PG&E: Market and Policy Perspectives on the First Climate Change Bankruptcy

Lead PI: John MacWilliams, James Kobus, Sarah La Monaca

Unit Affiliation: Center on Global Energy Policy (CGEP)

August 2019 - Ongoing
North America ; United States
Project Type: Research Outreach

DESCRIPTION: The Pacific Gas and Electric (PG&E) bankruptcy, which was caused by liabilities resulting from massive wildfires, has widely been called the first climate change bankruptcy. It will likely not be the last, as climate change exacerbates natural disasters, leading to more frequent and intense wildfires, storms, and flooding. Wildfires alone could become up to 900 percent more destructive in certain regions by midcentury, and utility assets will also be increasingly exposed to threats stemming from hurricanes, rising sea levels, and other climate-related events.

These extreme weather events will increase costs to utility-sector stakeholders, including investor-owned utilities, state and local governments, ratepayers, and taxpayers. These risks could place financial stress on utility companies, drive up electricity rates, crowd out essential investment in renewable energy and grid upgrades, and disrupt service.

In this paper, Columbia University’s Center on Global Energy Policy reviews and analyzes the PG&E bankruptcy, assesses how capital markets have reacted to the bankruptcy through the lens of valuations in the US utility sector, and discusses policy implications of California’s recent legislative response to wildfire risk. This paper examines market indicators to assess investor expectations of climate risk exposure and likely cost allocation. Neither debt nor equity markets suggest widespread concern about climate risk in the utility sector.

OUTCOMES: The paper finds the following:
• Market indicators suggest that the California wildfires and subsequent PG&E bankruptcy have not caused imminent concern about climate risks in the utility sector.
• There are several reasons why markets may not reflect widespread climate risk to utilities, despite the scientific evidence around likely future damage. Investors may believe that cost increases from climate change will occur too far in the future to materially impact the present value of their investments.
• Financial markets may also reflect the belief that the costs of climate change in the utility sector will fall predominantly on ratepayers, insurance companies, and/or taxpayers rather than investors, and therefore investors may not view themselves as materially exposed.
• California’s recent creation of a wildfire insurance fund with contributions from both ratepayers and companies provides important policy lessons for designing comprehensive frameworks to allocate climate damage costs.
• The policy also presents some potential pitfalls that may be instructive for other state policy makers. The legislation sets aside large reserves for future damage, a necessary measure, but one that will result in higher electric bills. The bill does not allow utilities to earn a return on safety-related spending, which broadly diminishes incentives for proactive climate mitigation investment.