This could get messy.
Facing tens of billions of dollars in wildfire liabilities, Pacific Gas and Electric on Tuesday filed for bankruptcy protection, a step that the company has said was its “only viable option.” But some PG&E investors, elected leaders in its home state of California and public interest groups contend that bankruptcy is not needed and will hurt millions of ratepayers and anybody who owns shares in the utility or does business with it.
That fundamental disagreement about the company’s financial health is one of the main reasons the utility’s bankruptcy case could drag on for months. The filing will create uncertainty for the company’s creditors and people who have lost homes and loved ones to fires that were started by PG&E’s equipment and are seeking compensation from the company. The case could also cost the company hundreds of millions of dollars in fees, to Wall Street and white-shoe law firms.
PG&E’s bankruptcy could have consequences far beyond its immediate winners and losers. The bankruptcy could shape California’s response to climate change and the threat of catastrophic wildfires.
Why did PG&E file for bankruptcy protection?
At first glance, PG&E appears to be solvent. At the end of September, the company’s assets exceeded its debt by about $20 billion. What is at dispute is just how much the company owes for starting wildfires in 2017 and 2018. The utility says it could be on the hook for $30 billion.
But right now, investors seem to be betting that PG&E can go through bankruptcy, meet wildfire claims and still have money left over for shareholders. That is why PG&E’s stock price closed up more than 16 percent on Tuesday afternoon, giving the company a market value of more than $7 billion. Bankrupt companies typically have a negligible market value.
And investors may be optimistic because they believe PG&E will end up paying substantially less than $30 billion in wildfire claims. One reason for that outlook is that the California Department of Forestry and Fire Protection concluded last week that PG&E equipment was not at fault for the Tubbs Fire, which killed 22 people and destroyed over 5,600 buildings. Had it been found responsible, the company could have been liable for $8 billion in damages.
Bankruptcy could also help ease the financial pressure on PG&E. By delaying some payments, and taking on new loans, the company hopes to avoid running low on cash and not being able to afford improvements that reduce the risk of future fires. That is because loans a company takes on while it is in bankruptcy court are typically paid before the company’s other obligations.
Who might get trampled in a bankruptcy?
Estimating wildfire costs is tricky, and PG&E’s liabilities could end up being larger than investors expect. In that case, the stock could get wiped out. Creditors and wildfire claimants would then be at risk of not getting all that they are owed.
That risk was highlighted last week in federal court in a separate case. In that case, PG&E is under probation after the utility was convicted of felonies stemming from a 2010 gas explosion in San Bruno near San Francisco. Judge William Alsup of Federal District Court, who is overseeing the utility’s probation, has said he wants PG&E to eliminate the risk that the utility’s equipment would start wildfires. In a court filing last week, PG&E said complying with the judge’s proposal could cost up to $150 billion.
But even if the utility appears to have enough money to meet all debts and liability claims, some people or businesses could be hurt. To keep its operations going, PG&E is expected to make payments to some contractors and vendors before others. And contracts that were reached at prices that are well above today’s prevailing rates could be revised down in bankruptcy.
Several contracts PG&E has signed with solar power suppliers might be vulnerable to such revisions. One supplier, NextEra, has asked the Federal Energy Regulatory Commission, which oversees wholesale power contracts, to intervene if PG&E tries to reject contracts. PG&E on Tuesday asked the bankruptcy court to assert that it has exclusive jurisdiction over such contracts.
Wildfire victims might have to wait longer than they had anticipated for their claims to be paid. A case involving the utility stemming from the so-called North Bay fires of 2017 is scheduled to go to trial in September in San Francisco County Superior Court. Resolution of that case could be delayed because it might now also have to win the approval of the federal bankruptcy court, a lawyer for plaintiffs in that case said.
“The reality is that there’s a ton of needless work that’s going to get done,” the lawyer, Michael Kelly, said.
Who’s going to make money from PG&E’s bankruptcy?
Bankruptcy cases involving big corporations usually produce hundreds of millions of dollars in fees for lawyers, bankers and consultants. BlueMountain Capital Management, which owns PG&E stock and opposes the company’s bankruptcy, says PG&E’s last bankruptcy, filed in 2001, cost more than $400 million in fees. The current case could cost a lot more because lawyers’ hourly rates have gone up a lot since then.
The 2014 bankruptcy filing of Energy Future Holdings, a Texas utility, yielded professional fees of more than $600 million, according to data collected by Texas Lawbook.
Still, some legal experts say that processing many claims in one court can save money. “It’s going to produce some pretty big efficiencies,” said Lynn M. LoPucki, a law professor at the University of California, Los Angeles.
PG&E has also asked the bankruptcy court to approve roughly $130 million of 2018 bonus payments to employees, who stand to get $5,000 to $90,000 each. The $130 million figure does not include the bonuses for 12 senior PG&E executives. The company has not yet asked the court to approve payments to those executives, although it noted that senior officers are typically eligible to receive bonuses in bankruptcy.
What can California do to get lasting benefits out the bankruptcy?
It depends on what steps elected leaders take. PG&E’s bankruptcy highlights the flaws in how the state pays for catastrophic wildfires. Even after bankruptcy, PG&E may not be strong enough to prevent and meet the cost of future fires. As a result, many investors might be reluctant to lend to the company or might only do so at high interest rates.
The California Legislature could seek to expand the scope of legislation it passed last year that allowed utilities to pass on some of the costs of wildfires to its customers in the form of higher electricity rates. But voters would consider that a bailout of PG&E.
An idea outlined in a bill introduced this month by Chad Mayes, a Republican assemblyman, offers a different approach. He is proposing to create an industry-financed insurance fund that pays for catastrophic wildfire costs. Such a fund might reassure investors that bankruptcy is no longer the most likely option when a utility is hit with huge damage claims, and it may also satisfy residents who oppose legislation that is too favorable to utilities.
California needs to take bold steps to avoid another utility bankruptcy, said Severin Borenstein, a professor at the Haas School of Business at the University of California, Berkeley. “The potential for catastrophic loss and liability is going to be here, and as long as it’s here, you’re going to need some sort of process for sorting it out that’s not bankruptcy.”