PG&E Profits Going Up In Smoke

Bailout or bankruptcy: For Pacific Gas & Electric Company, one of the nation’s largest investor-owned public utilities, that’s a question that may soon have to be answered.

As investigators continue sifting through the ashes of California’s most destructive wildfire seeking the cause of a conflagration that incinerated the small Butte County community of Paradise, PG&E has emerged as the prime suspect since reporting problems with two of its high voltage transmission lines during a storm on the morning of Nov. 8 in the area where the fire is believed to have started.

Already reeling from huge financial liabilities incurred when it blew up a San Bruno neighborhood in 2010 and burned down part of Santa Rosa last year, if the utility is ultimately determined to be responsible for igniting Butte County’s Camp Fire, the financial impact could be devastating for both the utility and its holding company, Pacific Gas & Electric Corporation.

With the political, legal and regulatory heat generated by the 2017 and 2018 wildfires sending PG&E’s stock price into freefall and evaporating stockholder dividend payments possibly for years to come, the utility now faces the most perilous financial challenge in its 113-year history. Already PG&E is estimated to face more than $15 billion in claims arising from the 2017 wildfires. If investigators determine the utility was responsible for the Camp Fire that amount could easily double.

What direction the utility decides to go will be decided behind closed doors at PG&E’s San Francisco headquarters where company directors must grapple with the predicament of how to minimize potential fire-related liabilities that could ultimately exceed the company’s net worth and at the same time keep major stockholders happy.

The utility has traveled both routes during the past two decades and each resulted in increases on monthly electric bills sent to more than five million addresses in Northern California and the Central Valley.

Whatever path PG&E chooses – and both strategies have proved beneficial to the company in the past — public records and regulatory filings suggest the well-being of stockholders seems to be the utility’s paramount consideration.

“PG&E regularly uses the threat of bankruptcy to extract what it wants from regulators and lawmakers,” said Mindy Spatt of The Utility Reform Network (TURN), a consumer advocacy organization that represents ratepayers in proceedings before the California Public Utilities Commission. “For customers, the end result of PG&E’s previous bankruptcy reorganization was higher rates, the same result we’ll see if P&GE gets a bailout.”

Since 2004, when the utility emerged from bankruptcy prompted by the energy deregulation crisis of the 1990s, the utility has been a cash cow for its holding company and sole stockholder since 1997. The holding company, in turn, has several hundred shareholders who own its publicly-traded stock, including huge investment funds such BlackRock and the Vanguard Group.

Over the past 13 years PG&E Corporation has paid out nearly $9 billion in common stock dividends — including $1 billion of those payments coming during the first nine months of 2017 before dividends were suspended after the utility calculated its potential liability for the Wine Country fires. Nearly 97 percent of all dividends paid to holding company stockholders since 2005 came from dividends paid by the utility to its parent company with profits generated from ratepayers.

Millions for Arm-Twisting

During the same 13-year period the utility and its parent spent $28.4 million on Sacramento lobbyists and $4.4 million to lobby the California Public Utilities Commission (CPUC) for the utility’s seemingly endless requests to increase rates, the most recent this month when the utility asked the CPUC to approve a rate hike that would raise customer’s monthly bills by an estimated $10.57.

Of the $6.1 million paid for lobbying during the three-month period from July through September of this year alone, PG&E reported $4.4 million was directly related to “payments for grassroots and other advocacy related to state legislative proposals concerning improved wildlife preparedness and response.” Lobbying expenditures for the last three months of this year won’t be reported until January, but are expected to be significant in the wake of the disastrous Camp Fire.

The utility has not disclosed how many additional millions were spent on its “Building a Better California” advertising campaign that’s flooded television and newspapers during the past year.

Arm-twisting at the state capitol has been money well spent. In September Gov. Jerry Brown signed into law a bill championed by Sen. Bill Dodd, who represents an area devastated by 2017 wildfires, that provides PG&E with financial relief for those fires and any wildfires occurring in 2019. Many PG&E critics have characterized Dodd’s bill as a blatant utility bailout.

