PG&E files for bankruptcy. Here’s why that could mean bigger electricity bills

By Sammy Roth

PG&E Corp., which owns California’s largest electric utility, filed for bankruptcy protection Tuesday in anticipation of huge legal claims, starting an unpredictable process that could take years to resolve and is likely to result in higher energy bills for the millions of Californians who depend on Pacific Gas & Electric for their power.

PG&E said a Chapter 11 bankruptcy filing, which allows the company to continue operating while it comes up with a plan to pay its debts, was the only way to deal with billions of dollars in potential liabilities from a series of deadly wildfires, many of which were sparked by the company’s power grid infrastructure.

“Through this process, we will prioritize what matters most to our customers and the communities we serve — safety and reliability,” interim Chief Executive John R. Simon said in a statement. “We believe that this process will make sure that we have sufficient liquidity to serve our customers and support our operations and obligations.”

Energy experts say PG&E’s rates probably will increase when the utility emerges from Chapter 11 protection because bankruptcy inevitably makes it more expensive for a company to borrow money, and the utility passes costs along to its customers.

“It’s almost impossible to see a way out of this that doesn’t have some short-term cost increases,” Ralph Cavanagh, co-director of the energy program at the Natural Resources Defense Council, said in a recent interview.

A bankruptcy judge could also allow PG&E to reduce its eventual payouts to California fire victims. That could include Paradise residents whose homes were destroyed by last year’s Camp fire, if PG&E’s equipment is found to have sparked the blaze. The utility has already started skipping payments to families whose properties were destroyed by the 2015 Butte fire, which was caused by a tree falling on a PG&E power line.

PG&E officials say electricity and natural gas service will continue uninterrupted for its 16 million customers in Northern and Central California. The company has lined up at least $5.5 billion from several banks to fund its operations during what it expects to be a two-year bankruptcy process, and it filed a motion Tuesday asking the court to approve that so-called debtor-in-possession agreement.

Lawmakers watched in dismay as PG&E chose bankruptcy, but there was nothing they could do to stop the company from filing. State Sen. Bill Dodd (D-Napa) said the situation is “extremely disappointing and underscores the need for change at PG&E in both its leadership and corporate culture.” Assemblyman Chris Holden (D-Pasadena), who chairs the Utilities and Energy Committee, lamented that the effect on fire victims and PG&E ratepayers “may be severe.”

“Our goal all along was to protect the most vulnerable, but now the Bankruptcy Court will be managing the future of PG&E and its creditors, including the damages of fire victims for which the utility is deemed responsible,” Holden said in a statement.

PARADISE, CALIF. - DECEMBER 12: The remains of Edgewood and Sawmill Estates community, in the Camp Fire decimated town of Paradise on Wednesday, Dec. 12, 2018 in Paradise, Calif. (Kent Nishimura / Los Angeles Times)
PARADISE, CALIF. - DECEMBER 12: The remains of Edgewood and Sawmill Estates community, in the Camp Fire decimated town of Paradise on Wednesday, Dec. 12, 2018 in Paradise, Calif. (Kent Nishimura / Los Angeles Times) (Kent Nishimura / Los Angeles Times)

PG&E listed $71.4 billion in assets and nearly $51.7 billion in total debts. The firm said it filed requests for authorization to continue paying employee wages and to continue existing customer programs, including energy efficiency and support for low-income ratepayers. It also said it intends to pay its suppliers under normal terms for goods and services provided on or after the date of the bankruptcy filing.

Financial pressure has been mounting on PG&E since October 2017, when a series of wildfires ravaged Northern California, killing 44 people. State investigators determined that PG&E’s equipment sparked or contributed to more than a dozen of those fires, which killed 22 people. The company’s crisis only grew with the November 2018 Camp fire, which killed 86 people and destroyed most of the town of Paradise.

The California Department of Forestry and Fire Protection has yet to announce a cause for the Camp fire, but PG&E’s infrastructure is suspected. The utility company’s stock has lost more than 80% of its value since the 2017 fires broke out, and its credit rating has been downgraded to junk status.

