Pacific Gas & Electric is on the cusp of ending its year-and-a-half stint in bankruptcy. But whether it can successfully rebuild its finances and make its power grid safer without drastically raising rates on millions of customers is far from clear.
On Thursday, the California Public Utilities Commission approved PG&E’s $58 billion bankruptcy plan. The unanimous vote came despite scores of public comments in opposition to allowing the company to emerge without higher levels of government control over its safety practices. PG&E has been held criminally responsible for 84 deaths in the November 2018 Camp fire and is under criminal probation for its role in the deadly 2010 San Bruno natural-gas pipeline explosion.
Critics question whether PG&E will be able to raise the capital its transformation will require amid the COVID-19 economic downturn. Failure to do so could prevent PG&E from emerging as a “financially viable, reliable utility,” more than 200 county and city representatives wrote in a letter asking the CPUC to “pursue another path” — namely, to convert PG&E to a customer-owned utility.
U.S. Bankruptcy Court Judge Dennis Montali is now hearing final arguments in PG&E’s bankruptcy case. Calls for a state takeover of PG&E have not diverted Gov. Gavin Newsom from negotiating a plan that would allow PG&E to remain a private company, albeit one with much greater state oversight.
The CPUC has established a multistage oversight regime that could lead to the state revoking PG&E’s license and taking it over if it repeatedly violates safety guidelines or causes more disasters; a law giving the state that authority, SB 350, is moving through the California legislature.
“This puts at risk PG&E’s license to operate if it continues to cause fires like those it caused in 2017 and 2018, or continues to operate poorly,” CPUC Commissioner Clifford Rechtschaffen said before Thursday’s vote. “It sends a very strong signal to PG&E” that its future as a utility serving Northern California customers “is a privilege, not a right.”
Those pushing for a public takeover say it could reduce the costs of meeting the utility’s future obligations and align its interests more closely with those of its customers. Those against a takeover warn that it could saddle the state’s taxpayers with paying for PG&E’s past mistakes and the costs of future disasters.
Here are three big questions, short and long term, the utility must grapple with as it prepares to leave bankruptcy.
Can PG&E avoid more wildfires while still in bankruptcy?
PG&E’s first challenge is to prevent its equipment from causing any more wildfires before it exits bankruptcy. The company is already paying billions to settle claims from fires in 2017-2018, but it's relying on access to a $21 billion state wildfire insurance fund to shield it from future liabilities.
“Without the wildfire trust find, the company wouldn’t have a viable plan out of bankruptcy [that also allow it] to pay the wildfire survivors,” UC Hastings law professor Jared Ellias said.
PG&E needs to gain bankruptcy court approval of its plan by June 30 to access the fund. Until it does, any new wildfires could derail its plans, since liabilities incurred during bankruptcy can’t be reduced through negotiation. “One of the nightmare scenarios was that you’d have massive wildfires during bankruptcy, and those claims would come ahead of the claims of other wildfire victims,” Ellias said.
PG&E’s heavy reliance on fire-prevention blackouts last year angered millions of residents who lost power and pushed the CPUC to impose new rules governing safety blackouts. At the same time, the public-safety power shutoff events may have helped avoid the catastrophe of another deadly fire.
Even so, they didn’t prevent the October 2019 Kincade fire, which appears to have been started by a PG&E transmission tower failure — and the utility has already set aside $600 million to cover the likelihood that it’s found at fault for that fire.
Can PG&E gain favorable terms on the equity and debt it needs?
PG&E will exit bankruptcy with nearly $40 billion in debt, nearly twice the $22 billion it held before its January Chapter 11 filing. While that’s a necessary consequence of meeting state demands to boost fire-victim payments, “people who are worried about the level of debt this company will have coming out of bankruptcy have strong ground to stand on,” Ellias said.
The majority of the debt will be issued by PG&E itself and secured by its assets. But with $4.75 billion in new debt for its holding company, PG&E Corp. may fail to receive an investment-grade rating, which leaves a “question whether, in today’s market, they can get people to buy those bonds,” said Dan Richard, a former PG&E senior executive advising 58 cities and 10 counties promoting a plan to convert PG&E into a customer-owned utility.
Richard questioned whether PG&E's reliance on debt is driven by major shareholders’ desire to avoid diluting their own equity.
At the same time, PG&E’s plan to raise $9 billion in new equity may also face challenges, since the utility agreed to forgo dividends for the next three years, a common perk of most utility stocks. PG&E does hold backstop financial commitments from hedge fund investors if it can’t find market buyers, Richard noted.
Wildfire victims are concerned that their $13.5 billion in compensation reached through a settlement with the utility and its creditors will be degraded by a plan that relies partly on $6.75 billion in PG&E stock to fund it.
The required return on equity capital is “notably higher than on debt capital, including non-investment-grade debt,” said Dennis A. Sperduto, principal energy research analyst at S&P Global Market Intelligence. That means relying more on equity could drive financing costs for ratepayers even higher.
Can PG&E raise money for grid upgrades and wildfire mitigation without overburdening ratepayers?
Finally, PG&E needs to invest about $40 billion over the next five years in its infrastructure, much of it to prevent future wildfires. It’s also under pressure to reduce the number of fire-prevention blackouts.
The question for PG&E, Richard said, is this: “Will they be able to function in any kind of normal utility way to raise the capital they need that would go into upgrading their system to prevent future wildfires and also to avoid these power shutoffs?”
Even after the 2010 San Bruno gas pipeline explosion forced a major increase in gas network maintenance, “they’d only been spending about $2 billion to $3 billion per year on capital outlays,” he noted. PG&E’s current plans, by contrast, add up to nearly $8 billion per year.
PG&E will “have a lot of financial constraints when it comes to investing in the grid or investing in new technologies,” Ellias said. “Where is PG&E going to get money from in the future? It’s probably going to be ratepayers.”
San Jose Mayor Sam Liccardo, a chief proponent of converting PG&E to a customer-owned cooperative, doubts the utility will be able to find the market financing to avoid that hit to ratepayers.
“The company’s weak finances will have it running to credit markets with a ‘junk bond’ rating to try to raise tens of billions of dollars in additional debt to fund overdue safety and reliability improvements to the grid,” he wrote in a Thursday statement.