“Apparently PG&E’s lobbyists are welcome in Sacramento despite PG&E’s felony conviction for lying to federal authorities, and the obvious incongruity of spending millions to convince lawmakers you are broke and in need of a bailout,” says TURN spokesperson Spatt. “This [coming] year we hope legislators will reject the company’s self-serving corporate agenda and focus on protecting consumers.”

Besides mandating electric utilities to assess and report any significant risks its electrical lines pose for starting catastrophic wildfires, Dodd’s legislation permits PG&E to utilize state-authorized bonds to pay off more than 200 lawsuits filed against the utility after the 2017 wildfires and pass some of those costs along to ratepayers if the CPUC found PG&E had engaged in poor equipment maintenance practices before the fires started.

If the CPUC determined PG&E hadn’t conducted proper maintenance, the company and its stockholders would have to pay the costs. But under any circumstances there would be a limit to how much the utility would pay out of its own pocket. Dodd’s bill requires the CPUC to conduct a “bankruptcy stress test” to determine just how much of a financial hit the utility could withstand, with any costs beyond that being billed to customers.

At the same time Brown signed Dodd’s bill, he vetoed a bill by State Sen. Jerry Hill of San Mateo County that would have prohibited PG&E from charging electric ratepayers for fines, penalties or uninsured costs resulting from any negligent behavior by the utility, a protection that PG&E gas customers already enjoyed. The governor vetoed the bill saying it was “inconsistent” with Dodd’s legislation.

Legal Largesse

Additionally the utility has paid hundreds of millions for lawyers to pursue its interests in courtrooms and before regulatory agencies. According to CPUC disclosures between 2015 and 2017 the utility paid $62.5 million in compensation to its own staff attorneys and another $302.6 million to outside lawyers and law firms.

Legal expenses appear to have paid off in some cases. For example, a month before the devastating Camp Fire ignited, the utility signed an agreement with Butte County District Attorney Michael Ramsey related to the Cherokee, Honey and LaPorte fires of October 2017, infernos that collectively burned 14,718 acres and destroyed 80 structures. In return for paying $1.5 million to fund an enhanced fire prevention program operated by the county fire department, PG&E received a guarantee the district attorney would not commence or participate in any civil or criminal actions against the utility.

In announcing the agreement Ramsey said it didn’t constitute any admission of wrongdoing by PG&E and specifically prohibited the utility from passing along the costs to ratepayers.

“PG&E has spent a vast amount on lobbying and on its lawyers,” Hill told Patch. “If [it] had spent those millions upon millions of dollars on safety, equipment maintenance and vegetation management, Northern Californians would not have to live in fear of running for their lives in the next wildfire.”

For its part, PG&E continues to maintain “safety is the foundation of, and our highest priority, in serving customers every day.” In requesting CPUC approval for rate increases last month, PG&E said “nothing is more important than keeping our customers and communities safe.”

Much of that safety is based upon proper vegetation management — the trimming of trees and removal of underbrush near power lines. The most recent CPUC data shows PG&E spent $1.2 billion on vegetation management between 2011 and mid-2017. That amount was $55 million less than the utility had asked the CPUC for permission to spend.

Will Bailouts Continue?

Since Dodd’s legislation didn’t address 2018 wildfires, including the inferno that destroyed Paradise, what action lawmakers will take during the new legislative session is uncertain, although one assemblyman is considering the need for additional PG&E relief.

Assemblyman Chris Holden, whose district encompasses Pasadena, Monrovia and the heavily-forested San Gabriel Mountains, is exploring options for additional legislation because he believes there were gaps in Dodd’s legislation.

“Last year’s wildfire legislation was just a first step toward addressing wildfires in our state,” Holden said, indicating he’ll be working with fellow lawmakers to revisit the issue in the new legislative session. “Our priority will be on maintaining reliable and affordable utility service, not on the fate of any utility provider.”

One area state lawmakers are expected to avoid in any new utility-related legislation is inverse condemnation, the legal theory that if a utility’s equipment is determined to have substantially contributed to the damage caused by wildfires or other events, despite the fact accepted equipment inspection procedures and safety guidelines were followed, the utility could still be held liable for any property damage and related attorney fees.

California is one of only a few states where inverse condemnation has been applied to utilities under a section of the state’s constitution requiring “just compensation be paid when private property is taken or damaged for public use.”

