Comprehensive reform to address mounting wildfire costs is essential if California utilities are to maintain capital spending for electric infrastructure to support reliability and environmental goals, PG&E Corp. officers told financial analysts.
California's strict liability standard under inverse condemnation is unsustainable, and the state legislature must provide solutions before the end of August, PG&E Corp. CEO and President Geisha Williams said July 26 during a second-quarter earnings call.
"We cannot be put in a position of being held strictly liable for damages without the ability to recover costs," Williams said.
As long as flawed policies remain in place, the company must weigh whether it can support its current level of capital expenditures for subsidiary Pacific Gas and Electric Co., or PG&E. "For example, we may need to pull back on some of the clean energy projects that are so critical to our state's ability to meet its clean energy goals," Williams said.
Gov. Jerry Brown's proposal to limit utilities' need to pay for wildfire damages when they are not at fault is constructive, but it is not sufficient because that is just one part of a comprehensive set of reforms lawmakers must quickly address, Williams said. For example, she pointed to the need for a clear reasonableness standard the California Public Utilities Commission would use as a basis for approving cost recovery, so utilities know what to do to comply with the commission's requirements for wildfire prevention and response.
PG&E's concern is not just about cost recovery for billions of dollars in claims for 2015 and 2017 wildfires, but for dealing with future wildfires, Williams emphasized, saying, "This is going to be a perennial issue and our focus ... is we have got to come up with new legislation and solutions that deal with this new normal. The time for action is now as we are dealing with wildfire after wildfire today."
PG&E Corp. Senior Vice President and CFO Jason Wells said if the company is compelled to pay unrecoverable wildfire damage claims then ultimately those costs would have to be financed with company equity and it would have to file for a waiver of its capital structure. Like Williams, Wells also noted capital expenditures may have to be limited. CapEx for 2018 is projected at $6.3 billion, according to the company's earnings presentation.
"The pipeline of projects is extensive. We have an aging system that requires significant investment at a time when we need to modernize our grid," Wells said. "To the extent that we don't see constructive legislative reforms in inverse condemnation this year, we may have to pull back on some aspect of spending."
Wells also pointed to dramatic changes in the insurance market, in which insurance rates are increasing and limits are being placed on coverage. Today, millions of dollars in insurance costs are not recovered in rates, he said.
If legislation to address wildfire liability is not passed, PG&E Corp. will request permission from regulators to increase its limits on the cost of financing, because infrastructure investments require access to capital, Williams said.
She noted the PUC recently approved the utility's request to delay its 2020 general rate case application until Jan. 1, 2019, for the utility to see first what the outcome of the legislative session will be before filing its investment plans.