California utility goes for “cash conservation.” Investors, not just rate payers, to foot the bill.
Wednesday evening, two sleepy trading days before the long Christmas weekend, when no one was supposed to pay attention, Pacific Gas and Electric, the Northern California utility that is being investigated and sued for allegedly having triggered the wildfires in the Bay Area, “the most destructive and deadliest in our state’s history,” as the Department of Insurance had put it, announced that it would suspend its dividend.
PG&E shares [PCG] plunged 10% in after-hours trading. Thursday morning, shares plummeted 16.5% to $42.75. They’re now down 38% in total since the beginning of the wildfires that killed 43 people and caused still untold property and environmental damage, including $9 billion in insurance claims so far, with the tally likely to rise further. About three dozen lawsuits have been filed against PG&E.
PG&E’s announcement was terse:
On December 20, 2017, the Boards of Directors of PG&E Corporation (the “Corporation”) and its subsidiary, Pacific Gas and Electric Company (the “Utility”), determined to suspend quarterly cash dividends on both the Corporation’s common stock, beginning with the fourth quarter of 2017, and the Utility’s preferred stock, beginning with the three-month period ending January 31, 2018, due to uncertainty related to causes and potential liabilities associated with the extraordinary October 2017 Northern California wildfires.
In the accompanying press release, PG&E said:
No causes have yet been identified for any of the unprecedented wildfires, which continue to be the subject of ongoing investigations.
However, California is one of the only states in the country in which courts have applied inverse condemnation to events caused by utility equipment. This means that if a utility’s equipment is found to have been a substantial cause of the damage in an event such as a wildfire – even if the utility has followed established inspection and safety rules – the utility may still be liable for property damages and attorneys’ fees associated with that event.
The primary suspect is PG&E’s infrastructure and its maintenance. On October 8, when the wildfires started, heavy winds toppled power poles, transformers, and power lines. And there it gets complicated. On October 23, The Mercury News reported:
For the better part of a decade, California’s utilities have helped to stall the state’s effort to map where their power lines present the highest risk for wildfires, an initiative that critics say could have forced PG&E to strengthen power poles and bolster maintenance efforts before this month’s deadly North Bay fires.
A review of the mapping project by the Bay Area News Group shows that utilities have repeatedly asked to slow down the effort and argued as recently as July that, as PG&E put it, certain proposed regulations would “add unnecessary costs to construction and maintenance projects in rural areas.”
Cutting costs and maximizing shareholder value, at its called, for better or worse.
On October 31, as the plot thickened, KQED reported:
Pacific Gas and Electric has informed state regulators of at least eight instances in which trees or tree limbs brought down power lines in the hours when a series of devastating wildfires started in the North Bay earlier this month.
PG&E’s incident reports to the California Public Utilities Commission provide brief accounts of trees toppling in high winds in an area stretching from Potter Valley, in Mendocino County, to the outskirts of Napa late the night of Oct. 8 and early Oct. 9.
The exact location of the incidents is redacted from the documents, released Tuesday by the CPUC. But many of the incidents were located inside or near the perimeters of the wildfires. In most of the reports, PG&E said Cal Fire had taken possession of tree limbs and damaged electrical equipment as part of its investigation into how the wildfires started.
So Wednesday evening, PG&E added in its press release that suspending the dividends “is prudent with respect to cash conservation and is in the best long-term interests of the companies, our customers and our shareholders.”
On November 2, to soothe the frayed nerves of Wall Street after PG&E shares had plunged 25% already, CEO Geisha Williams told analysts that PG&E only carried $800 million in liability insurance for that blaze and that “our costs over and above insurance coverage should be shared by all customers.”
PG&E would seek a rate hike to transfer the costs to ratepayers rather than investors — which state Senator Jerry Hill, echoing the broader sentiment around the Bay Area, called “outrageous” at the time. “Where I draw the line is if it was shown that it was due to their negligence, as was the case in previous tragedies, then ratepayers should not be held liable for PG&E’s negligence.”
PG&E is already trying to get approval to stick ratepayers with the tab for the liabilities in excess of its insurance coverage associated with the Butte fire in September 2015 that ravaged parts of the counties of Amador and Calaveras.
But with the dividend suspension, PG&E has conceded that investors – the beneficiaries of PG&E’s now controversial cost cutting efforts – will pay at least part of PG&E’s liabilities arising from the wildfires.
The report by the California insurance commissioner is based on claims data as of December 1, supplied by over 260 insurance companies. Read… How Much Did the Fires in California Cost? Answers Emerge.
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.