California Utility Crisis Could Reshape Regulatory Environment

California’s recent fire crisis has the potential to shape the regulatory and business landscape of one of the largest energy markets in America. In past several years, there have been a large number of natural disasters throughout the state, including fires and mudslides, whose liability has been connected to three giant utilities that operate within the California market. Here’s where those utilities stand in relation to these challenges.

In January of last year, Pacific Gas and Electric declared bankruptcy in response to a $30 billion penalty imposed on it as a result of starting a number of fires. The final settlement was reached later in the year for $13.5 billion, with California Governor Gavin Newsom establishing a requirement that PG&E exit bankruptcy by this summer. The company and the state are currently in dispute over portions of the Chapter 11 restructuring plan, with Governor Newsom rejecting the most recent plan. The governor has stated that if the utility does not pull itself out of bankruptcy by the established deadline, the state will take over.

Also recently, in light of the vast liabilities incumbent upon the utilities, the California Public Utilities Commission (CPUC) unanimously ruled to reject rate hike requests from each of the entities. Several executives of the companies have said that without the increases, there will be continued planned power outages to manage the risk of fires for five more years. Recent legislative efforts seem to target restricting the utilities’ ability to rely on these blackouts to limit the risk of fires. These efforts would require the utility to both compensate customers for the blackouts as well as impose financial penalties for every hour a blackout remains in place.

Another utility, San Diego Gas and Electric, recently had an appeal to the U.S. Supreme Court denied. The case was related to the start of wildfires in 2007. The goal of SDG&E was to have a $379 million liability passed onto ratepayers, challenging the underlying condemnation doctrine that holds utilities entirely responsible for damage caused by their equipment whether or not they were negligent. This legal result, combined with the refusal of the CPUC to increase margins for the California utilities, puts all three of the utilities (Southern California Edison is the other) in a difficult financial position moving forward, with heavy reliance on planned blackouts to combat the risk of fire liability.

The three utilities are all coming off million or billion dollar settlements related to wildfire and mudslide claims. They’re still engaged in a legal battle over other many wildfire and mudslide events, but few have individuals have found solace in settlements covered in large part by their respective insurance carrier.

It’s reasonable to assess that in the near future there will be significant changes to both the operations of the utilities themselves and the regulatory requirements placed upon them. The PG&E bankruptcy and its requirement to exit by this summer, the potential of the state to take over one or multiple utilities and the increasing frequency of fires and mudslides creates an environment of uncertainty over the future relationship between the state, the utilities, the scheduling coordinator and the customer.

SchneiderDowns has experience with clients operating within the CAISO and other regulatory requirements within California. If you’re interested in assessing the internal control of your organization as it relates to the shifting landscape of energy legislation and regulation, please contact us at contactsd@schneiderdowns.com.

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