Pacific Gas & Electric’s stock price saw a sharp rebound on Friday, after California’s chief utility regulator told Wall Street analysts that the state would prevent the utility from losing access to funding needed to keep its grid safe and reliable.
“It’s not good policy to have utilities unable to finance the services and infrastructure the state of California needs,” California Public Utilities Commission President Michael Picker said in a Thursday interview with Bloomberg. “They have to have stability and economic support to get the dollars they need right now.”
Picker’s statements seemed to reassure investors that were selling off PG&E shares since the Camp Fire, the state’s deadliest in history, broke out last week. PG&E says it experienced an equipment malfunction near the origin of the fire. Shares rose from $17.75 on Thursday to $25.20 on Friday morning, a 35 percent gain, although still far from the $32 to $33 per share range prior to last week’s selloff.
In an interview with the San Francisco Chronicle, Picker expanded on the comments he made to Wall Street analysts: “They have to be financially healthy to be able to provide those goods and services that ratepayers need. If they can’t borrow money, if they have liquidity problems and they can’t do vegetation management, that’s a problem. That’s not good policy, to really let them get financially unstable.”
Of course, Picker’s statement also reflects an understanding of how PG&E’s critical operations would likely be managed through a potential bankruptcy process. In a Thursday statement, Picker noted that California has a legal imperative to keep PG&E’s grid safe and reliable, and that “an essential component of providing safe electrical service is the financial wherewithal to carry out safety measures.”
PG&E also managed to keep operating the grid through its previous bankruptcy after the state’s 2001 energy crisis — although at a cost of roughly $10 billion to its customers, and tens of billions of dollars to the state as a whole. But today, PG&E is much more closely intertwined with the state’s ambitious green energy and carbon reduction goals, with billions of dollars in renewable energy procurement, grid modernization and distributed energy integration investment at stake.
Despite the stock market rally, PG&E’s exposure to insolvency appeared to grow on Friday, after Moody’s downgraded its credit rating to near-junk status. Moody’s justified the move based on its own estimate that PG&E could face $10 billion in liabilities if it’s found culpable for last year’s massive Tubbs Fire, as well as its exposure to liabilities from the Camp Fire.
More than 600 people remain missing since the Camp Fire broke out in the Sierra Nevada foothills last week, with 63 confirmed dead, and more than 6,000 structures destroyed, including the entire town of Paradise. On Friday, PG&E told the CPUC that it “experienced an outage on the Caribou-Palermo 115 kV transmission line in Butte County,” in a location and at a time close to those identified as the “ignition” point of the Camp Fire.
“Moody’s negative outlook incorporates the view that additional financial stress for PG&E is likely,” the credit ratings agency wrote in a Thursday release. “Going forward, we will look for signs of additional legislative and regulatory support for the utility as it works through various legal processes with CAL FIRE and other state-run organizations. Moody’s still expects, however, that state regulators will look to ensure PG&E and other utilities remain financially healthy to help the state meet its ambitious renewable energy targets.”
PG&E announced Tuesday that it was withdrawing all available cash from its $3.1 billion in revolving credit facilities, a move that industry observers noted could be a precursor to filing for bankruptcy protection. PG&E said it made the move to give it “greater financial flexibility” and “for general corporate purposes, including upcoming debt maturities.”
While Picker spoke in support of keeping PG&E financially stable, he also pledged on Thursday to “open a new phase examining the corporate governance, structure and operation of PG&E, including in light of the recent wildfires, to determine the best path forward for Northern Californians to receive safe electrical and gas service in the future.”
This pledge of action through PG&E’s existing Safety Culture investigation proceeding, formed in response to the finding that PG&E negligence led to the deadly San Bruno natural gas pipeline explosion in 2010, was taken by some analysts and state lawmakers as an opening for pursuing a breakup of the utility. “We can’t continue to bail them out if they’re negligent,” State Sen. Jerry Hill, a Democrat representing San Bruno who has pushed previously to break up PG&E, told Bloomberg. “People talk about them being too big to fail, but I think they’re too big to succeed.”
Picker also addressed how the CPUC intends to use the state law SB 901, passed in September, to pursue financial remedies for PG&E. The law includes a provision for PG&E to issue bonds to pay for the costs of last year’s wildfires, backed by the ability to raise rates on its customers.
However, as Moody’s noted, SB 901 “does not address recovery for any potential liabilities related to wildfires that occur in 2018. The gap in coverage is a material credit negative, especially considering the magnitude of the Camp Fire, which may be the most destructive wildfire in California history.”
Picker told the Chronicle that “cleanup legislation” will be required to allow the CPUC to extend this debt option to PG&E for covering potential Camp Fire liabilities. But as Rob Rains, energy analyst at Washington Analysis, noted Friday, “although state lawmakers start a new session in December, there does not appear to be any meaningful work in progress to produce emergency legislation to address wildfires or regulatory liability issues that have greatly affected PG&E’s share price.”
SB 901 also provides for the CPUC to put any investor-owned utility through a financial “stress test” when it comes to wildfire liabilities, with the goal of limiting any financial payments to avoid undermining the utility’s ability to reliably and safely operate its grid. Picker told the San Francisco Chronicle that the CPUC would undertake that test after the Camp Fire is controlled.
However, the provisions of SB 901 that lay out this approach to balancing wildfire costs through a so-called “reasonableness review” applies to wildfires that occur after January 1, 2019, “which leaves a gap in coverage for the 2018 fires, a credit negative,” Moody’s noted.
