Pacific Gas & Electric has entered 2019 in a state of crisis.
The California utility faces renewed, if unconfirmed, reports of imminent bankruptcy preparations and plans to sell off its natural-gas operations to manage its massive liabilities from the deadly wildfires of the past two years. And while many California lawmakers are pushing to protect the state’s largest utility from bankruptcy, others are calling for its breakup, or even for criminal prosecution.
The bad news began last Friday, when NPR reported that PG&E had prepared a plan, dubbed “Project Falcon,” to sell off its natural gas division in the spring to fund the billions of dollars in potential claims from wildfires. The plan would cover expenses from the Tubbs Fire of 2017, which killed 23 people and caused an estimated $10 billion in damages, and the Camp Fire, in November 2018, which killed 86 people and caused damages in the range of $10 billion to $16 billion.
Later that day, Reuters reported that PG&E was exploring bankruptcy protection for some or all of its businesses, partly to prepare for the possibility of a “significant financial charge” for wildfire liabilities in the fourth quarter of 2018. But PG&E would prefer to avoid this contingency, and was awaiting last-minute changes to a state law passed last year, SB 901, that could allow it to pass on the costs of last year’s wildfire liabilities on to customers.
PG&E shares, which had already lost roughly half of their value between the start of November and the end of December, fell an additional 30 percent in after-hours trading since the stories broke.
Shares fell another 15 percent on Tuesday, after S&P slashed PG&E's credit rating five notches to "B'' from "BBB-,” pushing it from investment grade to “junk” status, citing what it described as a deteriorating financial and political climate for the utility.
S&P threatened to further cut its rating on PG&E’s roughly $18 billion in debt over the next few months if lawmakers don’t take “explicit steps” to improve the regulatory framework that would allow the utility to manage having billions of dollars more in potential wildfire liabilities than it has in market capitalization, let alone insurance.
State investigators haven’t determined the cause of the Tubbs Fire, but did find that PG&E lines were the cause of several fires that killed at least 15 people and razed more than 5,000 homes in 2017. And while the Camp Fire is still under investigation, PG&E has reported a transmission equipment failure at the same time and place as the fire began.
PG&E is also under scrutiny over its decision not to pre-emptively shut off power to the area in the days and hours before the fire started, despite weather conditions such as high winds and low humidity that indicated a threat of downed power lines igniting dry vegetation.
The utility faces dozens of lawsuits from people who lost loved ones and property in the fires, and under a legal standard known as "inverse condemnation," utilities in California are held liable for damages caused by fires started by their equipment, even if they are found to be safely and legally operating that equipment.
SB 901, the wildfire bill passed in September, gives the California Public Utilities Commission (CPUC) the authority to allow utilities including PG&E to pass on some wildfire-related costs on to ratepayers through increased bills — a first for the state. This provision only extended to fires in 2017 and earlier, however, which has created the need for the legislative fix Reuters has reported that PG&E is hoping for. To address future wildfire costs, SB 901 allows the CPUC to apply a so-called “reasonableness” review, to determine which costs can be passed on to ratepayers, versus those that must be borne by the utility’s shareholders.
CPUC President Michael Picker has already taken the unusual step of personally calling Wall Street analysts in November to assure them the agency was seeking multiple avenues to avoid a PG&E bankruptcy, including acting quickly on SB 901's provisions. But the CPUC has also launched a review of PG&E’s overall “corporate governance, structure and operations,” based on its failure to address the safety problems that led to the utility’s deadly San Bruno pipeline explosion in 2010, and may have played a role in the deadly wildfires of the past two years.
PG&E is facing a mounting tide of criticism from politicians and the public over its role in these disasters, with the state senator representing San Bruno calling for its breakup. Last month, a federal judge supervising PG&E’s San Bruno felony trial asked the state attorney general to weigh in on “the extent to which, if at all, the reckless operation or maintenance of PG&E power lines would constitute a crime under California law” if they are found to be the cause of the Camp Fire.
This all represents less than good tidings for PG&E in 2019.