What Fate Awaits PG&E?
Many Californians are wondering if there will be another year of devastating forest fires in 2019, PG&E executives are wondering too.
Pacific Gas and Electric Company (PG&E) power lines caused the devastating Northern California wildfires of 2017 and 2018. These wildfires killed hundreds of people and scorched thousands of homes, accruing more than $30 billion in liabilities for the California utility. Unable to compensate the victims, PG&E declared bankruptcy. Since then, bondholders, shareholders, and a group of insurance companies have proposed exit options for PG&E.
Recently, on behalf of PG&E bondholders, Elliott Management Corp offered to raise $30 billion in equity and pay $18 billion to wildfire victims. According to people familiar with the matter, Elliot's strategy would grant bondholders nearly full control of PG&E (85 percent of PG&E's stock) when it exits bankruptcy.
Many of PG&E's equity owners do not support Elliots' proposition because only uncompensated creditors can propose a reorganization plan for a bankrupt company, and bondholders are always the first to be compensated. The shareholders would prefer issuing new bonds and a ubiquitous rate increase of $10.57 a month to gradually pay off wildfire claims and return the utility to profitability. Company executives presented this idea at a company press conference, and it received much scrutiny because many of the attendees were fire victims.
In response to the controversial proposal, Frank Pitre, a lawyer for victims said, "if PG&E wants to do the honorable thing, they should stop spending tens of millions of dollars in bankruptcy court and begin putting together the plan to compensate the victims." Mr. Pitre's comments illustrate that PG&E customers do not want to wait any longer to be compensated for the damages.
As the company continues to consider its options, a group of insurance companies filed a proposal in US Bankruptcy Court to pay all its wildfire liabilities and other debts in exchange for full control of the company. According to these insurance companies, PG&E owes them a combined $20 billion. The insurers said their plan "preserves the ability of individual fire victims to assert their claims against a well-funded trust and realize a full recovery on their claims. Admittedly, the major open issue ... is the total funding required for the individual fire victims' trust." This quotation demonstrates how difficult it is to value the fire victim's claims and fund these claims.
Since the tragic fires, PG&E has implemented various safety precautions including weather stations, fire detection algorithms, and satellite surveillance, each of which heightens the company's ability to monitor and track dangerous weather. In the words of Sumeet Singh, PG&E vice president of the Community Wildfire Safety Program, "we've accomplished a lot, but there is more work to do. Our system is better today than it was yesterday, and it will be better tomorrow than it is today. We are committed to further reduce wildfire risks and help keep our customers and the communities we serve safe." Although the company is continuing to improve its safety standards, it has a long way to go before returning to profitability.
If Pacific Gas and Electric Company (PG&E) goes bankrupt, another utility will have to take its place and will face the same challenges. The fact is transporting and distributing energy in California is a risky business.
Written by James Mueller, Edited by Sonakshi Dua & Alexander Fleiss