As $30B In Wildfire Claims Bankrupt PG&E, California Wonders Who Will Pay After The Next Conflagration

21 January 2019

USA -The Tubbs Fire hit Santa Rosa, California in October 2017; it burned 36,000 acres, destroyed 5,600 structures and killed at least 22. It was considered the worst fire in state history until 2018 when the Camp Fire broke out in Butte County. It burned 150,000 acres, incinerated 19,000 buildings and took 86 lives.

Both fires have been blamed in part on equipment owned by power utility PG&E, which last week missed an interest payment on its bonds and announced the intention to reorganize itself under Chapter 11.

Bankruptcy is the natural option, says Hugh Wynne, analyst with Sector Sovereign Research — it enables the utility to continue operating, to consolidate the many claims against it, and, most importantly, to sell assets free of those claims in order to raise cash. Wynne sees this as the beginning of a years-long restructuring of the ownership and operation of the California power grid — a restructuring that will end up costing PG&E’s current ratepayers an enormous sum of money not just to cover past fire destruction, but also to harden the grid against the fires to come.

Wynne, formerly with Bernstein Research, is a profound number cruncher. He figures that PG&E will manage to reduce its $30 billion in claims to $22 billion —still an enormous sum. How to pay that? Wynne sees PG&E’s only good option to be raising cash by selling generation and transmission assets, especially those in fire-prone territories — which he thinks could raise $18 billion.

PG&E doesn’t have the balance sheet to borrow enough to just write a check for its likely fire bill. To finance that $22 billion or so by selling long-term bonds at 4%, PG&E would need to convince regulators to let it hike electricity rates by 17% just to service the debt. Besides, the company’s borrowing costs are shooting up — investors have sold off debt, driving yields on some of PG&E’s 20-year bonds up to 8%. In a respresentative issue, PG&E’s 6.25% bond of 2039 last sold at 83 cents on the dollar, for a 7.95% yield, according to FINRA data. A year ago it sold at 127 cents.

Alternatively, perhaps PG&E could convince all its ratepayers to chip in equally — to the tune of $4,500 for each of 5.5 million customers, twice the average annual power bill.

The Public Advocates Office, a consumer watchdog arm of the California Public Utilities Commission, has already warned of a fight against any proposal that would force ratepayers to foot the bill for the recent fires, especially if it can be proved that they were the result of negligence on the part of PG&E. Attorney Jim Frantz says he is representing 1,600 “victims of PG&E negligence,” arguing that the utility should have learned from past wildfire disasters to impose better vegetation management, line protection, and to shut down power to an area when winds get too strong. The last time PG&E went bankrupt, after a power-trading scandal in 2001, ratepayers ended up on the hook for about $7 billion of $12 bllion in total liabilities.

PG&E has already practiced the “hardening” of its assets against fire risk. A month before the Camp Fire, in its November investor presentation, PG&E said it had proposed to regulators $6 billion in ratebase spending through 2023 on a fire threat reduction program including 600 hd cameras, 1,300 weather stations and “enhanced vegetation management” including a 12-foot radial clearance around poles. Other measures include insulating or burying transmission lines, and even the donation of emergency backup battery systems to nursing facilities with critical power needs.

Indeed, because of the political difficulty of imposing fire costs on ratepayers, Wynne sees PG&E selling the majority of its power generation and a large portion of its 125,000 miles of transmission and distribution lines, which could fetch about $18 billion in cash (fire losses would wash any tax liability). The gas-fired and renewable power plants will have ready buyers, but there’s not a huge universe of investors keen to own high-voltage transmission lines in fire zones. A good approach could be for PG&E to work with creditors and outside investors to establish a handful of new investor-owned utilities to own and operate PG&E’s riskiest assets.

Newly capitalized regional power utilities will work until a couple more strong fire seasons bankrupt them as well. Eventually the only solution will be to have an electric distribution system backstopped, insured, and maybe even run by the state of California itself. Already, California Gov. Gavin Newsom has been in discussions regarding how the state can help keep PG&E solvent. Good that Newsom at least is willing, because California taxpayers are only a couple bad fire seasons away from being the owner of last resort for PG&E’s northern territories. As Steve Bowen, director of forecasting at Aon Benfield, puts it, “these heightened losses put a further spotlight on the growing risk of peril around the world.”

After the resources of PG&E and its insurance policies are exhausted, who else is there to pay for damages but the state and ratepayers. Could California afford to own PG&E’s assets, and more importantly, its future fire liabilities? Annual state tax revenue of $135 billion couldn’t absorb too many $30 billion fire seasons.

There is one other way for California to pay for fire damage: the state could pass legislation that would address the principle of inverse condemnation. This is the requirement under law that compensation be paid whenever private property is damaged or taken — and it’s the reason why PG&E has to pay for the property destroyed by its likely equipment failure.

But aside from being protected by a long line of precedent and the Fifth Amendment, inverse condemnation is unlikely to be overturned in California, says Wynne — it would make much of the state uninsurable. To put the scale of the recent fire damage into perspective, the entire state of California pays $8 billion a year in premiums to ensure its property statewide. Insurance companies could insure more of the risk of wildfire damage, but would demand much higher premiums. Insurers Allstate, State Farm and USAA have already sued PG&E to recoup their clients’ claims. One small insurer, Merced Property & Casualty, went under.

There’s a lot to come as California’s power grid restructures to withstand a fire-prone future. Wildfires have bankrupted PG&E, and there’s a good chance they will bankrupt whatever new utility company emerges to buy the company’s assets. With private investors scared off, it looks to be just a matter of time before the state is forced to backstop the power business. At that point there won’t be any more shareholder value to tap in paying for the next conflagration. Whether that bill ultimately comes in the form of higher taxes, rates, premiums or fees, the person who is ultimately paying for these fires, dear Californians, will be you.

21. January 2019/by GFMCadmin