Tag Archives: bankruptcy

PG&E’s bankruptcy—what’s happened and what’s next?

The wildfires that erupted in Sonoma County the night of October 8, 2017 signaled a manifest change not just limited to how we must manage risks, but even to the finances of our basic utility services. Forest fires had been distant events that, while expanding in size over the last several decades, had not impacted where people lived and worked. Southern California had experienced several large-scale fires, and the Oakland fire in 1991 had raced through a large city, but no one was truly ready for what happened that night, including Pacific Gas and Electric. Which is why the company eventually declared bankruptcy.

PG&E had already been punished for its poor management of its natural gas pipeline system after an explosion killed nine in San Bruno in 2010. The company was convicted in federal court, fined $3 million and placed on supervised probation under a judge.

PG&E also has extensive transmission and distribution network with more than 100,000 miles of wires. Over a quarter of that network runs through areas with significant wildfire risk. PG&E already had been charged with starting several forest fires, including the Butte fire in 2015, and its vegetation management program had been called out as inadequate by the California Public Utilities Commission (CPUC) since the 1990s. The  CPUC caught PG&E diverting $495 million from maintenance spending to shareholders from 1992 to 1997; PG&E was fined $29 million. Meanwhile, two other utilities, Southern California Edison (SCE) and San Diego Gas and Electric (SDG&E) had instituted several management strategies to mitigate wildfire risk (not entirely successful), including turning off “line reclosers” during high winds to avoid short circuits on broken lines that can spark fires. PG&E resisted such steps.

On that October night, when 12 fires erupted, PG&E’s equipment contributed to starting 11 of those, and indirectly at least to other. Over 100,000 acres burned, destroying almost 9,000 buildings and killing 44 people. It was the most destructive fire in history, costing over $14 billion.

But PG&E’s problems were not over. The next year in November 2018, an even bigger fire in Butte County, the Camp fire, caused by a failure of a PG&E transmission line. That one burned over 150,000 acres, killing 85, destroying the community of Paradise and costing $16 billion plus. PG&E now faced legal liabilities of over $30 billion, which exceeds PG&E’s invested capital in its system. PG&E was potentially upside down financially.

The State of California had passed Assembly Bill 1054 that provided a fund of $21 billion to cover excess wildfire costs to utilities (including SCE and SDG&E), but it only covered fires after 2018. The Wine Country and Camp fires were not included, so PG&E faced the question of how to pay for these looming costs. Plus PG&E had an additional problem—federal Judge William Alsup supervising its parole stepped in claiming that these fires were a violation of its parole conditions. The CPUC also launched investigations into PG&E’s safety management and potential restructuring of the firm. PG&E faced legal and regulatory consequences on multiple fronts.

PG&E Corp, the holding company, filed for Chapter 11 bankruptcy on January 14, 2019. PG&E had learned from its 2001 bankruptcy proceeding for its utility company subsidiary that moving its legal and regulatory issues into the federal bankruptcy court gave the company much more control over its fate than being in multiple forums. Bankruptcy law afforded the company the ability to force regulators to increase rates to cover the costs authorized through the bankruptcy. And PG&E suffered no real consequences with the 2001 bankruptcy as share prices returned, and even exceeded, pre-filing levels.

As the case progressed, several proposals, some included in legislative bills, were made to take control of PG&E from its shareholders, through a cooperative, a state-owned utility, or splitting it among municipalities. Governor Gavin Newsom even called on Warren Buffet to buy out PG&E. Several localities, including San Francisco, made separate offers to buy their jurisdictions’ grid. The Governor and CPUC made certain demands of PG&E to restructure its management and board of directors, to which PG&E responded in part. PG&E changed its chief executive officer, and its current CEO, Bill Johnson, will resign on June 30. The Governor holds some leverage because he must certify that PG&E has complied by June 30, 2020 with the requirements of Assembly Bill 1054 that authorizes the wildfire cost relief fund for the utilities.

Meanwhile, PG&E implemented a quick fix to its wildfire risk with “public safety power shutoffs” (PSPS), with its first test in October 2019, which did not fare well. PG&E was accused of being excessive in the number of customers (over 800,000) and duration and failing to coordinate adequately with local governments. A subsequent PSPS event went more smoothly, but still had significant problems. PG&E says that such PSPS events will continue for the next decade until it has sufficiently “hardened” its system to mitigate the fire risk. Such mitigation includes putting power lines underground, changing system configuration and installing “microgrids” that can be isolated and self sufficient for short durations. That program likely will cost tens of billions of dollars, potentially increasing rates as much as 50 percent. One question will be who should pay—all ratepayers or those who are being protected in rural areas?

PG&E negotiated several pieces of a settlement, coming to agreements with hedge-fund investors, debt holders, insurance companies that pay for wildfire losses by residents and businesses, and fire victims. The victims are to be paid with a mix of cash and stock, with a face value of $13.5 billion; the victims are voting on whether to accept this agreement as this article is being written. Local governments will receive $1 billion, and insurance companies $11 billion, for a total of $24.5 billion in payouts.  PG&E has lined up $20 billion in outside financing to cover these costs. The total package is expected to raise $58 billion.

The CPUC voted May 28 to approve PG&E’s bankruptcy plan, along with a proposed fine of $2 billion. PG&E would not be able to recover the costs for the 2017 and 2018 fires from ratepayers under the proposed order. The Governor has signaled that he is likely to also approve PG&E’s plan before the June 30 deadline.

PG&E is still asking for significant rate increases to both underwrite the AB 1054 wildfire protection fund and to implement various wildfire mitigation efforts. PG&E has asked for a $900 million interim rate increase for wildfire management efforts and a settlement agreement in its 2020 general rate case calls for another $575 million annual ongoing increase (with larger amounts to be added in the next three years). These amount to a more than 10 percent increase in rates for the coming year, on top of other rate increases for other investments.

