Following the Great Recession, when financial institutions “too big to fail” needed hundreds of billions of dollars to stay afloat, Congress required annual stress tests to ensure that large banks can withstand another economic crisis.
Wildfires are shaping up as a similar threat to California electric utilities, and state lawmakers are looking at stress tests as a safeguard for victims, ratepayers and utilities.
A framework crafted by a special legislative committee, and endorsed by North Coast legislators as well as a group representing North Bay wildfire victims, would allow utilities to borrow money at low interest rates to pay property owners for fire-related damage — if it was necessary to keep the utility from going under.
No one would benefit if PG&E, or one of the state’s other electric utilities, was forced into bankruptcy.
In a bankruptcy, fire victims would end up standing in line with other creditors, and almost certainly settling for a fraction of any debt. Meanwhile, efforts to stop power equipment from sparking fires would suffer. So would investments in renewable energy — a cornerstone of California’s plan to curb the effects of climate change, which include more frequent wildfires.
The risk is real. Wall Street rating agencies are warning that investors will flee PG&E and that its creditworthiness could be reduced to junk bond status barring some assurance that fire damages won’t threaten the company’s solvency. Other utilities could be downgraded as well.
The framework, which also addresses vegetation management and expansion of the state’s mutual-aid firefighting system, must be locked into legislation today to be considered by the state Senate and Assembly before they adjourn for the year at the end of this week.
Its fate depends in large part on whether it’s perceived as a bailout for the utilities.
As outlined by state Sen. Bill Dodd, the committee’s co-chairman, it isn’t.
The committee rejected pleas from PG&E and other utilities for relief from “inverse condemnation,” which holds them liable for property damage in wildfires caused by power equipment, even if the utilities weren’t negligent.
PG&E already set aside $2.5 billion in anticipation of damages from October’s wildfires in Northern California, and by some estimates, the total cost could exceed $10 billion. Southern California Edison is facing its own lawsuits seeking damages from December’s massive wildfires in Ventura and Santa Barbara counties.
The committee is recommending securitization — that is, selling bonds to help cover damage costs. Utilities would be allowed to use payments from ratepayers to pay off the bonds, which could reduce interest rates by 40 percent or more, and would cost residential ratepayers about $5 a year per $1 billion in bond debt.
But before passing on any expense to ratepayers, the California Public Utilities Commission would have to determine through forensic accounting how much of the cost PG&E, or another affected utility, could shoulder without risking bankruptcy or losing the ability to provide adequate services. Investors would be on the hook for any damages below that ceiling.
That is the stress test model, and the PUC has used versions of it in the past.
Utilities aren’t popular. We get it. The banks weren’t popular 10 years ago. But we need to keep the lights on, and we need to make fire victims whole. Supporters of the legislative framework, including Dodd, state Sen. Mike McGuire, Assemblyman Jim Wood and Up from the Ashes, a group representing fire victims, understand that keeping PG&E solvent — but accountable — helps ratepayers in the long run and fire victims in the short run.
Read all of the PD's fire coverage here