PG&E has estimated its potential wildfire liabilities at $30 billion or more, although that number includes the Tubbs fire, the biggest and deadliest of the 2017 Northern California blazes. Cal Fire announced last week that the Tubbs fire wasn’t caused by PG&E, which by some estimates could cut the company’s potential liabilities in half.

Even without Tubbs fire damages on its ledger, PG&E’s liabilities could still exceed the company’s market value, which was down to about $7 billion on Tuesday.

“To be clear, we have heard the calls for change and we are determined to take action throughout this process to build the energy system our customers want and deserve,” Simon, the company’s chief executive, said Tuesday.

Critics say PG&E has exaggerated its financial woes and is filing for bankruptcy as a ploy to extract investor-friendly concessions from the Legislature or regulators. Those critics include ratepayer advocacy groups and lawyers for fire victims, whose clients could see court awards reduced by a bankruptcy judge. They also include BlueMountain Capital Management, a hedge fund that holds more than 11 million shares of PG&E stock that could be wiped out.

BlueMountain urged PG&E’s management not to go through with the bankruptcy filing and said last week it would nominate a full slate of new directors to the company’s board.

“Instead of rolling up their sleeves and getting to work, current board members are poised to concede defeat and pass the buck to a bankruptcy judge. There is no imminent financial crisis — there is a leadership crisis,” BlueMountain said in an open letter to other shareholders, asking them to join the hedge fund in its protests.

In addition to the likelihood of higher electricity rates and lower payouts for wildfire victims, PG&E’s bankruptcy could affect California’s ability to meet its climate change goals. Those goals depend on a rapid transition from fossil fuels to climate-friendly power sources, and state officials have been counting on PG&E to make massive investments in solar and wind farms and other clean energy technologies.

Already, PG&E has suggested it could seek to nullify existing contracts to buy power from solar and wind farms, or to slash payments under those deals. That possibility is worrying developers who have contracts with PG&E, and clean energy advocates who fear a chain reaction where lenders are hesitant to finance future projects in California.

The Florida-based developer NextEra Energy Resources has asked the Federal Energy Regulatory Commission to protect its contracts with PG&E. The agency gave NextEra an early victory last week, ruling it has “concurrent jurisdiction” with the bankruptcy court over those contracts. But PG&E objected on Tuesday, asking the bankruptcy court to declare that federal regulators have no say over the fate of those contracts.

Still, it’s far from clear what will happen next.

Some PG&E critics have called for the Legislature and Gov. Gavin Newsom to break the company into smaller pieces or convert it into a public entity. San Francisco has said it will study the possibility of acquiring PG&E’s electrical infrastructure in the city.

Most utility experts say a government takeover is unlikely because it could saddle state or local agencies with huge liabilities from future fires without addressing the causes of those fires. Newsom has played his cards close to his vest, saying Tuesday that his administration “will continue working to ensure that Californians have access to safe, reliable and affordable service, that victims and employees are treated fairly, and that California continues to make forward progress on our climate change goals.”

PG&E’s bankruptcy filing “does not change my focus, which remains protecting the best interests of the people of California,” Newsom said in a statement.

Unlike most companies that enter into bankruptcy protection, PG&E is a regulated monopoly that provides an essential public service. The California Public Utilities Commission will need to approve any reorganization plan that involves raising electricity rates, giving the state some ability to protect the interests of ratepayers.

But critics aren’t happy with how the PUC and its president, Michael Picker, have handled PG&E’s bankruptcy so far.

On Monday, the commission unanimously approved the company’s request to take on up to $10 billion in debtor-in-possession financing, over the objections of consumer watchdog groups that said the agency was needlessly rushing to accommodate PG&E’s planned Chapter 11 filing. The raucous emergency meeting, held on short notice, was attended by several angry utility customers and labor representatives who chanted “shame, shame” as the commissioners voted.

The commission’s own Public Advocates Office said the agency’s decision failed to include important safeguards for ratepayers, such as requiring that none of the financing go toward management bonuses or to any other purpose not necessary to keep the lights on. The Utility Reform Network, an independent ratepayer advocacy group based in San Francisco, accused the commission of blindly accepting PG&E’s claim that it needed billions in emergency cash to fund its operations.

