Why PG&E’s bankruptcy won’t please California wildfire victims, ratepayers or investors

Call it a taste of things to come as PG&E staggers into bankruptcy.

With a Chapter 11 bankruptcy case expected to begin Tuesday, the beleaguered utility last week refused to pay a $1.2 million settlement to a group of survivors of the 2015 Butte Fire in Calaveras County, according to the survivors’ lawyer Mike Danko. He said the utility “is reneging,” but PG&E says it has to conserve cash.

“PG&E cannot commit to pay one potential creditor over any other in the days prior to filing for bankruptcy,” the utility’s lawyer wrote the Sacramento Superior Court judge presiding over the case.

The Calaveras fire survivors aren’t alone. PG&E’s bankruptcy is shaping up as an ugly free-for-all that will leave no one happy — not its investors, not wildfire victims, not ratepayers.

“It’s just bad,” said Michael Wara, an energy-policy expert at Stanford University.

Hours before the expected bankruptcy filing, the Public Utilities Commission — ignoring dozens of chanting protesters — agreed Monday to let PG&E borrow $5.5 billion to steer the company through bankruptcy. Also Monday, a group of investors offered $4 billion in separate financing to help PG&E avoid bankruptcy, according to Bloomberg news. PG&E declined comment on the Bloomberg story.

If PG&E does go bankrupt, the outcome could frustrate legions of creditors.

Wildfire survivors will get something — whether they live in Calaveras, the wine country or the devastated town of Paradise — but probably not 100 cents on the dollar. PG&E itself and its shareholders will almost certainly take a beating, too, if chunks of the company get auctioned off to pay claims.

State regulators and elected officials aren’t looking forward to this, either, as they struggle with the idea of granting at least some measure of relief for a company that’s become extraordinarily unpopular. They’re hoping to cobble together a giant settlement plan that will somehow enable PG&E — or whatever the entity is that emerges from bankruptcy — to provide reliable service and prevent more wildfires while paying its debts without gouging ratepayers.

That’s a tall order. In the short run, despite their antipathy toward PG&E, state officials have to make sure the utility is healthy enough to keep the lights on and ramp up safety efforts for the upcoming fire season.

PG&E says it plans to spend $1.3 billion this year to reduce fire risks and has objected to a federal judge’s plan to force the company to go even further to prevent fires. On Monday, the Public Utilities Commission also protested the judge’s plan — which calls for exhaustive power-line inspections and tree removals, plus deliberate blackouts on windy days — saying it goes too far.

Even if PG&E can get through 2019 without racking up more fire liabilities, the debts the company faces are in the billions and any solution will bring pain to someone.

If it were up to state officials, PG&E shareholders would bear as much of the financial burden as possible. But it’s unclear how much financial capacity PG&E has, despite $17 billion in annual revenue. If the utility can’t pay all its debts, that could leave less for wildfire victims or put more strain on ratepayers — either of which is unappetizing to state officials.

State Sen. Bill Dodd, D-Napa, who authored legislation that gave PG&E some protection against 2017 wildfire liabilities, said the state wants to get wildfire survivors paid while keeping rate hikes to a minimum.

“What can we do to make sure victims don’t become victimized again, and ratepayers don’t get too big of a hit?” said Dodd, who represents survivors of the 2017 wine-country fires. “It’s a balancing act.”

Complicating matters is that state policymakers — Gov. Gavin Newsom, the Legislature, the Public Utilities Commission — will have their hands tied to a certain degree. Once PG&E Corp. and its Pacific Gas and Electric Co. subsidiary begin Chapter 11 proceedings, the bankruptcy judge will have broad power to accept or reject any settlement that’s proposed.

No priority for victims

Bankruptcy court won’t necessarily be kind to wildfire survivors and their claims for billions in damages — regardless of state officials’ desire to make sure they’re fully compensated. Jared Ellias, a bankruptcy expert at UC Hastings College of Law in San Francisco, said the bankruptcy judge will have the authority to “decide the merit” of any claim for damages from fire survivors.

What’s more, Ellias said, in bankruptcy those wildfire survivors will be lumped in with PG&E’s bondholders as unsecured creditors — claimants who don’t hold any collateral. If bondholders get, say, 50 cents on the dollar, so too will the fire victims.

While they’re sympathetic figures, “in bankruptcy, the fire victims won’t have any priority,” said Wara, the Stanford expert. “They will have equal priority to other creditors. They don’t come first.”

In the short run, fire survivors won’t get anything. PG&E has made clear to unpaid survivors of the 2015 Butte Fire in Calaveras County that their claims are on hold. “It’s David vs. Goliath .... These are individuals who for the most part have lived on burnt-out properties in trailers, waiting for a resolution,” said Amanda Riddle, a Bay Area lawyer representing some Butte Fire survivors.

