PCG PG&E Corporation

By Katherine Blunt and Rebecca Smith 

Already paying some of the highest electricity prices in the country, customers of California's largest utility, PG&E Corp., could soon face large rate increases due to the state's catastrophic wildfires.

PG&E asked state regulators on Thursday to approve a plan to sharply increase revenues it seeks from customers over a three-year period, with a hike of 12%, or more than $1 billion, in 2020, growing to 24% by 2022. The company is currently authorized to seek $8.5 billion next year.

The company said the request reflected expected additional spending on wildfire mitigation and insurance costs, but didn't include the largest potential expenses it faces -- liability from lawsuits alleging it is to blame for sparking wildfires in recent years.

If regulators approve its plan, PG&E estimates that an average residential customer would pay an additional $10.57 a month for gas and electricity in 2020. It hasn't released estimates for increases in 2021 and 2022.

"As California experiences more frequent and intense wildfires and other extreme weather events, we must take...steps to protect our customers," Steve Malnight, PG&E's senior vice president of energy supply and policy, said in a statement.

PG&E declined to comment on any potential liability or on the prospect of wildfire-liability-related rate increases.

While the exact scope of PG&E's fire-related liability remains uncertain, the utility potentially faces tens of billions of dollars in claims. That alone would amount to an average power-bill increase of as much as 17% if the full total were passed on to ratepayers, according to one analyst's estimate.

The liability burden is more likely to be spread between shareholders and ratepayers, but it could weigh on the economy of a state that already has high living costs. Under a state law passed this year, PG&E can seek permission to turn much of the obligation for fire expenses into securitized debt, which businesses and homeowners would then pay off over several years through higher power prices.

PG&E customers already pay power prices almost twice the national average. Of the 10 largest investor-owned utilities, PG&E has the second-highest rates, averaging 20.06 cents a kilowatt-hour, according to the U.S. Energy Information Administration.

"There is no real scenario where customers are not staring down the barrel of some pretty significant securitization costs," said Height Securities analyst Katie Bays.

California authorities haven't determined whether PG&E equipment helped start last month's Camp Fire, which killed at least 86 people and destroyed about 14,000 homes, making it the state's deadliest fire ever. They also have yet to determine whether PG&E helped cause last year's Tubbs Fire, the second worst in state history, which killed 22 people.

But the state's fire investigator, Cal Fire, has found PG&E responsible for 17 major fires in 2017 that scorched 193,743 acres in eight counties, destroyed 3,256 structures and killed 22 people. Eleven of those cases have been referred to county district attorneys for possible criminal charges against PG&E.

The utility released new information this week indicating that one of its power lines near where the Camp Fire started Nov. 8 came apart immediately beforehand, and fell from the metal tower that held it aloft. Investigators removed some utility equipment from it and from another line with broken power poles for closer analysis.

The company faces a mountain of lawsuits seeking to make it pay fire-related costs and damages. California's legal framework makes PG&E financially responsible for damage from fires started by its equipment, even if the utility wasn't negligent.

Under state law, shareholders could be asked to shoulder some of those costs, but not so much that the burden would drive up the company's capital costs and threaten its financial health. PG&E is currently one to two notches above junk-bond levels.

Some analysts have estimated that PG&E's shareholders could bear $3 billion to $6 billion in costs before the company would have to seek assistance from its customers. The rest of the costs could potentially be securitized as bonds and paid off by customers.

Hugh Wynne, an analyst at Sector & Sovereign Research, estimated that PG&E could face as much as $26.5 billion in liability costs from 2017 and 2018 fires. Fully securitized, he estimates this could raise the utility's average power rate by 17%. He expects customers will likely bear at least half of those costs.

PG&E's system-average cost of electricity service rose more than 4% a year from 2013 to 2017, far faster than inflation, as the utility passed on the cost of California's ambitious renewable-energy expansion and other expenses to customers.

The utility's customers are already having difficulty paying their bills. PG&E electricity-service disconnections for nonpayment jumped 32% from 2013 to 2017, according to the commission.

In a statement, PG&E said it was committed to working with customers who have trouble managing their energy bills.

After the 2017 fires, the California Legislature passed a law in August that allows utilities to securitize fire-related losses as bonds to be paid off by customers.

Assemblyman Chris Holden, a Democrat from the Los Angeles area, is planning to introduce legislation next year to expand the recently passed securitization law to include 2018 fires, a move that could substantially increase the amount of liability costs eligible for recovery from customers.

The companies have to get permission from the California Public Utilities Commission, however, to issue bonds. The commission could rule that some costs are ineligible for recovery, particularly if they resulted from fires caused by utility negligence.

Not all consumers would be on the hook for any wildfire bonds. The legislature exempted roughly 1.2 million low-income residential accounts at PG&E, leaving the remaining four million accounts responsible for paying whatever sum is assigned to residential customers.

Still, consumer advocates are concerned the costs may be unbearable for some ratepayers. "Where's the stress test for the utility customer?" said Mark Toney, executive director of The Utility Reform Network, an advocacy group in San Francisco.

Big energy consumers are bracing for a rate fight with PG&E, arguing that they shouldn't be saddled with too much of the bill.

Lance Hastings, president of the California Manufacturers & Technology Association, said that however the costs are divided, the result needs to support "our state's manufacturing competitiveness and economic stability."

California has spread out massive energy costs to power customers before. Following the electricity crisis of 2000-2001, when power prices surged after the state passed a flawed electricity-deregulation law, leading to blackouts and the eventual bankruptcy of PG&E, the state sold billions of dollars in bonds that utility customers continue to repay.

Patrick McCallum, a Californian whose home was destroyed in the October 2017 Tubbs fire, said he accepts that consumers will end up bearing some wildfire costs but is more worried about having a utility that is starved for capital and can't make needed safety improvements.

Finding solutions to the fire problem, he added, may be even more expensive than the liability tab. "Hardening the grid will be more costly than wildfires," he said.

Write to Katherine Blunt at Katherine.Blunt@wsj.com and Rebecca Smith at rebecca.smith@wsj.com

(END) Dow Jones Newswires

December 13, 2018 22:21 ET (03:21 GMT)

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