(Bloomberg) -- The lights would stay on if California utility giant PG&E Corp. files for bankruptcy. But the company, its customers and investors would be set for years of uncertainty.
While utility bankruptcies are rare, they can result in anything from a healthy company to a breakup, with business units sold off like spare parts. For consumers, the fallout likely means higher rates.
PG&E plunged Monday on news that it’s exploring a bankruptcy filing in response to an onslaught of wildfire liabilities that are estimated to be as high as $30 billion -- far exceeding the company’s roughly $10 billion market value. The potential move is seen as putting pressure on California lawmakers to provide a bailout and avoid more turmoil for the state’s largest utility.
Whatever the outcome, bankruptcy tends to be “massively inefficient,” said Severin Borenstein, an energy economist at the University of California, Berkeley.
“It freezes the company,” he said. “A judge who has no expertise essentially becomes the CEO. And there are these committees that get involved in every corporate decision.”
PG&E has been here before.
The San Francisco-based company’s Pacific Gas and Electric utility filed for bankruptcy in 2001 as soaring wholesale power prices and rolling blackouts threw California into crisis. The PG&E Corp. holding company itself never filed for bankruptcy. The utility emerged three years later, its business intact. Under the reorganization plan, ratepayers were responsible for $7.2 billion of the company’s debt from the electricity crisis.
Rare Occurrences
Bankruptcy filings tend to be rare for electric utilities because they have large and steady revenue streams. But there have been other cases. El Paso Electric, for example, filed for Chapter 11 in 1992, due largely to expenses tied to the Palo Verde nuclear plant. The Texas company exited bankruptcy court four years later with a new rate plan that let it recoup its costs.
Not every bankrupt utility has fared as well.
Last year, Energy Future Holdings Corp. was forced to sell off its electricity distribution business in Texas to Sempra Energy (NYSE:SRE) as part of a tortuous four-year bankruptcy proceeding. And the Puerto Rico Electric Power Authority, which filed for bankruptcy in 2017 due to mounting debts, now plans to hire a private operator to manage its electricity grid.
The Puerto Rico utility’s corporate disarray left it ill-prepared when Hurricane Maria slammed into the island in 2017 -- something California leaders would have to weigh in a PG&E bankruptcy as they face the prospect of another fire season with a power company in dire financial straits.
Different Issues
PG&E hasn’t commented publicly on the prospect of bankruptcy and didn’t have immediate comment for this story. While the company does have experience navigating the Chapter 11 process, the problems it faces now are far different from those in 2001.
Then, unscrupulous energy traders and companies -- most notably, Enron Corp. -- exploited flaws in California’s recently restructured electricity market to send wholesale power prices soaring. Utilities, their rates regulated by the state, couldn’t pass those cost increases on to their customers. At the time of the filing, PG&E’s debts were reported to be rising by $300 million per month.
This time, PG&E’s travails are tied to the role its power lines may have played in fires that killed dozens of people. In California, utilities can be held liable for damages even if they aren’t found to be negligent.
State investigators have blamed PG&E’s equipment for starting 17 of the wildfires that tore across Northern California in October 2017. Those investigators are now exploring whether a PG&E transmission line started November’s Camp Fire, which leveled the Butte County town of Paradise and left 86 people dead.
Political Pressure
California politicians have been considering legislation that would help PG&E pay off lawsuits related to the Camp Fire, and one veteran lawmaker has publicly questioned whether the company was using the specter of bankruptcy to pressure Sacramento. In 2001, Pacific Gas and Electric filed for bankruptcy while bailout talks with then-Governor Gray Davis were well underway. Davis, blindsided by the filing, called it a “slap in the face to California,” according to local reports at the time.
The company emerged from that bankruptcy without major structural changes and with its top management intact. A filing now may result in a harsher outcome, said Mark Toney, director of the Utility Reform Network consumer group. PG&E saw its reputation badly tarnished by the 2010 San Bruno gas pipeline explosion, which led to six criminal convictions against the company.
“Last time, PG&E was able to portray itself as an innocent victim, and there were bigger actors that were gaming the market, that were lying, stealing and cheating,” Toney said. “Now, I think the feeling is completely different. They are a convicted felon.”