(Bloomberg) -- Utility giants PG&E Corp. and Edison International are one step closer to getting California’s help in covering the costs of increasingly catastrophic wildfires.
The state Senate recently passed a bill that would create a multibillion-dollar fund that power companies could borrow from to cover future wildfire liabilities. It would also make it easier for them to recover costs from their customers. The legislation, which California Governor Gavin Newsom has been pressing lawmakers to pass before a recess begins July 12, still needs the Assembly’s approval.
The bill is seen as especially crucial for Edison’s Southern California Edison and Sempra Energy’s San Diego Gas & Electric, both of which face junk ratings if the state fails to act. In creating a fund, state lawmakers are looking to keep another utility from going bankrupt. PG&E filed for Chapter 11 in January, citing an estimated US$30 billion in liabilities from deadly fires that its equipment has ignited over the past two years. The state is just a few weeks into this year’s wildfire season, and power lines are already sparking blazes yet again.
PG&E and Sempra said that they don’t have a position on the bill, though Sempra called it “a good starting point” in addressing the challenges that California face. The legislation would probably preserve SoCalEd’s investment-grade credit rating, Caroline Choi, the utility’s senior vice president of regulatory affairs, said at a hearing on the bill.
PG&E shares rose as much as 6.3%, while Edison’s stock was up 0.5% at US$69.64 in New York. Edison’s bonds were among the biggest gainers in the investment-grade market. Its most actively traded bonds, the 5.75% notes due 2027, were up more than 1 cent on the dollar to 109.375 cents, according to Trace.
“There is widespread agreement that the utilities should be reasonably healthy for several reasons, not the least of which is to assist the state in achieving its policy objectives,” said Paul Patterson, a utility analyst for Glenrock Associates. “PG&E’s Chapter 11 filing demonstrates that utility wildfire liability in California can be decidedly unhealthy for utilities.”
The bill, passed by the Senate in a 31-7 vote, would:
- Create one of two types of funds:
- A US$10.5 billion, “liquidity” fund that would provide a line of credit for utilities to pay for wildfire claims while they’re waiting to recover the costs from customers. It would be funded with state bonds;
- Or a larger wildfire insurance fund that would include the bonds-backed US$10.5 billion from the state and another US$10.5 billion in shareholder contributions from utilities. Edison and Sempra would have to agree to this larger fund, and PG&E would have to pay about two-thirds of the companies’ contributions. Evercore ISI estimated that PG&E’s offering would total more than US$4.8 billion upfront.
- Bar PG&E from accessing the fund unless it has settled claims from previous wildfires and exits bankruptcy by June 30, 2020.
- Require that utilities comply with fire prevention plans and tie executive compensation to safety performance to obtain a safety certificate.
- Require utilities to make US$5 billion in fire safety investments without earning a profit from them.
Some wildfire victims and environmentalists have fought the bill. Food & Water Watch described it as a “bailout” for utilities and called on lawmakers to delay their vote. “Shoving through legislation that bails out utilities on the backs of ratepayers is no solution,” the group said. “It reduces accountability and continues a profit-driven electricity system reliant upon on fossil fuels.”
State senator Jerry Hill, a longtime PG&E critic, said during an earlier hearing that he was in favor of the bill as it includes ratepayer protections and would benefit fire victims. The measure also has the backing of a major wildfire victims’ group, Up from the Ashes, labor unions and solar energy providers.
Balancing the interests of power customers, utilities, and wildfire victims was “like threading 10,000 needles while riding a unicycle backwards,” state Senate Majority leader Bob Hertzberg said ahead of the vote, but “the cost of doing nothing is too high.”