Pacific Gas & Electric’s bankruptcy has become California’s most pressing policy crisis, forcing Gov. Gavin Newsom, state lawmakers, utility regulators and other key energy stakeholders to consider radical alternatives for the state’s largest utility in the face of its multibillion-dollar wildfire liabilities.
Policymakers are considering options such as breaking up PG&E’s electric and gas businesses, shifting it to a “wires-only” electricity provider, and converting it into separate publicly owned and operated entities. But no clear path forward has emerged to date, in a corporate reorganization that’s “shaping up to be one of the most complicated and challenging Chapter 11 bankruptcy cases of all time," according to Jared Ellias, a bankruptcy expert and associate professor at UC Hastings law college, who spoke at a PG&E hearing last week.
As we’ve noted in past coverage, the implications of this case could be huge. That’s because PG&E’s bankruptcy is unlike almost any other past utility bankruptcy, in that it's driven by legal liability to cover the costs of wildfires caused by its equipment. And in an era of climate change, those risks are increasing, not going away, despite any financial maneuvers the parties to the bankruptcy might take.
And while PG&E has been reasonably accused of failing to keep its grid as safe as possible, that doesn’t mean the state’s other investor-owned utilities aren’t subject to the same risks. In recent months, Southern California Edison and San Diego Gas & Electric have faced credit downgrades, and could be on the verge of being cut to junk status — a move that could force them into a financial bind similar to PG&E’s.
That’s why California Sen. Ben Hueso started last week’s hearing by noting that it was informational only, and that capital markets shouldn’t take the day’s discussion as indications of what future legislation might be unveiled in the weeks and months to come to manage the state’s utility and wildfire challenges.
For example, credit ratings agencies including Moody’s, Standard & Poor’s and Fitch have advised state lawmakers that they would like a law to alter the state’s inverse condemnation legal doctrine, which holds utilities liable for damages from fires caused by their equipment, whether or not they’re at fault. But lawmakers were unable to agree on adding inverse condemnation reform to the omnibus wildfire bill that passed last year. It’s considered unlikely to be included in any legislation emerging this year, given that it would require a two-thirds vote in both the Assembly and the Senate, as well as majority approval by voters, in order to amend the state’s constitution.
PG&E's liability situation
Other ideas for reducing utility exposure to massive wildfire liabilities are being discussed, such as a proposal from Assemblymember Chad Mayes to create a wildfire insurance fund, paid into by utilities and managed by a public agency, to back bonds to settle wildfire claims. Lawmakers could also take up an amendment to last year’s wildfire bill that would allow utilities to raise bonds to cover the costs of wildfires not just from 2017 and earlier, but from 2018 as well — a move that could be critical for PG&E as it faces billions of dollars in claims from November’s Camp Fire, the state’s deadliest.
While PG&E has been cleared by state investigators of starting the 2017 Tubbs Fire, which carried an estimated $15 billion in damages, it conceded early this month that one of its transmission lines was almost certainly the cause of the Camp Fire, after seeing needed repairs delayed for years. PG&E took a $10.5 billion charge in the fourth quarter for claims connected to the Camp Fire, and insurers have estimated the total losses could exceed $16 billion.
These circumstances explain why PG&E chose Chapter 11 reorganization, which put an automatic hold on all the litigation claiming damages against the utility, and allowed it to raise $5.5 billion in debtor-in-possession (DIP) financing last month to carry on operations, UC Hastings’ Ellias told lawmakers last week.
“This is an unusually large DIP loan — and what I think this reflects is the investor community’s confidence that PG&E has a bright future once it figures out what to do with its liability situation,” he said. Of course, this bright future will come partly at the expense of fire victims, who are likely to see their claims reduced alongside the rest of PG&E’s creditors seeking restitution through the bankruptcy process.
