does,” Michael Wara, an expert on energy and environmental policy at Stanford University, recently told The Economist, “is make the consequences of small errors much greater -- greater to the point where they threaten the financial viability of the utility.”
Utilities in other states are facing similar exposure to climate change. Florida, for example, has been throttled by hurricanes in recent years. But S&P pointed out that Florida utilities are responsible for recovering the costs of their own assets -- not everyone else’s.
Only Alabama has an inverse condemnation law similar to California’s. But it typically doesn’t face the same kind of flooding and wildfires that can put utilities on the hook for widespread damages.
In the meantime, Moline says utilities in the state are pushing lawmakers and others to help mitigate the potential effects of wildfires by reforming land use, forest management, and emergency evacuation and fire response procedures.
“This is one of those situations where you can’t point a finger at one place and say, ‘That’s the problem,’” he says. “The best solution will be reached when everybody drops their swords and sits down at the table and decides we all have to contribute to protect the public.”