Who Deserves PG&E’s Assets? Fire Victims Face a New Ordeal

Neil and Kathinka McKeown’s home in Calaveras, Calif., burned down in a 2015 wildfire that regulators believe started when a power line made contact with a tree. Late last year, they thought they were finally close to rebuilding after reaching a seven-figure settlement with Pacific Gas & Electric, whose line was involved.

But PG&E never sent the money, and because the company filed for bankruptcy protection in January, the couple will have to wait even longer. The McKeowns cannot expect payments until PG&E emerges from bankruptcy, something that may not happen for at least two years, according to legal experts.

“It’s been devastating,” said Mr. McKeown, a consultant who works on renewable energy systems. “It’s like the fire happened all over again. We were looking forward to resolving everything.”

And while they wait, the bankruptcy may at times put the McKeowns and other wildfire victims in conflict with PG&E and other parties with claims against the company.

The McKeowns had insurance, but the proceeds were used to pay off the mortgage on their destroyed home. They had counted on the settlement with PG&E to finance a new one. (The couple’s lawyer said the terms barred them from disclosing the exact amount of the payout.) In the meantime, they are living with their two children in a 400-square-foot trailer.

Their predicament highlights how corporate bankruptcies can leave some parties at a big disadvantage. Parties owed money by a company before it files for bankruptcy, like the wildfire victims, will have to wait until the bankruptcy proceedings are complete, and ultimately may get only a portion of what they hope to collect. By contrast, employees of the company, or anyone doing business with it while it is being reorganized, can expect to be paid.

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The McKeowns now live in a 400-square-foot trailer with their two children. “It’s like the fire happened all over again,” Mr. McKeown said of the wait to collect their settlement money.CreditJessica Chou for The New York Times

That divide became even starker in recent days. PG&E filed a motion last week asking the bankruptcy court in San Francisco to approve the payment of $235 million in employee cash bonuses this year.

After a series of deadly wildfires in 2018, the company decided not to pay its bonuses for the year. But PG&E says it wants to pay bonuses this year to ensure that employees remain motivated to achieve its operational and financial goals.

Bankruptcy experts say the judge, Dennis Montali, will almost certainly approve bonuses in some form. “In general, courts are extremely deferential to managers who say they need to pay bonuses,” said Jared A. Ellias, a professor at the University of California’s Hastings College of the Law.

At the end of last year, PG&E had $77 billion in assets and $64 billion in liabilities, including $14 billion in wildfire claims. But the figures on the liability side continue to grow.

PG&E has estimated that it faces wildfire claims of at least $30 billion, a sum that reflects the devastating fires of 2017 and 2018. Among them was the Camp Fire, the deadliest in state history, which killed at least 85 people in November. PG&E said last month that its equipment had probably caused the fire, making the utility liable for property damage under state law even if it was not negligent.

There is widespread sympathy for the wildfire victims in California. Gov. Gavin Newsom has asked the bankruptcy court to give strong representation to the victims.

But even if PG&E offered to make payments to some wildfire victims, other parties with claims might successfully block such a move. Legal scholars struggled to think of any large bankruptcy case in which individuals’ claims were paid before others. “All these fire victim claims are unsecured claims,” said Kenneth Ayotte, a law professor at the University of California, Berkeley.

The wildfire victims have an organized voice in the proceedings through an official committee set up last month. Another committee represents other unsecured creditors, including investors, contractors, union members and wholesale power suppliers. Though the committees have equal standing in the court, the groups may not always want the same thing.

The Camp Fire in November was the deadliest in California history, killing at least 85 people. PG&E said its equipment was probably the cause.CreditJim Wilson/The New York Times

The company’s bonus plan has become an early focus of the competing interests. Lawyers for the victims’ committee filed a brief this week urging the court to reject the proposal. “Implementing effective and proven safety measures should be the paramount focus of the company, not seeking discretionary bonus payments triggered by PG&E’s own vague interpretation of protecting public safety,” they argued. But employees contend that the bonuses are not excessive and say they rely on the payments for basic needs.

John Mader, an engineer and union official who joined PG&E 21 years ago, said losing the 2018 bonus translated into a 10 percent pay cut for him and other union members. A similar reduction this year, he said, would mean some employees would not be able to pay for items like child care.

Another concern is that PG&E might lose employees to other utilities, making it harder for the company to meet crucial goals. “It’s in the interest of the people of California to operate this business,” said Mr. Mader, president of the Engineers and Scientists of California Local 20, which represents 1,200 PG&E employees. “If you’re going to confiscate their pay for performance, which is an industry standard, it’s going to have an effect.”

Judge Montali is expected to approve the bonuses in some form, long before other issues are settled.

John Mader, a PG&E engineer, said losing his 2018 bonus translated into a 10 percent pay cut. His union, along with the company, is calling for a bankruptcy judge to permit this year’s bonuses.CreditSarahbeth Maney for The New York Times

But the judge may balk at the compensation package if he concludes that it is overly generous or its performance targets too easy to meet. “They can’t be layups,” said Robert K. Rasmussen, a law professor at the University of Southern California. “I am sure he’s going to make sure these things are designed in the right way.”

Certain features of the bonus package, known officially as the short-term incentive plan, may get particular scrutiny. The $235 million budgeted for the 2019 bonuses is 81 percent more than the $130 million that the company had sought to pay out for 2018 before withdrawing the proposal.

In addition, the company wants to pay out the bonuses each quarter, rather than annually. The change may make it easier to hit performance targets, which include goals related to safety and financial results. And while the company is not paying long-term stock awards this year, it is proposing that half of that compensation be paid out as cash bonuses.

Pertinently, the bonuses are shielded from many of the costs of wildfires. PG&E intends for 40 percent of the bonus to be determined by a financial benchmark known as earnings from operations, up from 25 percent last year. The calculation excludes many expenses that are not considered core to the company’s operations, including the claims relating to recent wildfires.

Matt Nauman, a PG&E spokesman, declined to say whether the 2019 plan would also exclude the wildfire costs.

Lauren Hepler contributed reporting.

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