Bills, bankruptcy and blackouts: California’s latest power crisis

California has been confronted by three extraordinary, but interconnected crises: Widespread wildfires, financial issues for one of its major electricity suppliers caused by wildfire liabilities, and an unprecedented shut down of power to an estimated 3 million people to avert more financial pain and fire risk.

On the back of these events California’s Governor Gavin Newsom signed an Assembly Bill (AB) 1054 in July this year, that introduced major changes to the way the state deals with wildfires by creating a fund (the Wildfire Fund) to facilitate payment of wildfire-related liabilities, overhaul the cost recovery review for electric utilities by the California Public Utilities Commission (CPUC), and establish safety certification protocols for major power companies to participate in the fund[i] arrangements. Regional power utilities with fewer than 250,000 customer accounts can opt to participate, but are not required to.

In October Pacific Gas and Electric (PG&E), which is already going through Chapter 11 bankruptcy due to the liabilities from previous wildfires (2017 and 2018), shut power off to 1.1 million customers[ii] (with estimates of up to 3 million people being affected[iii]) to avoid incurring further liabilities in the case of a fire being started by its infrastructure. The so-called Public Safety Power Shutoff (PSPS) is the largest in Californian history[iv]. Despite this PG&E reported a transmission failure close to where a northern Californian fire, known as the Kincade Fire, began in late October, although it should be noted that the cause remains under investigation[v].

On the back of the extraordinary shutdown by PG&E, Californian regulators have now announced a formal inquiry into the practice of public safety power shutoffs by utilities during high risk periods, while Gov Newsom said he wanted to see the CPUC launch a “total reform of power shutoff rules and regulations. Utilities must be held accountable and be aggressively penalized for their overreliance on PSPS”[vi]. He also called for the company to offer rebates to residential customers ($100) and small businesses ($250) affected.[vii] PG&E announced on 1 November that it had restored power to customers who had had their power cut off on 26 and 29 October[viii].

AB1054

The Bill was driven by concerns about increased risks from catastrophic fires and power companies’ exposure to financial liabilities from fires caused by their equipment, which has created increased costs for ratepayers[ix].

To participate in the new fund, the state’s power utilities had to commit to making an initial contribution to the fund and then annual contributions. The initial amount is equal to US$7.5 billion and each company’s contribution reflects the proportion of their service area in high fire-threat areas, while the annual contribution for each business is equal to $300 million and based on the same Wildfire Allocation Metric. These contributions have to come from company shareholders and cannot be recovered from ratepayers. There are two options for power companies – the liquidity fund or insurance fund option within the overall Wildfire Fund, which are outlined below:

1. Liquidity Fund: If utilities do not elect to join the fund it will act as a line of credit that will pay eligible claims of third party damages from wildfires started by utility infrastructure if the power company meets certain conditions. The utility would then be able to recover through rates expenses related to fires that are determined by the CPUC to be “just and reasonable”[x]. The company then has to reimburse the Wildfire Fund for the full amount it receives from ratepayers.

2. Insurance Fund: If utilities commit to the fund, it can be used to pay the same eligible claims as under the liquidity fund option, but there is a cap on the amounts that the company has to reimburse the Wildfire Fund. Just and reasonable expenses do not have to be reimbursed, while for those that are not considered to be just and reasonable there is still a limit on how much the power company has to reimburse the fund, but no limit to costs associated with conduct that constitutes conscious or wilful disregard of the rights and safety of other or where the company doesn’t hold a valid safety certification from the CPUC.

Of the $21 billion in the Wildfire Fund, $10.5billion is being financed by extending an existing $2.50 charge on customers’ bills – this was set up after California’s 2001 energy crisis and was due to expire in 2020. The fee will now be extended for another 15 years[xi].

The law also mandates that utilities tie executive compensation to safety performance, invest $5 billion in safety improvements “without profit” and go through an annual wildfire safety review and certification process.[xii]

Any of PG&E’s existing liabilities from earlier fires are not covered by the new law, which has a 30 June 2020 deadline for participation in the Wildfire Fund.

A former head of the CPUC, Loretta Lynch, claimed[xiii] that AB1054 would leave utility customers holding the bag in three major ways:

• They would pay for all utility insurance premiums, the vast majority of the wildfire funds through a $10 billion bond and future reimbursements, and further unknown amounts due to the repeal of rules that limit utility cost recovery.
• Customers would pay for the $2.5 billion in profits that utilities supposedly forgo for safety investments “because it’s not actually their money; it’s ratepayer money that will be paid into the fund”.
• If the initial claims estimates are wrong, either customers will rescue the fund or it will run out of money without paying all claims.

