California Is Set to Decide Whether PG&E Is ‘Too Big to Fail’

(Bloomberg) -- California lawmakers are debating whether utility giant PG&E Corp. is “too big to fail.”

The company -- which provides electricity and gas to 16 million people -- faces billions of dollars in liabilities from last year’s wildfires, and legislators have until midnight Friday to pass a bill that would direct regulators to limit how much PG&E shareholders would pay to cover the costs.

The outcome is critical for PG&E, which may owe as much as $17.3 billion from the blazes, JPMorgan Chase & Co. estimated. The utility owner has raised the prospect of bankruptcy, and its lost more than $11 billion in market value in the last year. Nonetheless, consumer advocates contend that the bill pending before the legislature amounts to a bailout.

“This is the state acting like PG&E is too big to fail,” said Mark Toney, executive director of the Utility Reform Network, a consumer advocacy group. “They want to make sure PG&E has a guaranteed backstop no matter how badly they operate.”

California investigators have already named PG&E power lines and other equipment as the source of 16 fires last year. In 11 of those instances, investigators said they found evidence that PG&E violated safety laws. Officials haven’t released the results of a probe into the most destructive of the 2017 California wildfires, which combined destroyed thousands of homes and killed 44 people.

Some lawmakers are concerned that massive fire claims could force PG&E into financial distress or bankruptcy. That could lead to higher bills, broken renewable energy contracts and job losses, according to testimony from labor unions, utilities and power producers before a legislative committee formed by Governor Jerry Brown to address the growing threat of fires.

“Having healthy utilities financially helps ratepayers,” State Senator Bill Dodd, a Democrat and co-chairman of the committee, said at a hearing this week. “This is an important premise that we all are going to have to grapple with. Otherwise, ratepayers pay more in the event of credit downgrades, bankruptcy or any of these unfortunate events.”

Pending Measure

Legislators have already cast aside a request from PG&E to change a state law that holds a utility liable for damages if its equipment caused a fire -- even if the company followed safety rules. Instead, lawmakers have proposed a series of measures to protect PG&E and other utilities from financial distress.

Earlier this week, the committee passed draft legislation that would direct regulators to conduct a stress test to determine how much PG&E can pay for the 2017 fires "without harming ratepayers and materially impacting its ability to provide adequate and safe service." Under the proposed law, the utility could cover the costs of anything above that amount by selling bonds backed by fixed customer rates.

“This issue is critical to our customers, the state and PG&E,” said James Noonan, a spokesman for the utility. “We are reviewing the proposed language to fully understand its implications, including potential impacts on wildfire victims and mitigation of future wildfire risks.”

PG&E shares fell 3.2 percent to $45.52 at 12:46 p.m. in New York Friday.

The provision takes "bankruptcy off the table,” said Andy DeVries, a credit analyst for CreditSights. However, the bill still "leaves significant uncertainty for investors" as it will be up to state regulators to decide how much PG&E pays, he said.

Brown and state leaders see PG&E as playing a critical role in helping the state combat global warming by investing in renewable power and infrastructure for electric cars. Lawmakers this week passed a bill that would require the state to get all of its electricity from carbon-free sources by 2045.

“The grid is an essential service,” said Michael Wara, a research fellow at Stanford University. “The idea that we are going to let the companies providing that service enter into severe financially distress -- it’s not in the state’s interest.”

--With assistance from Romy Varghese.

To contact the reporter on this story: Mark Chediak in San Francisco at mchediak@bloomberg.net

To contact the editors responsible for this story: Joe Ryan at jryan173@bloomberg.net, Simon Casey

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