But while all claims filed before PG&E’s Chapter 11 filing in January will be subject to this winnowing process, any claims coming afterward — including claims that might emerge from fires this year — will be subject to repayment in full, he said. That means that this summer could be a moment of reckoning for PG&E, depending on whether its equipment causes more destructive wildfires that lead to massive liabilities. If that happens, those claims “could swamp whatever assets PG&E has, and this summer’s victims could reduce the pot of assets available to pay out 2017 and 2018 wildfire victims, as well as bondholders,” he said.
PG&E's wildfire mitigation plan
The threat of additional liability has put focus on PG&E’s wildfire mitigation plan released last month, which includes plans to spend $1.5 billion to $2 billion to clear vegetation, inspect power lines, install sensors and cameras, and sectionalize parts of its grid in the most high-risk fire areas.
PG&E has also asked the California Public Utilities Commission (CPUC) for permission to expand its use of planned grid outages to avoid the risk of sparking wildfires — a controversial proposal that could lead to hundreds of thousands of people losing electricity for hours or days at a time. This approach would require significant mitigations to ensure it doesn’t cause more harm than it prevents.
PG&E has been under pressure from U.S. District Court Judge William Alsup, who is overseeing its criminal conviction for the 2010 San Bruno gas pipeline explosion, to drastically expand its tree clearing and grid de-energizing efforts. But PG&E and state regulators have argued that the judge’s proposed plan would be impossible to carry out, since it could cost up to $150 billion and require more skilled tree-trimming workers than are available in the country, let alone the state.
Last week, Alsup conceded the impracticality of his original proposal, deciding instead to simply order PG&E to carry out its own wildfire mitigation plan, and threaten to force it to suspend its dividend payments if it fails to do so. But the judge did not make a decision on PG&E’s proposed grid de-energization plans, postponing the matter for a hearing to be scheduled in the coming weeks.
PG&E has already vowed to replace half of its current board of directors, but activist shareholders are demanding that it go further. Minority investor BlueMountain Capital Management, which lobbied against PG&E filing for bankruptcy, last week nominated 13 candidates for PG&E’s board, including former California Treasurer and U.S. Financial Crisis Inquiry Commission Chairman Phil Angelides, and Kenneth Feinberg, the attorney who oversaw the Sept. 11 victim compensation fund and the Deepwater Horizon oil spill fund.
Utility regulators weigh in
At last week’s hearing, state Sen. Jerry Hill, who represents the district including San Bruno, asked CPUC Executive Director Alice Stebbins whether PG&E’s poor safety record might require the agency to increase its auditing and inspection of the utility’s efforts going forward. Stebbins replied that the CPUC is working on multiple proceedings related to PG&E, including a review that will consider whether it needs to undergo a corporate restructuring to ensure that it can continue to safely provide energy in the future.
At the same time, the CPUC has come under fire for not acting aggressively enough to protect public safety as utility-caused wildfires have become a major threat over the past few years. On Monday, the Wall Street Journal reported that Gov. Gavin Newsom is considering a replacement for CPUC President Michael Picker, as well as an unspecified overhaul of the CPUC, with plans to emerge in a matter of weeks.
At the same time, the CPUC has been actively seeking to assert its right to enforce state regulations on PG&E throughout the federal bankruptcy process, Arocles Aguilar, the agency’s general counsel, told lawmakers last week. That includes the CPUC’s decision to ask the Federal Energy Regulatory Commission to oppose PG&E’s proposal to use bankruptcy to force the renegotiation of some of its most expensive power-purchase agreements (PPAs), largely for solar farms built more than a decade ago.
Several of these legacy PPAs have already suffered credit downgrades, on the risk that PG&E will be allowed by a bankruptcy judge to renegotiation them to much lower market rates. This could save PG&E billions of dollars that could be made available for creditors — but it could also undermine the state’s clean energy goals by making it more difficult and expensive to finance future clean energy projects.
Other federal courts have ruled on similar jurisdictional challenges between bankruptcy courts and state and federal regulators over utility contracts, largely in favor of the bankruptcy court. But those decisions aren’t binding to the Ninth Circuit Court of Appeals, which has jurisdiction in California, Ellias noted, which means that any legal challenge will likely end up in that court — and any decision there is likely to be appealed.