PacifiCorp Faces Existential Threat: Wildfire Verdict Shakes Utility Industry

Xavier Roger
A substation owned by PacifiCorp is shown in this file photo.
A substation owned by PacifiCorp is shown in this file photo.
A substation owned by PacifiCorp is shown in this file photo.

(Bloomberg) — Destructive wildfires have become an all-too-common occurrence during summers in the American West, often leading to electrical utilities being held responsible for sparking these devastating blazes.

However, a recent jury verdict has taken the utility industry by surprise. Warren Buffett’s PacifiCorp, a subsidiary of Berkshire Hathaway Energy, was ordered to pay an average of $5 million to 17 property owners whose properties were destroyed by a series of Oregon fires in 2020. The total liability could amount to billions, raising concerns about the potential scale of exposure utilities face and their ability to survive.

PacifiCorp itself estimated its potential liability at $11 billion during the trial. Comparatively, PG&E Corp., based in Oakland, California, settled a larger group of victim claims for $13.5 billion in 2020 over California wildfires, indicating the severity of the situation.

The verdict casts an existential threat over the utility industry, especially considering the increasing risk of wildfires due to climate change. Utilities in the Western US now operate with significantly more business risk than in the past, as acknowledged by utility analyst Andy DeVries from CreditSights.

PacifiCorp denied responsibility for the fires, attributing them to lightning and climate change. Despite the company’s confidence in overturning the verdict on appeal, it acknowledges the growing threat to its ability to provide electricity, as excessive wildfire damages pose a significant challenge.

The potential liabilities resulting from the June verdict and other similar lawsuits have prompted S&P Global to downgrade PacifiCorp’s issuer credit rating and its parent company’s outlook from stable to negative. The verdict raises concerns among investors about the valuation of utility assets and their overall viability.

The impact of the jury’s decision has extended beyond PacifiCorp’s bonds, as utility companies across the Western US face heightened scrutiny from investors. The risk of liability extends to every utility operating in the mountainous regions.

With wildfire risks increasing due to extreme weather conditions fueled by climate change, utilities must carefully navigate their operations to mitigate potential liabilities. PacifiCorp chose to go to trial rather than settling claims over the 2020 fires, a decision that surprised many investors.

The jury found PacifiCorp grossly negligent and awarded 17 test plaintiffs far beyond their property losses, accounting for emotional distress in addition to economic damages. The collective emotional distress compensation was fifteen times greater than the economic damages awarded.

Though PacifiCorp plans to appeal the verdict, experts believe the process could take years, leaving the utility in a precarious position. The possibility of bankruptcy, as seen in PG&E’s case, looms if Berkshire Hathaway Energy, PacifiCorp’s parent company, does not step in to support the utility.

PacifiCorp insists that being part of Berkshire Hathaway Energy offers competitive advantages, including flexible dividend payments and capital spending. However, the mounting legal liabilities raise concerns about the utility’s financial stability.

To recover costs, PacifiCorp might attempt to pass them on to consumers, but this idea has sparked outrage among consumer advocates. The Oregon Public Utility Commission has been requested to allow the utility to track litigation expenses to decide whether to seek reimbursement from customers.

Settlement talks for the upcoming January trial have not been successful, with plaintiffs demanding significantly more than PacifiCorp is willing to offer. The company has stated its willingness to resolve wildfire damage claims when reasonable, but the situation remains uncertain.

As the utility industry grapples with the aftermath of this groundbreaking verdict, the impact will continue to reverberate across the sector. Utility companies must now proactively address wildfire risks, prioritize safety measures, and navigate potential legal challenges to ensure their viability in an increasingly unpredictable environment.

As utilities across the Western US face the ever-increasing threat of wildfires and potential liabilities, it is evident that the industry must adopt proactive strategies to safeguard communities, shareholders, and its own survival.

Source : Yahoo Finance

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