Chapter 11

PG&E filed for bankruptcy protection in January when it initiated voluntary reorganisation proceedings under Chapter 11. It faces an estimated $30 billion in liabilities related to wildfires that caused widespread property damage[xiv] in the past two years.

Gov Newsom indicated last week that California may have to step in and take ownership of the company. “PG&E as we know it may or may not be able to figure this out,” Newsom told a news conference. “If they cannot, we are not going to sit around and be passive. If Pacific Gas and Electric is unable to secure its own fate and future ... then the state will prepare itself as back-up for a scenario where we do that job for them.”[xv]

He also said that the company needed to be completely transformed “culturally transformed, operationally transformed” with a greater focus on safety.

Time magazine reported that PG&E has long faced scrutiny for its role in wildfires in California. After last year’s deadly Camp Fire killed at least 88 people and decimated the town of Paradise, PG&E said that its equipment was probably what caused the blaze, according to the New York Times. This May, a Federal District Court judge ordered directors of the utility company to visit Paradise and create a new safety committee, the Times reported. A month later, the company reached a $1 billion settlement with California cities, counties and agencies for damage caused by the fire, the Wall Street Journal reported.

With its most recent shutdown of power, PG&E acknowledged that turning off power for public safety presents a real hardship for customers and communities, “but it is a necessary tool in combatting the risk of catastrophic wildfire sparked by electrical equipment during periods of extreme weather”[xvi].

Unlike San Diego Gas & Electric Co., PG&E doesn’t have the technology to localise its shut-offs and limit the outages to areas facing serious wildfire threats, which is why some urban areas outside fire zones lost power during the shutdown, according to the LA Times.[xvii]

The CPUC said that PG&E’s actions “created an unacceptable situation that should never be repeated,” according to CPUC president Marybel Batjer. “The scope, scale, complexity, and overall impact to people’s lives, businesses, and the economy of this action cannot be understated,” she said

Meanwhile, a federal bankruptcy judge ruled that PG&E no longer had the sole right to shape the terms of its reorganisation, opening a path in court for backers of a rival proposal. The competing plan was devised by a group of PG&E creditors that includes prominent hedge funds, and it is supported by individuals with claims against PG&E for wildfire damages[xviii].

The company is not new to bankruptcy proceedings and emerged from US Bankruptcy Court protection in 2004 after filing for Chapter 11 on 6 April 2001[xix] as a result of the California energy crisis of 2000 and 2001. The troubles started because regulations prohibited both PG&E and Southern California Edison, the state's other big utility, from raising electricity prices rates and when wholesale power prices soared dramatically, the utilities’ incurred serious debts.

[i] “Landmark Legislation Creates New Wildfire Fund and Overhauls California’s Approach to Catastrophic Wildfires”, Nossaman LLP, 15 July 2019

[ii] PSCS Update, PG&E press release, 1 November 2019

[iii] CPUC President Directs PG&E To Take Immediate Corrective Actions After Unprecedented Power Shut-Off Event In Northern California, CPUC press release 14 October 2019

[iv] ibid

[v] “California governor calls on Warren Buffet to purchase bankrupt PG&E”, Utility Dive, 29 October 2019

[vi] Governor Newsom On Major CPUC Investigation Into Utility Power Shutoffs, Office of Governor, 28 October 2019

[vii] “California governor calls on Warren Buffet to purchase bankrupt PG&E”, Utility Dive, 29 October 2019

[viii] PSPS Update, PG&E press release, 1 November 2019

[ix] https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB1054

[x] ibid

[xi] California legislature approves Wildfire Bill, Utility Customers to pay $10.5 Billion Into Fund, KQED News, 11 July 2019

[xii] Governor Newsom On Major CPUC Investigation Into Utility Power Shutoffs, Office of Governor, 28 October 2019

[xiii] Open Forum: Proposed wildfire fund a reckless giveaway that echoes the Enron crisis, Loretta Lynch, San Francisco Chronicle, 8 July 2019

[xiv] https://www.utilitydive.com/news/california-governor-calls-on-warren-buffett-to-purchase-bankrupt-pge/566038/

[xv] “Governor says California could take over PG&E after wildfires linked to utility”, The Guardian, 3 November 2019

[xvi] PSPS Update, PG&E press release, 1 November 2019a

[xvii] “For Gov. Newsom, PG&E power outages offer political rewards – and some big risks”, LA Times, 12 October 2019

[xviii] “PG&E Banruptcy Judge Gives Outside Group’s Plan a Chance”, New York Times, 9 October 2019

[xix] “PG&E; Ends 3 Years Under Chapter 11”, LA Times, 13 April 2004