What’s Next for PG&E After Bankruptcy?

Tuesday, April 9th, 2019 at 4:32 pm by William Hayes

Pacific Gas and Electric (PG&E), California’s largest utility company, has set off a political storm in the state after filing for bankruptcy in late January—not least because of its request, in bankruptcy, to pay out more than $230 million in employee bonuses before compensating property owners for losses stemming from California’s recent devastating wildfires. Although PG&E currently has enough assets to outweigh its liabilities, prompting claims that the company has prematurely jumped into bankruptcy protection, the utility company is anticipating staggering liabilities of as much as $30 billion in the near future, arising from its role in the recent wildfires that ravaged California. California has already deemed PG&E responsible for 17 of the state’s 21 major wildfires in 2017, and still has yet to assign liability for the November 2018 Camp Fire, which left 86 dead.

In the midst of PG&E’s bankruptcy, California faces pressing decisions on both PG&E’s immediate future and the viability of its current regime for electric utility wildfire liability. As climate change and changing urban population trends continue to raise the risk of wildfires in the state, PG&E’s bankruptcy is prompting residents and outsiders to take a hard look at California’s approach to fire liability .

California State Law and Wildfire Liability

Part PG&E’s current financial distress is due not only to its conduct, but to a provision in California law that amplifies utility company liabilities for wildfire property losses. California’s inverse condemnation regime for wildfire losses imposes strict liability for utility companies whose equipment causes wildfires, regardless of whether the company was negligent or whether it followed proper procedures. That the state with a recent record of devastating fires also has one of the country’s most severe liability regimes has not gone unfelt by California’s utility companies, as California’s inverse condemnation law was specifically invoked in recent credit downgrades.

To be sure, PG&E’s financial predicament is not wholly attributable to California’s inverse condemnation regime. The company has had its share of culpable conduct, including deficient safety practices that led to a deadly 2010 gas pipeline explosion. PG&E was recently found to have violated the terms of its probation for that explosion when it failed to disclose its role in a 2017 fire, leading to a rebuke from the federal judge overseeing the case. Most dramatically, the California Attorney General recently signaled in a court filing that PG&E could be prosecuted for murder related to its role in the wildfires. Nevertheless, PG&E’s current financial precariousness is undoubtedly exacerbated because of California’s legal treatment of wildfire liability, and its bankruptcy has prompted many in the state, including Governor Jerry Brown, to consider the effects of inverse condemnation and the potential need to reevaluate California state law.

The Future of California’s Electric Utilities

PG&E’s complicated bankruptcy could extend years into the future, giving substantial time for state legislators and private companies to consider changes to the current regime for wildfire liability.

First, electric companies may seek short-term relief for wildfire liabilities by passing costs on to consumers. Utility companies are authorized to raise prices to pay down wildfire costs, although they are currently unable to increase prices to cover liabilities from the most recent fires. New legislation could similarly authorize rate increases to cover 2018 wildfire liabilities, but nascent political backlash has already signaled that such a solution would be unpopular.

Allowing companies to continue raise prices without more fundamentally reevaluating the causes of PG&E’s financial distress could also risk maintaining a legal framework that imposes ever-mounting costs on utility companies and consumers as wildfires increase in frequency. Indeed, the likelihood of future bankruptcies without reforms to California law could imperil approval of PG&E’s current plan for reorganization. Moreover, the potential obstacles to addressing state inverse condemnation laws through federal bankruptcy court could make PG&E’s current proceeding an unlikely avenue for changes to state law.

Another potential—and more drastic—solution remains possible. In the course of PG&E’s restructuring, California cities could have the opportunity to take portions of the utility under public control. Other cities in the state, including Los Angeles and Sacramento, already operate their own electric utilities, and San Francisco’s leaders have requested that the city consider taking over parts of the utility company that service the city. As PG&E looks to resolve its considerable uncertainties in bankruptcy, the drumbeat for public ownership may only continue to increase.

Public ownership is sure to raise its own host of issues, including whether cities themselves can handle future wildfire liabilities. Additionally, siphoning off the most attractive parts of PG&E’s business, while leaving only the most fire-prone areas under private control, could make the communities most vulnerable to fires worse off. But given the current financial distress at PG&E, the harsh financial consequences of California’s approach to utility liability, and the experience of other cities with public utility companies, the appetite for a dramatic solution to California’s beleaguered utility may only continue to grow.

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