Calamities and capital: Who will fund California’s utilities?

David J. Teece and Carl Danner, Contributors

California’s energy utilities have lived in a challenging world for decades, in part due to state policymakers’ insistence on costly and often risky initiatives that haven’t always worked out. Consumers pay the price through some of the nation’s highest rates for service. But the situation now facing PG&E breaks new ground and poses fundamental questions for not just the company and its investors, but also the public.

The issue is capital – financial capital that utilities use to make the huge investments required to provide reliable service. In some parts of the world, decent utility services aren’t available because investors fear having their funds lost or taken once they are put in the ground. Since investing is a voluntary activity and investors always have options, they must be offered some assurance of safety and a return if they are to commit their money. Normally, this is not a critical issue in the U.S., notwithstanding the back-and-forth arguments about its finances that any regulated utility faces.

But these are not normal times in California. A confluence of circumstances has primed entire regions of the state for horrifying, catastrophic wildfires and previously unimaginable losses to lives and property. Electricity service permeates these areas, provided by facilities that pose a risk of starting fires – a risk that can never be reduced to zero even with the best efforts of utilities and regulators.

As a result of prior court decisions, California also enforces an unusual “inverse condemnation” rule, through which investor-owned utilities are liable for any fire damage associated with their facilities – whether or not a utility followed its safety rules or was otherwise at fault. In recognition of these risks, the governor and the California Legislature enacted a new law last fall to permit the California Public Utilities Commission (CPUC) to allow utilities partial recovery from customers of fire damages they pay. However, the new law did not include the fall period of 2018, when the town of Paradise tragically burned. Lawsuits from those victims will add to others already filed regarding previous fires.

PG&E’s stock price responded with new lows, down as much as 90 percent prior to its bankruptcy filing. A slight recovery since has still left a loss to investors of $25 billion in less than two years, which serves as a rough estimate of PG&E’s likely lawsuit payouts and legal and bankruptcy expenses even beyond whatever financial assistance the CPUC might provide. This also assumes no new catastrophic fires, an outcome that can’t be counted on. It is becoming less clear how – or whether – PG&E will survive as a company, or who or what might take its place (including operating its facilities in fire-prone areas).

This is more than just a story of tragic losses for which investors will pay. No major electricity system is static. Every year there is a need for extensive new investments – especially in California – to become more fire-safe. PG&E expects this to cost $6 billion in each of 2019 and 2020, and many billions more into the future. Someone will have to put that money up.

Of course, there are financing options, such as selling parts of the company and perhaps bond sales (although PG&E’s bonds have also been pressured). Still, society must find a way to invest more money in this utility system to keep it running and hopefully safe. Public ownership of PG&E would not change this necessity. It would only substitute customers as the new owners who would continue to face the same open-ended liability should those same facilities spark another fire that grows out of control.

None of the above is meant to discount anyone’s claim to compensation for losses, or to assume away current policies or laws. Our question is somewhat different, and actually becomes more important the more you assume these factors will continue. Given California’s legal liability standards and perhaps inevitable imperfections in utility facilities and operations, and the dreadful fire risks that many face in our state: How can we move forward with viable electricity systems, of improving safety and reliability, that don’t cost customers huge amounts they might not be able to afford?

To figure that out – in a supercharged political environment – might be the greatest California energy policy success story of all. California must once again confront the fact that you cannot get something for nothing, and we have, for various reasons, created an adverse environment for investors. That must change, or we will need to support the required investment with public monies” which would create its own, and likely worse, set of problems.

David J. Teece is a professor at University of California, Berkeley and chairman of the Berkeley Research Group. 

Carl Danner is managing director of the Berkeley Research Group.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

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