The utility had paid $806 million worth of Butte Fire claims as of last Sept. 30, according to Securities and Exchange Commission filings. About $294 million worth of claims remained unresolved.

PG&E won a victory last week when Cal Fire announced that PG&E’s equipment wasn’t responsible for the Tubbs Fire — the largest and deadliest of the 2017 wine-country fires.

Still, lawyers for Tubbs Fire survivors aren’t likely to drop the cases they’ve been pursuing against PG&E. Cal Fire’s report “adds confusion, yes, it adds a different layer, but it will not change the efforts of victims and their lawyers,” said Patrick McCallum, who leads an alliance of wine-country fire survivors called Up From the Ashes.

PG&E said last week it still faces “a deteriorating financial situation,” even if its potential liabilities from the Tubbs Fire vanish. PG&E has already been blamed by Cal Fire for a dozen other fires from 2017, and the prospect of huge liabilities from the November Camp Fire put the company in an even deeper jam.

The Camp Fire destroyed 13,000 homes in Paradise and killed 86 people, more than any other fire in California history. Insurance Commissioner Ricardo Lara said Monday that property owners in the fire’s burn area have filed $8.4 billion worth of insurance claims, and he expects that figure to grow. He had no estimate of damages suffered by uninsured residents.

All told, PG&E has told the Securities and Exchange Commission that its wildfire liabilities could total $30 billion, although it hasn’t said how much of that estimate included potential losses from the Tubbs Fire. The utility also owes bondholders $18 billion.

Where’s the cash?

How does that get paid off? The answer isn’t likely to pop up overnight. PG&E’s first bankruptcy — in 2001, the result of bloated electricity costs during the energy crisis — took three years to resolve. This could take just as long.

One potential source of cash could be a sale of PG&E’s natural gas division. Wara said the gas division could possibly fetch $10 billion to $12 billion. He said selling PG&E’s real estate in San Francisco, including its headquarters near the Embarcadero, could generate $1.5 billion in the city’s hyper-inflated market.

“I feel very confident that they’re marketing the gas division as we speak,” Dodd said. PG&E has refused to comment on whether it might sell that unit.

But selling the gas division wouldn’t solve everything — and could possibly make things worse for PG&E’s creditors, including fire victims.

That’s because creditors might wind up getting compensated, at least partly, with PG&E stock, according to Ellias. He said such an arrangement — swapping debt for ownership — is typical in a big corporate reorganization case. “The creditors pre-bankruptcy become shareholders afterward,” the UC Hastings professor said.

And if PG&E unloads its gas division, which accounts for nearly one-fourth of its revenue, he said the remaining company will be smaller and less valuable to its shareholders. PG&E stopped paying quarterly dividends to shareholders in late 2017, costing them hundreds of millions of dollars already.

Breaking up the company, or having a governmental entity take the business over, as some officials have suggested, is easier said than done. PG&E suggested splitting itself up in 2001, during its first bankruptcy, but the idea was rejected by the PUC, according to Wara. Now, given the recent history of wildfires in California, it might be difficult to find buyers, he said.

“Who wants to own the risks in the high wildfire areas?” Wara said.

Ratepayer pain?

So what about ratepayers? How much pain will they wind up absorbing?

In the 2001 bankruptcy, rates went up substantially to help PG&E repay billions owed to energy suppliers. “Ratepayers took it on the chin,” Dodd said. “They softened the blow by doing it over a number of years but it still had an impact.”

This time around, the utility is already seeking a $1 billion rate hike beginning in 2020, with half the money going to fire safety. The rate hike would increase average residential electric bills $8.73 a month and natural gas $1.84.

None of that money would go to pay liability claims from wildfires. But it’s possible that ratepayers could wind up footing some of the liability bills anyway. In Senate Bill 901, signed into law last fall by former Gov. Jerry Brown, the Legislature gave the Public Utilities Commission the authority to pass some of PG&E’s 2017 wildfire liabilities onto customers if the debts overwhelm the company’s capacity to pay.

Dodd, who wrote the legislation, said SB 901 doesn’t create a free ride for shareholders; the PUC will have to conduct a “complete financial scrub of PG&E” before allowing the utility to start billing ratepayers for wildfire claims.

In any event, SB 901 says nothing about the 2018 fires, and Dodd said the Legislature is in no mood to provide more protection for PG&E — at least not right now.

Lawmakers should wait until after the Camp Fire investigation is complete before considering additional action on PG&E, Dodd said. The November disaster appears to have begun near a high-voltage PG&E transmission tower that experienced problems just before the fire started, but Cal Fire is still investigating.

Regardless of what happens to rates, Dodd said California officials will insist on this: PG&E stockholders will pay a stiff price.

“They come out of bankruptcy and everybody takes a haircut,” he said. “I think it’s important for them to take one, too.”

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