Anathema to all California electric utilities, PG&E says the state’s application of inverse condemnation has limited the number of companies willing to provide it with wildfire insurance coverage, resulting in much higher premiums charged by those who will provide coverage.

Fire insurance isn’t just a problem for the utilities. Home and business owners who’ve suffered losses in the state’s rash of wildfires are also faced with not only negotiating payouts by insurance companies but having their fire insurance coverage cancelled altogether.

Claims from Camp Fire victims have already resulted in the near insolvency of one small insurer — Merced Property & Casualty Company – that was taken over by the state Department of Insurance last month.

Serial Firebug

PG&E is no stranger to wildfires or other catastrophes – and has criminal convictions spanning more than a quarter-century to prove it.

In 1997, the utility was convicted on 739 misdemeanor counts of criminal negligence for failing to trim trees near its power lines in the Sierra foothills of Nevada County, resulting in a 1994 wildfire that destroyed 12 homes and a schoolhouse in the historic gold mining community of Rough and Ready. During the trial prosecutors presented testimony that alleged PG&E had diverted millions of dollars from its tree trimming program to shareholder profits.

Previously, in 1990 and 1995 PG&E had pleaded no contest to similar charges in both Nevada County and Sonoma County.

In January 2017, PG&E became a convicted felon when it was fined $3 million by a federal judge on six criminal charges related to the devastating 2010 San Bruno gas pipeline explosion that killed eight people and destroyed a neighborhood. Two years earlier, the CPUC had levied a $1.6 billion penalty on the utility for causing the explosion due to shoddy maintenance and poor record-keeping.

Last August, PG&E was convicted on five charges of violating federal pipeline safety regulations and one charge of obstructing a National Transportation Safety Board investigation.

The CPUC itself was caught in the fallout of the San Bruno explosion when criticism of the Commission by Hill and others resulted in revelations of its long-standing cozy relationships with those it regulated and improper communications between PG&E and former CPUC president Michael Peevey, who ultimately stepped down.

Problems Ongoing

But gas pains continue to plague PG&E. The CPUC announced Dec. 14 it is considering action against the utility for what it says “are systemic violations” of rules designed to prevent damage to gas pipelines during excavation activities over a five-year period from 2012 through 2017. The CPUC ordered PG&E to take immediate action to insure it’s properly marking the location of pipelines so third parties, such as construction workers, don’t damage them during excavations.

“Just last week, the CPUC opened an investigation of PG&E for allegedly falsifying records from 2012 through 2017 in a program to locate and mark natural gas distribution pipelines so that construction workers don’t accidentally dig into them,” said Hill, a member of the State Senate’s Energy, Utilities & Communications Committee and chairman of its subcommittee on Gas, Electric & Transportation Safety.

“With the safety performance of PG&E’s electric and gas systems again under scrutiny, it is time for a hard look at whether there are viable alternatives to providing these services in a safe, efficient and cost-effective manner,” said Hill, a member of the state senate’s Energy, Utilities & Communications Committee and chairman of its subcommittee on Gas, Electric & Transportation Safety. “Clearly PG&E has not learned from its past — not from the 2017 fires or from the 2010 explosion that leveled a San Bruno neighborhood.”

PG&E responded to the CPUC action in a statement released Dec. 16, saying it recognized “the serious concerns” raised by regulators regarding its failure to comply with certain reporting requirements.

“We did not live up to our commitment to accurate reporting and record-keeping in this case,” the utility said. “While these events were unacceptable, PG&E took and continues to take several critical corrective actions to meet our regulatory requirements.”

Among those actions, said the utility, were adding more personnel, improving training and utilizing independent consultants to audit and review the process of locating and marking underground pipelines. PG&E also said it was making organizational changes that would include “some leaders no longer being with the company,” but providing no further details.

Other programs the utility has proposed and that are being studied by the CPUC include procedures for cutting off power in areas of high fire danger during severe storms.

Consumer advocates are taking a wait-and-see attitude.

“Customers pay their bills every month with the expectation of safe, reliable service in return, but PG&E doesn’t appear able to deliver that,” says TURN spokesperson Spatt. “There’s no justification for passing the costs of corporate neglect and mismanagement to customers, who have no control over PG&E’s operations, and don’t share its profits when it is profitable.”