A notification went out to employees of PG&E Corp. and its subsidiary Pacific Gas and Electric on January 14 regarding the company’s intent to file for Chapter 11 bankruptcy. It is widely assumed that the $30 billion in potential liability costs from wildfires in 2017 and 2018 exceed the company’s assets. While PG&E has not been found responsible for the recent fires, both of which are still under investigation, the California Department of Forestry and Fire Protection (Cal Fire) determined in May that PG&E lines were the cause of several fires that killed at least 15 people and razed over 5,000 homes last fall. Speculation is rife over the future of the company: will a recent Senate Bill save the day, or will the State of California end up nationalizing the utility company?
As a company, PG&E faces an inordinately difficult political environment within the state of California due to past failures of the utility company. After filing for bankruptcy following the ENRON scandal and the West Coast power price spikes in 2001, the company has faced increased scrutiny regarding its safety performance following on from the San Bruno natural gas pipeline explosion in 2010 and the planned implosion of the South Bay Power Plant in 2013. In 2018, the California Public Utilities Commission (CPUC) ordered PG&E to implement the safety recommendations of CPUC staff as outlined in a report by an independent third-party.
California’s treatment of the so-called inverse condemnation legal doctrine comes into play here. The state has ruled that Inverse condemnation not only applies to government agencies that damage private property while providing a public service but also to utility companies because they are authorized by the state to provide a vital public service. California utilities can, therefore, be held liable for damages from incidents derived from their equipment, regardless of if the safety laws were followed or not. Further, there is no guarantee that the CPUC will authorize the passing on of costs to ratepayers as was evidenced by the fact that the commission rejected a bid by Sempra Energy’s San Diego Gas & Electric in 2017.
Utilities in California are also required to develop very detailed risk mitigation and asset management plans. It was not until the past couple of years, however, that wildfires have taken a priority compared to pipeline safety. Yet since this time PG&E has taken some extraordinary steps with regards to managing the risks around wildfires, for example, opening a wildfire monitoring control room, real-time weather-watching tools, and even contracting military helicopters to supplement Cal Fire efforts.
On September 21, 2018, the Senate Bill (SB) 901, which addresses several wildfire liability reforms relating to public utilities, was signed into law by Gov. Jerry Brown. The jury is still out as to whether SB 901 will have any benefit, though one could take PG&E filing bankruptcy as an indication that the reforms would have a negative impact on the company, despite prior criticisms from consumer groups that SB 901 was simply a ‘bailout’. Indeed, the SB 901 as passed by the Legislature does not make any changes to the state’s legal doctrine of inverse condemnation. Experts believe that PG&E is most likely concerned that some of its facilities will be found to be at fault for the wildfires, and that because it will be up to the discretion of the CPUC as to whether facilities were properly maintained, this could subsequently open a floodgate of lawsuits.
A Catch-22 situation has therefore arisen. If the government does not bail PG&E out, or if SB 901 isn’t used in a way to help cost recovery – the company will cease to exist. Somebody is obviously going to have to foot the bill, but the question remains as to who that will be and how will they will go about paying for it. If there is not enough money in the pot, then shareholders cannot pay, leaving the Californian ratepayers to settle costs to ensure the continuous running of their gas and electricity services.
Servicing of assets
it is considered most unlikely that the State of California would want to take over ownership of PG&E. Experts predict that the company will go through the bankruptcy process and come out the other side as an investor-owned utility. In any ownership scenario, however, outcomes will inevitably end up the same because the risks of challenges in managing a dry forest have essentially not been addressed. The situation needs to be viewed in terms of asset quality, in that the assets are the areas being serviced, each with their own externalities and risks. A strategy, therefore, of ‘failing safely’ needs to be implemented to, at best, minimize the impact of wildfires and dealing with the environment around the equipment. PG&E and the ratepayers of the State of California are finding themselves in the middle of an extremely convoluted problem, and the unsupportive political environment is not conducive to finding a quick-win solution.
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