Occasionally, massive tort liability can be the sole reason a company files for Chapter 11 protection. See In re Johns Manville Corp., 982 F. 2d 721 (2d Cir. 1992): In re A.H. Robins Co., 862 F. 2d 1092 (4th Cir. 1988); In re Dow Corning Corp., 211 B.R. 545 (Bankr. E.D. Mich. 1997). This was the case when California’s largest investor-owned utility company, Pacific Gas and Electric (PG&E), filed Chapter 11 in January 2019 in Northern California.
California’s deadly wildfires over the past few years have had far-reaching implications beyond the fires’ victims and the homeowners who lost their houses; liability for the wildfires was the driving reason for PG&E to file Chapter 11. Due to the large number of parties with bargaining power and disparate interests, this case is one of the most complicated and difficult recent Chapter 11 cases, and it could take years for PG&E to get through bankruptcy with a confirmed plan.
There are three investor-owned utility companies in California: PG&E, Southern California Edison, and San Diego Gas & Electric. PG&E is the largest of the three, serving 16 million people in central and northern portions of the state. California law requires that utility companies compensate property owners for damages from fires caused by their equipment, even if the utilities were not negligent. Because the state’s wildfires over the past few years have been especially destructive, the California utilities are facing massive liability.
Investigators found that PG&E caused at least 17 of 21 major fires in Northern California in 2017 and the Camp Fire in 2018. Previously, PG&E was convicted of criminal charges relating to insufficient maintenance and bad recordkeeping that were brought in connection with a gas line explosion that killed eight people in San Bruno in 2010. The utility also paid $565 million to settle civil claims brought by about 500 victims of the blast.
The utility companies have acknowledged some responsibility for several of the recent fires—and PG&E promised after the Camp Fire to increase inspections, tree-trimming, and other maintenance activities in an effort to reduce future wildfire occurrences—but claim that climate change and development in remote areas have also contributed to making recent fires more destructive.
All three investor-owned utility companies have spent millions lobbying state lawmakers to allow them to pass on the costs for wildfire liability to their customers. Just two months before PG&E filed for Chapter 11, legislation was approved allowing the utility companies to pass along the costs for their 2017 wildfire liability to customers through higher rates, shifting that burden from the utilities’ shareholders to consumers.
PG&E admitted in February that it had experienced failure in equipment located near the origins of the 2018 Camp Fire, a blaze that resulted in 86 deaths and destroyed most of Paradise, California, a community of 26,000. Having been found to have caused at least 17 major Northern California fires in 2017 and expecting to also be found liable for several 2018 major fires, including the Camp Fire, PG&E estimated its total fire-related liability at $30 billion. PG&E said that amount exceeded its assets and insurance coverage, leaving Chapter 11 as “the only viable option,” and the company, along with its parent company, filed for bankruptcy on January 29, 2019.
Investors and shareholders complained that the company had rushed into bankruptcy too quickly and should have waited to determine its course of action until its actual liability for the 2018 fires had been determined. Elected leaders were split on the bankruptcy filing, but some lawmakers did support the move. Before PG&E’s Chapter 11 filing, California legislators were considering expanding the law that allowed the utility companies to raise rates to pay damage claims from 2017 fires to include the fires from 2018.
Interestingly, the company appears solvent based on its initial bankruptcy schedules; PG&E claimed $51.7 billion in debt and $71.4 billion in assets as of September 30, 2018. However, because PG&E expects the amount of its debt and liabilities to increase significantly after the completion of investigations into the causes of the 2018 fires, it elected to file Chapter 11 sooner rather than later.
PG&E’s stock price actually closed up 16% the day it filed its Chapter 11, signaling that investors were betting that the utility would not be held liable for the full $30 billion in wildfire claims and would emerge from Chapter 11 with money left for shareholders. Since the filing, PG&E has obtained approval for $5.5 billion of debtor-in-possession financing to allow it to continue business operations during the bankruptcy, which the company estimated could last for two years. In April, Bankruptcy Judge Dennis Montali also ruled that PG&E could pay $235 million in bonuses to 10,000 PG&E employees.
