It looked like bondholders had the upper hand in taking control of PG&E. Then the politicians waded in
After years of underinvestment its grid needs a massive upgrade. Stephen Byrd of Morgan Stanley, a bank, calculates that burying its transmission and distribution lines in the most vulnerable areas underground to reduce fire risk would cost $100bn. Lawrence Makovich ofMarkit, a consultancy, points out that the utility is saddled with another cost. A state law passed last year requires that half of electricity come from renewables by 2025, up from about a third in 2017.
Then there is California’s “inverse condemnation”: an idiosyncratic state law holds utilities liable for damage caused by their equipment during fires even if they followed safety rules and were not negligent. Reckless expansion of housing into fire-prone areas has put nearly $110bn in property at high risk in California. Climate change is only making dry weather drier and wildfires fiercer. By creating untold potential liabilities the statute has made utilities virtually uninsurable.
Last July the state created a $21bn wildfire-insurance fund, to be financed equally by private utilities and customers. Helpfully, the scheme pools risk. But it is too small. It limits the pool to California, notes Joseph Scalise of Bain, a consultancy. States in which utilities have access to insurers and reinsurers can spread risk globally.
The hapless utility could yet be hit with huge fire-related expenses this dry season, which ends in December. These could wipe out its remaining equity. Bondholders may then back out of promised capital injections. Government may be left on the hook. Whoever wins the battle for control of
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