Putting Out Fires – Is Restructuring The Only Future For PG&E?

As record wildfires in California  become the new normal, the crisis continues to deepen for Pacific Gas and Electric (NYSE: PCG). Amid rolling blackouts and an offer to distribute $13.5 billion in compensation to wildfire victims, the company’s stocks are down 60% in the past three months.

The utility is faced with a slew of allegations by wildfire victims and state regulators condemning PG&E of negligent maintenance practices. They argue that expensive but necessary transmission line management was ignored in favor of maintaining shareholder dividends. Lawmakers are now pushing for the company to be taken over by the state, or to be broken-up for city governments to run.

PG&E filed for bankruptcy in January following the deadly Camp Fire which left 85 dead and 153,000 acres of land razed in Butte County. Faulty transmission lines and lack of appropriate brush/tree trimming around critical equipment was later determined to be the cause.

The Kincade fire, which forced the evacuation of nearly 200,000 people and led to planned power shutdowns for around 2.8 million homes, has made the future of the bankrupt company increasingly bleak. PG&E already admitted to a malfunction in a 230,000-volt power line near the aptly named Burned Mountain, which investigators believe to be origin of the blaze.

While severe drought, record high temperatures, and strong winds cannot be ignored as a factor in California’s growing wildfire crisis, PG&E bears a significant amount of responsibility. For its role in the Camp fire, the troubled company owes around $30 billion in liabilities.

There are concerns that PG&E can’t exit bankruptcy with a viable plan to pay off wildfire claims by a state-mandated deadline of June 30, 2020. Subsequently local governments – backed by California Governor Gavin Newsom – have since expressed interest in owning pieces of the utility themselves in a push for ‘municipalization.’  The bankruptcy ruling combined with rolling blackouts across California (brought on by PG&E measures to perform much-needed emergency maintenance) caused a selloff of more than 50% of stock value since November 8.

What can PG&E do against  future fires

According to scientists, California has warmed at least 3 degrees Fahrenheit over the past century thanks to climate change. Fifteen of the 20 largest fires in California history have occurred since 2000. The increased frequency and intensity of wildfires in the state is capturing the attention of voters and lawmakers.

California has already passed Senate Bill 100 which obligates state utilities to acquire “100 percent of total retail sales of electricity [in California] to come from eligible renewable energy resources and zero-carbon resources by December 31, 2045.” State Republicans have lambasted the measure as dooming PG&E to dissolution, as such a target would require massive investments to achieve, resources that PG&E a) does not have or b) could be better used to improve resilience of the grid.

Fire prevention measures as suggested by state regulators, including undergrounding of existing lines, or grid hardening, could cost from $3 – $5 million per mile, according to PG&E. At that cost, the undergrounding of 80,000 miles of the utility’s most vulnerable high voltage transmission lines equates to $15,000 per PG&E customer, and would take over 1,000 years to complete at current rates. 

But tech solutions do exist.

Australia’s state of Victoria, whose electric grid was responsible for its fair share of dangerous brush fires over the past decade, is planning to install so-called power diverters. These Rapid Earth Fault Current Limiters (REFCLs) can detect the moment a power line hits the ground or strikes a tree, causing the device to drop the voltage to connected lines in under 40 milliseconds. Lower voltages mean lower chances of sparking wildfires.

San Diego Electric has already adopted synchrophasor tech which periodically monitors grid power and can immediately detect  and report broken lines to substation managers. This technology, however, has only been deployed on a limited scale. These tech solutions may be too little too late for the embattled utility.

The Kincade Fire burned through an area three times the size of San Francisco wiping out $ 1.2 billion in shareholder equity overnight. If the Burned Mountain power line turns out to be the definitive cause of the Kincade blaze, then California bankruptcy law dictates that the company will have to pay any fire-related damages upfront. Governor Newsom has already rejected the possibility of a bailout for PG&E which further increases the likelihood of a massive restructuring and shareholder backlash.

But it is not just PG&E taking the heat. California lawmakers have come under Federal scrutiny for their handling of the wildfire crisis. President Trump took to Twitter amidst the Kincade fire and threatened to cut off federal disaster funds while accusing Newsom of improper forest management. Newsom fired back on Twitter: “You don’t believe in climate change. You are excused from this conversation.”

The critique that the California Public Utilities Commission (CPUC) failed in its oversight role is a fair one, as the CPUC treated PG&E more like a corporate partner than a public good. The CPUC was unable to find that PG&E had been falsifying records of excavation sites intended to protect buried electricity cables and gas pipelines. As the WSJ reports, company workers claimed to be meeting obligations and deadlines when they were not.

Public and private sector reforms are badly needed to mitigate California’s future wildfire disasters, and so are advanced tech solutions. Human progress is a competition between natural threats and man-made solutions. Without concerted changes, hundreds more lives and billions of dollars of assets and property could be lost in the next fire – which is sure to come.

With assistance from Zuhair Khan