After PG&E’s Climate-Driven Bankruptcy, Who’s Next?

(Bloomberg) -- When PG&E Corp. filed for Chapter 11 early today, it marked not just one of the largest utility bankruptcies in history – it’s also one of the first tied to climate change. PG&E, owner of California’s largest electric utility, made the move after estimating that it faced a $30 billion liability from two years of wildfires whose intensity has been blamed by state officials on worsening droughts linked to global warming. Fire victims suing PG&E say it didn’t adapt quickly enough to the increased risks created by more persistent hot, dry weather. The bankruptcy filing points to the danger that warming could pose for many companies. Those risks aren’t always obvious, and assessments of them are often buried deep within securities disclosures. Is it time for them to move beyond the fine print to become an active market concern?

1. Why were investors caught off guard?

In PG&E’s case, they shouldn’t have been. Ever since the 2017 wildfires in northern California’s wine country, the company has repeatedly warned that climate change is raising the risk of catastrophic fires in the state, as frequent drought and invasive, warm-weather pests decimate the state’s forests. The company’s ex-CEO Geisha Williams, who stepped down, called it the new normal and said that utility companies were bearing the costs of climate-fed fires. The company’s critics had dismissed those warnings as a scare tactic intended to pressure the state government into changing California’s wildfire liability rules, something the legislature in Sacramento refused to do.

2. Have climate risks been overlooked at other companies?

Almost certainly. Or, just as likely, they may be treating them as difficult-to-pinpoint long-term risks, even as that future begins to arrive. The warnings scientists have issued for over 30 years of threats to businesses and economies are increasingly being connected to specific disruptive events, whether hurricanes or droughts or the spread of pests. Businesses are increasingly disclosing awareness of locally relevant threats, and many are building climate challenges into their long-range plans. Coastal property owners are more and more attentive to sea-level rise, just as agricultural companies are to northward growing zones and utilities, such as it is, to more devastating fires. But costs can be hard to quantify, and there are limits to how much even large companies that regard themselves as forward-thinking have done to prepare for a systemic global problem.

3. Isn’t the market supposed to price in risk?

Yes, through tools like insurance and credit-default swaps, as well as demanding higher premiums for greater risk in lending. But markets don’t always price some kinds of risk correctly, and economic research suggests that climate change falls in that category. Since 2008, many people, including former Treasury Secretary Hank Paulson, have likened the swelling systemic pressures of climate change to the under-priced risks that exploded during the financial crisis. There is also a timing mismatch between climate threats and conventional insurance practice. As Warren Buffett has said, insurance policies are rewritten every year, and it’s hard to know on that time frame how decades-long threats shake out in pricing.

4. Who else is getting hurt?

PG&E shareholders shouldn’t expect to see dividends again anytime soon, but analysts don’t expect them to be wiped out. Customers can expect the lights to stay on, but their bills may go up. PG&E lined up $5.5 billion to keep its operations going during bankruptcy. For once, the decision to raise rates won’t rest solely with regulators at the California Public Utilities Commission. Rate increases will be tied to whatever reorganization plan the bankruptcy court judge overseeing the proceeding approves. California passed a law last year allowing PG&E to pass on to ratepayers some of the costs of wildfires for which it had been blamed in 2017, but it’s not clear how the law’s provisions will apply to a company that’s already in bankruptcy. Indeed, some of those provisions were designed to prevent utilities from going bankrupt.

5. Could other utilities suffer as well?

So far, the fallout from PG&E’s planned bankruptcy has been largely limited to other utility companies in California. Edison International’s Southern California Edison utility and Sempra Energy’s San Diego Gas & Electric both saw their credit ratings cut by Standard & Poor’s. But the problem of power lines sparking fires could pop up in other drought-prone western states, and power companies with contracts with PG&E have been affected, including New York’s Consolidated Edison Inc., which owns renewable energy projects that sell power to the California utility.

6. What about the wildfire victims suing PG&E?

Filing for bankruptcy puts those lawsuits on hold and wraps them into the bankruptcy proceedings. That’s part of bankruptcy’s appeal to PG&E. The company will be able to bring all those cases into a single forum for resolving its financial problems, including wildfire suits. Bankruptcy filings also can force litigants to accept smaller settlements than they would have been able to negotiate otherwise.

7. Could this interfere with California’s climate change goals?

California requires all its utilities to increase their use of renewable power, and PG&E has already lined up enough power purchase contracts to meet the state’s targets for the next few years. But the state’s climate fight very much relies on healthy electric utilities in multiple ways, such as deploying electric vehicle charging stations and making homes more efficient. California’s new governor, Gavin Newsom, is expected to make climate one of his signature issues and has already said that he wants California’s utilities to be strong enough to invest in the state’s energy transition. Meanwhile, analysts are waiting to see if PG&E will use bankruptcy proceedings to get out of some of the most expensive renewable contracts it signed years ago, before the costs of wind and solar power plunged.

The Reference Shelf

  • PG&E’s bankruptcy will have ripple effects from Sacramento to Washington, D.C.
  • Investor groups pitch competing plans for PG&E to avoid bankruptcy.
  • PG&E’s shareholders may survive bankruptcy, if the past is prologue.
  • PG&E CEO exits, as bankruptcy looms.
  • Bloomberg Daybreak: PG&E Woes (Podcast).

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