And PG&E still faces various legal difficulties. The utility pleaded guilty to 85 chargesof manslaughter in the Camp fire, making the company a two-time felon. The federal judge overseeing the San Bruno case has repeatedly found PG&E’s vegetation management program wanting over the last two years and is considering remedial actions.

Going forward, PG&E’s rates are likely to rise dramatically over the next five years to finance fixes to its system. Until that effort is effective, PSPS events will be widespread, maybe for a decade. On top of that is that electricity demand has dropped precipitously due to the coronavirus pandemic shelter in place orders, which is likely to translate into higher rates as costs are spread over a smaller amount of usage.

Is PG&E really a “recidivist felon”?

TURN, the residential ratepayer intervenor group, submitted a comment letter to the California Public Utilities Commission (CPUC) in Pacific Gas and Electric’s (PG&E) bankruptcy investigation proceeding (I.19-09-016). TURN has some harsh statements asking for denial of recovery of some large expenses, including wildfire victim payments and legal fees. One particular passage caught my attention:

The stark truth is that PG&E is a recidivist felon that has caused multiple
major catastrophes within the space of a decade.

I looked up the definition on Wikipedia. (There are other definitions that differ some.)

Recidivism is the act of a person repeating an undesirable behavior after they have either experienced negative consequences of that behavior, or have been trained to extinguish that behavior. It is also used to refer to the percentage of former prisoners who are rearrested for a similar offense.

But does “recidivist” apply in this situation for this reason: Has PG&E really suffered negative consequences from its previous behavior? So far, despite being convicted of felonies twice in the last decade, PG&E has been fined a total of $6.5 million for the San Bruno gas line explosion and the Camp Fire, which is equal to just over 4 hours of revenues for PG&E, and no one has gone to prison. PG&E continues to hold its franchise with few restrictions over most of northern California, and it appears headed for exiting bankruptcy by June 30 with a favorable finance plan in which current shareholders still hold most of the equity. It’s also not obvious how PG&E has been “trained” to extinguish its behavior, although the CPUC has instituted more oversight.

So, it’s not clear where and how PG&E has suffered significant negative consequences for its criminal acts, unless you consider “flea bites” as real punishment.  To the contrary, PG&E has turned each of these events into money making enterprises.  The first was by catching up on its deferred natural gas pipeline maintenance that it should have been spending on for decades. Instead, the CPUC could have simply ordered that the deferred spending be taken from past revenues. The second is the added investment of billions in hardening the rural distribution system and setting up back up generation in danger areas. That will add hundreds of millions or even a couple billion to annual revenues, all delivering a 10%+ return to company shareholders. Instead of negative consequences, PG&E has been able to turn these convictions into positive financial gains for its investors.

Should California just buy PG&E?


Governor Gavin Newsom asked Warren Buffet to use Berkshire-Hathaway to buy PG&E. Berkshire-Hathaway has been acquiring utilities throughout the West including PacifiCorp and Nevada Power. However, other than deep pockets, it’s not clear what Buffet has to offer in this situation.

PG&E’s stock fell as low as $3.80 per share on Tuesday, closing at $5.03. The total market value, including the natural gas utility, is now $2.66 billion. The invested book value on the other hand is about $26 billion.

Not sure why California doesn’t just buy the company for, say, $5B instead of appealing to an out of state private owner. Several state legislators, including a key state senator, Bill Dodd, have expressed support for some sort of state acquisition. Then the state can either parse it out to public utilities, set up a cooperative or bid out the franchises to multiple operators or owners. Ratepayers/taxpayers will have to pay most of the wildfire liabilities anyway, so why not remove the high-cost (and apparently incompetent) middleman?

One bad legislative idea: Bail out PG&E


The California Legislature is still struggling with whether and how it should protect PG&E from a $17 billion liability from the Sonoma wildfires that could push the utility into bankruptcy. The latest proposal would have the CPUC conduct a “stress test” on PG&E’s finances if it faced a large liability, and then PG&E could raise rates sufficiently to cover the difference between the total liability and exposure deemed sufficient to maintain financial solvency. We don’t have enough details to understand how well the stress threshold is defined and how it would differ from the current cost of capital evaluations, but this is a bad idea regardless.

Firms need the threat of bankruptcy to perform efficiently and effectively. We’ve already seen how PG&E manages and performs sloppily, whether its maintaining vegetation (which has been a problem since the early 1990s), tracking its pipeline maintenance (which led to the San Bruno accident), or managing risk in its renewable power portfolio (which has added a $33 per megawatt-hour premium to its cost.) Clearly CPUC oversight alone is not doing the job. Outside litigation may be the only way to get PG&E’s attention, especially if it creates an existential threat.

Policymakers have taken the wrong lesson from PG&E’s previous bankruptcy, filed in 2001 during the California energy crisis. The issue there that lead to the final resolution was whether PG&E was required to provide power to its customers at whatever cost. This situation is not about PG&E’s obligations but rather about its management practices, and a bankruptcy court is much less likely to require a cost pass through.

Instead, the state could simply step in buy PG&E for $1 if the utility declares bankruptcy (an option that Governor Gray Davis was too much of a coward to consider in March 2001.) The state could then directly manage the utility, or better yet, parse it  down to eight or ten smaller utilities. (Two studies in PG&E’s 1999 General Rate Case, and the subsequent decision, found that the most efficient utility size is about 500,000 customers. PG&E now has over four million.) Customers would find the utilities more accessible and responsive, and by creating municipal utilities, rates could be much lower with cheaper financing cost. It’s time to rethink where we should head.