Markets Cheer a PG&E Plan; Ratepayers May Feel Differently

(Bloomberg Opinion) -- In case it needs to be said, shares in a bankrupt utility mired in the aftermath of catastrophic wildfires and the politics of California are liable to sudden and inexplicable moves.

One such came late on Wednesday, when Bloomberg News reported PG&E Corp. had proposed a plan to lawmakers in Sacramento for an $11 billion fund to cover claims from previous wildfires and contribute toward covering future ones. The plan was reportedly worked up in conjunction with lawyers representing a group of hedge funds holding equity in the bankrupt utility.

I say “when” although, curiously, PG&E’s stock had surged well before news of the plan hit the wires.

That wasn’t the only curious aspect. Of the mooted $11 billion figure, $8 billion would reportedly be earmarked to settle claims arising from the 2017 and 2018 wildfire season. That looks low, given those claims are estimated to be north of $20 billion. However, as Andy DeVries of CreditSights points out in a report released Thursday, PG&E has up to about $12 billion of potential additional funding available, in the form of a securitized bond due to mature in 2020. As mentioned in the recent preliminary report issued by Governor Gavin Newsom’s “blue-ribbon” wildfire commission, that bond could be refinanced, providing more money. Moreover, as Californians are already paying for these bonds, doing so wouldn’t raise their bills.

Such optics matter. However, behind them is the reality that, absent having to fund such claims, there was potential for bills to actually decline when the bond rolled off. So even if bills didn’t rise on that portion of the funding, this rollover would still effectively represent ratepayers shouldering a bigger part of the claims. Plus, while the plan appears to envisage PG&E taking a lower return on equity to help cover the cost of new securitized bonds as part of that $11 billion – the shareholders’ burden, in effect – the reported figure of $400 million a year doesn’t look like enough to fully offset the cost .

The prospect of such an outcome, however vague, is why the stock rallied, of course. The reason PG&E still carries a notional $10 billion-odd of market value despite the company’s repeated disasters and trip into chapter 11 is that, for all the complexities involved, the central question behind the whole process is a simple one: Who pays for what? The burden of dealing with existing claims and mitigating the risk of future ones must be shared, but the exact proportions remain the subject of fierce debate. PG&E’s stock is largely an option on the result of that debate.

A rival proposal from a group of bondholders has been going around since March. That one envisages a wider distribution of the burden, including California’s other utilities, insurance companies, ratepayers and shareholders. As I wrote here, it has its own issues, not least the need to corral multiple stakeholders into doing their bit and also initially proposing a claims fund that looked ambitiously light. That said, the initial $35 billion plan has now been expanded to north of $45 billion, with the extra cash going toward the pools for existing claims and insurance against future fires. In theory, that would satisfy victims relatively quickly, enabling PG&E (in whatever form) to re-emerge from bankruptcy without piling too much extra cost on ratepayers, and with a sizable insurance policy in place against tomorrow’s fires.

Using DeVries’s initial math, the latest reported proposal might see existing shareholders retain perhaps two-thirds to three-quarters of the equity in a reorganized PG&E. The bondholders’ proposal, on the other hand, injects a big slug of new equity and so would take the existing investors below half, by my calculations.

The commission's full report is due Friday. But Newsom’s press release issued last week alongside the summary suggests there is little appetite in Sacramento to tackle the thorniest issues around the PG&E bankruptcy, such as reforming “inverse condemnation” – California law holding utilities responsible for fire damages, regardless of negligence – or establishing a large fund to cover claims from future wildfires. Clearly, Newsom would like to move on from this inherited crisis as soon as possible.

Yet in doing so, he must tread carefully. While the latest polling conducted by the Public Policy Institute of California shows a net favorable rating for his handling of the crisis so far, almost a third of respondents were undecided. And fully 78% of respondents expressed concern about their power bills rising further as a result of the wildfires – understandable in a state where rates are high already, especially relative to incomes outside the more affluent counties.

As it is, many residents look set to pay in another way as PG&E uses de-energizing (planned blackouts, essentially) to mitigate the risk of future disasters in fire-prone areas. In that context, being seen to favor shareholders over ratepayers in distributing the costs could come at a steep cost for the governor. 

I have no details to go on. But an $11 billion securitized bond at an interest rate of even 3%, amortized over 20 years, would cost more than $700 million a year, by my calculations.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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