Picker defended the commission’s decision on Monday, citing a “substantial risk” that PG&E won’t be able to keep providing reliable power and gas service without the emergency funding. He also said PG&E won’t be able to pass along any of the costs to ratepayers until the commission reviews how the utility ultimately spends the money.

“The action does not encourage or enable PG&E to seek bankruptcy. Under federal law that is their choice. This decision just ensures they can take actions necessary to continue providing service in bankruptcy,” Picker said.

Even without the fires, PG&E continues to grapple with the fallout from the 2010 explosion of one of its natural gas pipelines, which killed eight people and destroyed 38 homes in San Bruno. PG&E was fined $1.6 billion by the PUC and $3 million by a federal judge. Just last month, the commission accused PG&E of falsifying pipeline safety records for years after the deadly explosion.

Alsup also suggested he could order PG&E to preemptively shut off electricity in certain areas when strong wind and other weather conditions create a high fire risk. PG&E and the state’s other big investor-owned utilities, Southern California Edison and San Diego Gas & Electric, rarely use preemptive power shutoffs as a wildfire prevention strategy, but that could change as climate change fuels bigger fires.

The last time PG&E filed for bankruptcy, in 2001, fires had nothing to do with it.

That bankruptcy was a result of California’s infamous energy crisis, in which a failed deregulation plan allowed Enron Corp. and other energy traders to manipulate markets and send prices skyrocketing. PG&E said it needed relief from $9 billion in debt that it incurred because it couldn’t recover its higher costs from ratepayers.

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California’s largest power company faces an existential crisis as it confronts the looming possibility of tens of billions of dollars in wildfire liability.

Shares of PG&E Corp. — which owns Pacific Gas & Electric Co. — sank 22.3% to $18.95 on Monday after reports that the utility could face at least $30 billion in liability related to fires and has considered filing for bankruptcy protection or unloading its natural gas operations.

The consequences of bankruptcy or an asset sale could ripple far beyond the utility’s shareholders, some experts say, affecting 16 million Californians who depend on PG&E for energy and potentially threatening the state’s ability to meet its climate-change goals.

The utility has faced tremendous scrutiny over the last decade, starting with a 2010 gas explosion that killed eight people in San Bruno and continuing with among the deadliest and most destructive fires in state history, some of which may have been sparked by PG&E’s infrastructure. The California Public Utilities Commission is considering breaking up the company as part of an investigation into PG&E’s safety culture.

Some PG&E critics have called for a government takeover or for the massive company to be replaced by smaller, municipal utilities. But it’s far from clear that local governments across Northern and Central California have the ability or the desire to take control of PG&E’s infrastructure, and to assume the huge liabilities that running the power grid entails. And state officials aren’t likely to support a takeover because then the utility’s problems would become Sacramento’s problems instead.

“For the state to take over every bit of the wildfire liabilities is just insane,” said Mike Gatto, a former state lawmaker who led the Assembly’s utilities committee.

PG&E declined to comment on specific steps it may be considering. In an emailed statement, spokesman Andy Castagnola said the company is “reviewing structural options to best position PG&E to implement necessary changes.”

“Safety is and will continue to be our top priority as we work to determine the best path forward for all of our stakeholders. PG&E remains fully committed to helping our customers and the affected communities recover and rebuild — and to doing everything we can to reduce the risk of future wildfires,” Castagnola said.

The fundamental challenge is that PG&E isn’t like most private companies. It’s the only entity authorized to deliver electricity to 5.4 million homes and businesses, and gas for home heating and cooking to 4.3 million customers. The company’s geographic reach spans nearly half the state, from Eureka to Bakersfield.

(Lorena Iñiguez Elebee / Los Angeles Times)

The Public Utilities Commission is eager to avoid a Bankruptcy Court proceeding, in which a federal judge would control the company’s fate and the interests of creditors would be placed above those of ratepayers. Commission President Michael Picker has said California won’t let PG&E go bankrupt. He compared the process of reforming the troubled company to “repairing a jetliner while it’s in flight.”

“Crashing a plane to make it safer isn’t good for the passengers,” Picker said in a statement last month.

