Many people in California are irate about PG&E. In 2017, downed PG&E power lines contributed to a wildfire that destroyed parts of Santa Rosa California. In 2018, downed PG&E power lines ignited a wildfire that destroyed the city of Paradise. In 2019, PG&E developed a plan to avoid wildfires that meant turning off electricity to hundreds of thousands of customers, and then a large wildfire ignited anyway which appears ready to destroy a couple cities in Sonoma County.
PG&E is California’s largest investor-owned utility company, and it covers a huge territory in Northern California sweeping from the high tech companies of Silicon Valley to the remotest parts of the Sierra Nevada Mountains. That PG&E is the identified culprit in large wildfires caused by downed electricity lines means high liability costs. As a result in PG&E entered bankruptcy to have an orderly process to paying off all debts including those claims. In that context various possible buyers are circling PG&E.
While it’s clear that PG&E’s mismanagement contributed greatly to these wildfires, the destruction of many properties, and many deaths, there’s a bigger issue. California’s ever-more-dangerous wildfires are happening in the context of global climate change. In California one effect of climate change has been years of drought creating tinder-box-dry forests waiting to be sparked into an inferno.
Climate scientists have warned for years of the possibility of increased wildfires due to climate change, among other disasters. With California’s wildfires we are seeing validation of those warnings. Dried out vegetation resulting from an increasingly hot/dry climate, is easily set ablaze, and the inferno can destroy whole cities.
PG&E’s plight points to a risk faced by many kinds of businesses. The future impacts of climate change are. As the climate changes it’s predicted all kinds of calamities will ensue. In many cases the blame will be pinned on business-owned equipment triggering an unwanted thing. In this case it is PG&E’s failing power lines, that PG&E hasn’t properly maintained, that fail and have caused wildfires that destroy whole cities. Businesses can and should be found liable for causing such destruction, because they should be held responsible for safe operation of their equipment. But, what company could possibly pay off the settlements for destroying a whole city, with 1000+ structures destroyed and 80 people (or so) killed?
As I write this it is late October 2019, and the Kincaid Fire in Sonoma County has grown to over 26,000 acres in size in 3 days. A “historic wind storm” is set to blow in tonight and officials have ordered the evacuation of Healdsburg and Windsor along with nearby areas, affecting over 50,000 people.
In other words, the risk to PG&E did not stop last year with the Camp Fire which destroyed Paradise just as it did not stop with the Tubbs fire in 2017 which destroyed parts of Santa Rosa. It will not stop with the Kincaid Fire this year, since it’s very likely that next year another fire (or two) will ignite and destroy another city.
Will the current system be able to survive the cost of predictable future impacts of climate change?
San Jose and San Francisco propose buyout of PG&E
The Wall Street Journal reports that San Jose Mayor Sam Liccardo see’s that “This is a crisis begging for a better solution than what PG&E customers see being considered today.” An earlier WSJ report says San Francisco offered $2.5 Billion for the portion of PG&E’s grid that serves that city.
San Francisco’s proposal
There’s nothing new about San Francisco advocating to buy out PG&E and run a municipal-owned utility. The city made a similar proposal 25 years ago, which I recall reading about in the SF Bay Guardian.
In January 2019, SF Mayor London Breed requested a study of whether SF could buy out PG&E’s control of the electrical grid in the city. The preliminary report was published in May 2019, and observes that “Purchasing PG&E’s electric assets would provide the City with full power independence. ” The preliminary findings show possible results of
- Durable and long‐term cost savings
- Timely and cost‐efficient modernization of the electrical grid
- Meeting the City’s priorities on affordability, clean energy, safety, reliability, workforce development and equity
The report cites a long history of friction between San Francisco and PG&E over the Hetch Hetchy reservoir (owned by San Francisco but located in the Sierra Nevada Mountains) and delivery of electricity to San Francisco from that dam. The Hetch Hetchy system is also the source of San Francisco’s water.
San Francisco is in a fairly unique position because it’s electricity is delivered from a remote location through transmission lines owned by PG&E. San Francisco’s position is that:
San Francisco’s reliance on PG&E to deliver power to many of San Francisco’s Hetch Hetchy Power customers has become highly problematic, notwithstanding the fact that the terms and conditions of the delivery service are established in a Federally‐regulated, open‐access, tariff. Because PG&E is a direct competitor in serving San Francisco customers, its strategy has been to leverage its ownership of assets to impose unnecessary and expensive requirements on the City.San Francisco
And the preliminary report outlines these options:
Regarding the offer made by San Francisco in September 2019, PG&E replied saying “We don’t believe municipalization is in the best interests of our customers and stakeholders. We are committed to working with the City and will remain open to communication.” A more detailed response is in a letter from PG&E to San Francisco.
San Jose’s proposal
According to Utility Dive, San Jose Mayor Sam Liccardo proposed converting PG&E “into the nation’s largest cooperative electric utility through a coordinated buyout among California cities and counties under the utility’s service.” PG&E responded saying it is not for sale.
Utility Dive doesn’t provide a link to a concrete proposal. But it is commonplace for cities and other governments to own utility companies.
PG&E CEO Bill Johnson is quoted saying to both San Jose and San Francisco that “Our financing strategy to emerge from bankruptcy does not envision selling off company assets. We believe we can resolve and fairly fund all claims and other items through conventional financial markets.”
PG&E’s debt problem
According to Utility Dive, PG&E has a reorganization plan relying on $34.4 billion of debt refinancing, and $17.9 billion to pay off damages claims.
According to Bloomberg News, PG&E is seeking to fend off bondholders seeking to take over the bankruptcy process. One issue seems to be that fire victims have priority in collecting money from PG&E over the bondholders.
The problem with the statement by PG&E CEO Johnson, and the accounting of current debts, is the debts we can predict PG&E will face due to predictable future disasters. It may be that PG&E can line up financing to pay off current debts. But….
Who would own PG&E in the face of future Climate Change impacts?
An opinion piece on Bloomberg by Liam Denning asks approximately that question. He notes the existing problem PG&E is facing, an already high debt load that is compounded with paying off fire victims over the last couple years. The article has a lot of details about PG&E’s debt load, and also notes that fire victims are to be paid before bondholders are paid, which is surely why the bondholders are trying to buy out PG&E on their own.
It is too early to know if PG&E will be found liable for the Kincaid Fire currently raging in Northern California as I write this (October 2019). But, given what’s known about how that fire started, it seems likely PG&E will be found liable.
The bigger issue Denning gets to, at the end of the article, is – what’s the future risk to PG&E given the process of climate change?
In my mind that’s the primary issue, and why was it shoved to the back of the article? There is a clear trend that California’s landscape is drying out, and it’s likely we will see wildfire after wildfire in California.
Therefore we can expect some of those wildfires to be started by downed power lines. PG&E’s plan for fixing susceptible power lines will take 10 years to replace or retrofit power poles and lines. Even if PG&E’s replacement is perfect and will never fail and never cause a wildfire, that is 10 years of time in which PG&E is at risk of being found liable for future fires.
What if PG&E does change ownership? Clearly responsibility for fires caused by those power lines will then rest with whoever becomes the owner of PG&E assets.
There is a huge risk of future immense liabilities. Where will the money come from to pay for that future destruction? Will the companies that are directly responsible be able to pay? Or will it fall on the shoulders of governments?
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