In addition to obtaining the $5.5 billion of new financing through the Chapter 11, PG&E can also delay some debt payments during the bankruptcy, freeing up more cash to make necessary improvements
to lessen the risk of its equipment causing future wildfires. In Chapter 11, PG&E can pay some vendors and contractors considered critical before paying other creditors. Through the bankruptcy process, PG&E can also essentially renegotiate its contracts with its electricity suppliers by rejecting certain contracts with terms it views as unfavorable.
Many believe that contracts with solar power suppliers, in particular, are at risk for rejection. Those suppliers had sought help from the Federal Energy Regulatory Commission to block such a move, but Montali ruled on June 7 that the agency doesn’t have the authority to intervene in the bankruptcy case. He said he would consider the merits of a move to reject one or more of the supplier contracts should PG&E file such a motion in the case.
As a result of the bankruptcy, the assessment and payment of homeowners’ and other claims will be delayed, so fire victims will almost certainly have to wait longer for their claims to be paid. It may be months and perhaps longer before those who lost homes in the Camp Fire learn how much they will be paid on their claims. However, PG&E announced in June that it had agreed to pay $1 billion to local governments to settle damage claims from fires in 2015 and 2017 and from the Camp Fire. That settlement, which includes $170 million for Paradise and $252 million for the county in which the town is located, must still be approved by Montali.
One of the reasons the PG&E case is so complicated is the myriad competing interests involved in the Chapter 11 and the political nature of many of them. Several different parties are flexing their political muscle in this case, and their interests will have to be balanced by the judge.
The approval of the California Public Utilities Commission, which regulates PG&E, will be an important part of confirmation of any plan of reorganization proposed by the utility. The commission is reportedly also considering options that include breaking up the utility or transforming parts or all of the company into a government-owned entity.
Some state political figures have expressed concern that investor-owned utilities prioritize the interests of their shareholders and maximizing profits over safety. The Public Utilities Commission is investigating those allegations, which could result in the agency pushing to divide the utility into separate divisions for gas and electric services, or to convert it into a government-owned entity or entities.
Creditors and wildfire victims have also formed committees in the bankruptcy to ensure that their interests are represented and protected.
California’s elected leaders will also play a role in the case, weighing how much to help PG&E and the other two investor-owned utilities against other political considerations, including the potential for being lambasted for providing companies with government bailouts. Since the Chapter 11 filing, some state lawmakers have proposed new legislation to force PG&E to fully compensate wildfire victims, and others have suggested that the 2018 legislation that allows costs to be passed to customer through higher rates should be revised or rescinded. Some lawmakers want PG&E to be broken up into smaller companies based on geography, or into one company to handle gas services and a second to provide electric services. Still others support converting PG&E into a government-run utility.
Several ongoing investigations will also impact any plan of reorganization PG&E may file in the bankruptcy. First are the investigations into the 2018 wildfires. On May 15, the California Department of Forestry and Fire Protection announced that it had determined the Camp Fire was caused by electrical lines owned and operated by PG&E. The utility expects its liability for the 2018 wildfires alone to amount to tens of billions of dollars.
Furthermore, in early May 2019, it was reported that the Securities and Exchange Commission had opened an investigation into how PG&E accounted for its losses related to Northern California wildfires in 2015, 2017, and 2018. Consumer advocacy groups argue that the SEC’s apparent concern is a good reason not to trust PG&E.
PG&E had asked the Bankruptcy Court for an additional six months of exclusive right to file a plan of reorganization, a request opposed by California Governor Gavin Newsome, who asked the court to limit the extension to 75 days, and wildfire victims, who asked the judge to deny the request altogether. Following the recommendation of the creditors’ committee, Montali on May 22 granted a four-month extension of the deadline for PG&E to submit a plan.
Also during that hearing, Montali approved PG&E’s creation of a fund to make $100 million available to aid wildfire victims who lack housing or have other urgent needs.
There are several possibilities for PG&E’s exit from the Chapter 11. With enough pressure from the California Public Utilities Commission, state legislators, and consumer groups, PG&E could be broken up into separate smaller companies and sold. Several California cities, including Los Angeles and Sacramento, already operate their own electricity companies, so it is possible the city of San Francisco might consider doing the same.
At any rate, it is certain that some parties will object to any plan of reorganization proposed by PG&E. Due to the sheer number of groups with bargaining power and the political maneuvering at play in the case, it will be interesting to see how this Chapter 11 unfolds in the coming months.