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Thursday, Jul 18, 2024

Edison Faces Fire Liability

Expect shareholders of Edison International – who have seen $4 billion in market cap wiped out in recent months amid concern about liability for last year’s devastating Thomas Fire in Ventura County and beyond – to keep their eyes on Sacramento this month. That’s because state lawmakers are set to craft legislation spelling out responsibility for billions of dollars in damages from last year’s wildfires in cases where the cause is attributed to equipment of any of the state’s three investor-owned utilities. The legislation also will apply to future wildfires. The stakes are high for Southern California Edison, the utility subsidiary of Rosemead-based Edison International. At issue is whether Edison International shareholders or ratepayers could be on the hook for up to $4 billion in damages from the Thomas Fire, and possibly more damage claims from the subsequent deadly mudslides in Santa Barbara County this past January. “2017 was such a huge year for wildfire liability – there is a sense of urgency now that the risk of wildfire year-round is growing and our Governor (Jerry Brown) is calling it the ‘new normal,’” said Darren Bouton, director of state public affairs for Southern California Edison. “The intensity and frequency of wildfires is increasing, so we need to have this fixed sooner rather than later.” The California Department of Forestry and Fire Protection (Cal Fire) has not yet determined the cause of the 282,000-acre Thomas Fire – which burned through much of Ventura and Santa Barbara counties and damaged or destroyed more than 1,300 structures last December, ranking as the largest blaze in California’s recorded history. Shareholder worries Edison International shareholders are concerned about how much they would be on the hook if the cause of the Thomas Fire is linked to Southern California Edison. They have watched as state fire investigators traced the cause of at least a dozen of the wildfires that ravaged Northern California last fall to power lines or other equipment or wiring operated by Pacific Gas & Electric, the electric utility subsidiary of San Francisco-based PG&E Corp. Fitch Ratings of New York laid out a worst-case scenario for Edison International in May, considering the possibility that the utility will be forced to pay out $4 billion in Thomas Fire-related liabilities over four years. Fitch issued a negative watch on bonds issued by Edison International, which reported net income of $689 million last year on revenue of $12.3 billion. “The Negative Watch reflects potential financial exposure to the destructive California wildfires that raged across the state in 2017, causing significant damage in SCE’s service territory,” the rating report said. Southern California Edison’s share price plunged 25 percent from around $80 to about $60 in the weeks during which the Thomas Fire was burning. They have since made up some of that ground, closing at $66.08 on Aug. 1. The determination by state fire investigators that put Pacific Gas & Electric on the hook for at least $10 billion in liabilities from last fall’s Northern California wildfires – and the potential for Southern California Edison to be held responsible for billions of dollars more in its territory – has utilities and their lobbyists urging lawmakers to reform the system under which liability is determined. At the center of the legislative debate is the legal doctrine of inverse condemnation, under which government entities and electric utilities are required to pay compensation when property is damaged by facilities providing public services, such as electricity. Investor concern over this potential liability has been heightened due to a ruling from the California Public Utilities Commission last fall that assigned liability for $380 million in costs related to three 2007 wildfires in San Diego County to San Diego Gas & Electric shareholders instead of that utility’s customers. The commission ruled that SDG&E, a unit of Sempra Energy of San Diego, had failed to act as a prudent manager of its grid infrastructure despite following relevant rules and regulations at the time. Southern California Edison’s Bouton said the top priority of Edison International and the other two investor-owned utilities in the state is to reform the inverse condemnation doctrine. “We are looking to prevent unlimited liability for damages caused by our equipment even when we didn’t do anything wrong,” Bouton said. “We also support replacing the current strict liability standard with a ‘reasonableness’ standard.” For the future, Bouton said the utilities are seeking clear, upfront standards for mitigation measures, such as clearing vegetation away from wires, fireproofing utility poles and turning off power during “red flag” wind conditions. “Where a utility substantially complies with an approved mitigation program, we want a finding that the utilities actions are deemed reasonable and prudent,” Bouton said. Edison International has spent $864 million since 2014 to replace 54,000 poles with “fire hardened” models made of fire-resistant materials and with more insulation around the wires. The company and the other investor-owned utilities are seeking a “fair apportionment” of liability costs between ratepayers and shareholders, Bouton said. “Right now, it’s pretty much an all-or-nothing approach, meaning all the costs are either borne by shareholders or ratepayers,” he said. “The costs need to be apportioned.” But Bouton also said that if a utility is found to be in “substantial compliance” with wildfire mitigation standards, ratepayers should shoulder 100 percent of the damage costs, a position almost certain to generate pushback from ratepayer advocates.

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