January 24, 2020

Breakingviews: PG&E is squandering its bankruptcy

by Breakingviews.

America’s largest utility is close to emerging from bankruptcy for the second time in two decades. PG&E, with over 5 million customers, has wildfire victims, insurers and creditors on board with its plan. In terms of setting PG&E up for a sustainable future, though, it’s a squandered opportunity.

PG&E filed for bankruptcy a year ago saying it faced $30 billion or more in fire-related liabilities. Yet the current plan envisages a return to normal corporate life with about $10 billion more debt than when it started the process, according to creditor Elliott Management – even as the company’s revenue has declined year-on-year in nine of the last 10 quarters. The chance to reset by wiping out equity holders has been missed, with the company’s stock still worth some $7 billion. Indeed, California Governor Gavin Newsom objects to the plan, saying it leaves the firm with too little financial flexibility to provide safe, reliable and affordable power.

The process will have accomplished a few things. Victims will be compensated with $13.5 billion in cash and PG&E stock. And California has set up a $21 billion fund to help insulate utilities from new fire damage. PG&E is also spending more on maintenance after skimping over the years, even receiving a felony conviction following a 2010 pipeline explosion.

But the expensive restructuring largely looks a short-term fix for Chief Executive Bill Johnson. Customers in fire-prone areas aren’t being forced to pay rates that reflect the risk. Under a state doctrine called inverse condemnation, utilities are liable for damage caused even by properly maintained equipment, and the new fund is only a modest buffer. And the state is pushing utilities to phase out electricity from fossil fuels.

Long-term answers require policy choices. For example, putting all PG&E’s wires underground could cost hundreds of billions of dollars. That’s money the company doesn’t have, but the state does. And if California wants homeowners protected against increasingly destructive fires, there are ways other than inverse condemnation, like requiring insurance. There’s been little serious discussion of these, or other radical options such as a government takeover of the utility.

Against that backdrop, being reliable, green, cheap and profitable at the same time remains a challenge for PG&E. Creditors have joined other parties in backing the plan. It doesn’t look like it will solve much.

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