California Shouldn’t Waste a PG&E Bankruptcy
(Bloomberg Opinion) -- It’s rare for a utility to go bankrupt, especially twice. For PG&E Corp., which may enter Chapter 11 by the end of the month, there are compelling reasons to do it anyway — and not just for the utility itself.
PG&E, facing perhaps $30 billion or more of claims and penalties, has started the clock ticking even before the last of its cash runs out. One look at its stock — trading at a princely 0.17 times book value — tells you it has lost the confidence of public markets. That rather undercuts the whole point of being an investor-owned utility.
Clearing the uncertainty hanging over the company begins with consolidating the litany of claims against it into a known quantity and dealing with them expeditiously. As Luckey McDowell, a partner at Baker Botts LLP specializing in corporate restructurings, puts it, a bankruptcy court gets you to a point where “You can say, ‘This is the number,’ and then you can craft a solution around that number.”
That was how it worked in 2001, when PG&E’s utility subsidiary went bankrupt, caught between maladroit California power-market reform and demonically adroit Enron traders. What makes today’s case different, and far more difficult, is that it isn’t just the liabilities incurred so far that have broken PG&E’s model. The ones to come are just as important.
PG&E’s crisis represents a big, tangible cost of climate change (see this), with wildfires becoming a chronic problem in California. So even if PG&E emerged from a Chapter 11 process that dealt with liabilities arising from wildfires in 2017 and 2018, it would remain hobbled in terms of courting investors who would then be worrying about the wildfires of 2019 or 2020 or whenever.
On the other side of a Chapter 11 trip for PG&E, northern California will need an entity or entities that can credibly manage and finance the grid, including proofing it against climate change. There must be a parallel process at the legislative level. Beyond PG&E’s own failings, what has happened in effect is that a new liability under the broad rubric of climate change has materialized and must be dealt with fairly and efficiently. A bankruptcy court doesn’t deal with future liabilities. Nor is it equipped to fashion a sustainable electricity system providing power at a reasonable cost while preventing deadly fires. That’s in the purview of Sacramento.
From the politicians’ point of view, including new governor Gavin Newsom, PG&E’s entry into bankruptcy could be seen as risky, in the sense that it empowers a new figure in all this: the bankruptcy judge. Indeed, PG&E may have hoped giving notice of a potential filing would push the state to make a last-minute intervention.
The biggest risk relates to where the powers of the judge rub up against those of regulators. On Wednesday, I wrote about concerns a bankrupt PG&E might abrogate power-purchase agreements. Yet, there are several good reasons — not least the prospect of counter-claims by project developers — for a bankruptcy judge not to go there.
Similarly, if California’s regulations are anything like those in Texas, utility regulators should retain consent rights over any change of control if PG&E or some of its assets get sold off or transferred. The Public Utility Commission of Texas blocked several suitors for Energy Future Holdings Corp. — a remnant of the busted TXU Corp. buyout — before Sempra Energy won the day (after making sizable concessions).
For Newsom, the bankruptcy process could actually prove useful. Politically, it would signal he isn’t bailing out PG&E or rewarding failure; rather, it could be presented as a decisive move to deal with problems that arose before his watch.
Moreover, having claims against PG&E expedited in bankruptcy court would mitigate the risk of this debacle dominating Newsom’s entire term, especially as his campaign was centered on other hot-button issues like housing, healthcare and education. The claims process is crucial, too, in ensuring that lingering litigation, like wildfire risk, doesn’t stymie whatever entity (or entities) eventually emerges.
Because something useful must ultimately emerge from all this. A return to the status quo ante is a non-starter given the ongoing wildfire risk, and all options should be on the table: selling the gas business, splitting the service territory, municipalization or whatever else. A comprehensive approach to apportioning the cost of wildfire mitigation, including possibly revisiting the principle of inverse condemnation (see this), is also needed. Meanwhile, there’s an opportunity to overhaul the regulatory structures that have been charged with overseeing PG&E all this time.
It’s too early to say what the right structure will be. But the goal has to be a safe, efficient and sustainable power system that has the confidence of both the public and the capital markets. A spell in Chapter 11 by PG&E could be a useful tool in getting there, but only if California uses it as a means, not an end in itself.
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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