For one thing, a bankruptcy could lead to higher rates for PG&E customers.

The company filed for bankruptcy once before, in the midst of the early-2000s energy crisis that stemmed from a failed deregulation scheme and led to rolling power outages in much of the state.

The crisis made California a riskier place to invest, which led to higher borrowing costs for PG&E and the state’s second-largest investor-owned utility, Southern California Edison. Those costs were passed on to utility customers in the form of higher rates, said Michael Colvin, a former top official at the Public Utilities Commission.

“It probably took 5 to 10 years for California to shake that risk premium that happened after the energy crisis,” said Colvin, who now works as a senior manager for the Environmental Defense Fund, a nonprofit advocacy group.

Renewable energy developers, meanwhile, are worried a bankruptcy filing would make it more difficult for California to meet its environmental goals.

California law requires the state to get 60% of its electricity from climate-friendly sources by 2030 and 100% by 2045. Developers say meeting those targets depends on financially viable utility companies that can sign long-term contracts to buy electricity from solar and wind farms or from other clean energy facilities. Those long-term utility contracts allow developers to secure financing to get their projects built.

“We have tens of billions of dollars worth of contracts with PG&E to meet the state’s climate change goals and its renewable energy goals. A bankruptcy would be very disruptive, basically put those contracts potentially in danger, and would send potentially a very negative signal in terms of future development in California,” said Jan Smutny-Jones, chief executive of the Independent Energy Producers Assn., a trade group that represents renewable energy and natural gas developers.

The American flag soars in the wind on Feb. 9, 2015 at the 550-megawatt Desert Sunlight solar farm in eastern Riverside County, which sells electricity to Pacific Gas & Electric and Southern California Edison.
The American flag soars in the wind on Feb. 9, 2015 at the 550-megawatt Desert Sunlight solar farm in eastern Riverside County, which sells electricity to Pacific Gas & Electric and Southern California Edison. (Marcus Yam / Los Angeles Times)

Mark Toney, executive director of the Utility Reform Network, a ratepayer watchdog group, has a different worry. He’s afraid PG&E might play up the risk of bankruptcy as a scare tactic, to persuade state lawmakers to shield the company’s shareholders from huge potential liability from Northern California’s 2017 Tubbs fire, which killed 22 people, and the 2018 Camp fire, which killed 86 people.

He pointed to the Legislature’s approval last year of Senate Bill 901, which allows PG&E and other investor-owned utilities to charge ratepayers for some of the costs they may incur from 2017’s deadly fires.

“PG&E threatened bankruptcy last year and got their bailout. And they are threatening bankruptcy again and are asking for another bailout. That’s not sustainable,” Toney said.

Toney described bankruptcy as a “bad option” but still better than business as usual at California’s biggest utility. He said dramatic changes are needed to transform PG&E.

“There needs to be some sort of fundamental reorganization. Whether that will be accomplished through a new board of directors, new management, or someone else coming in to run the franchise, or the company being broken up into different components, we don’t know what the real proposals are out there,” Toney said.

A sale of PG&E’s gas business, the possibility of which was reported last week by National Public Radio, wouldn’t fix the utility’s safety problems. But it could help the company pay down billions of dollars in wildfire-related costs.

For now, it’s unclear how realistic such a sale would be. PG&E’s guaranteed customer base and its nearly 50,000 miles of natural gas pipelines would almost certainly attract potential buyers. But a sale would need to be approved by the Public Utilities Commission, which could require any buyer to take steps to protect ratepayers.

Another obstacle is organized labor, a politically powerful group that is already objecting to a potential sale. The International Brotherhood of Electrical Workers represents more than 12,000 PG&E employees, roughly 3,000 of whom work on the gas side of the business. Tom Dalzell, business manager for IBEW Local 1245, said a sale of PG&E’s gas assets would be “a long and complicated process with many opportunities for our members to lose something,” from retirement benefits to career options.

Ratepayer advocates would scrutinize a sale too. One key question: Would the buyer be a utility with a strong safety record or a hedge fund looking for a quick profit?

“We certainly don’t want to exchange one bad actor for another bad actor,” Toney said.