As deadly wildfires wreaked havoc on the lives of thousands of Californians last year, the state’s largest utility found itself thrown into its own state of chaos by the disaster.
PG&E Corp. filed for Chapter 11 bankruptcy protection in January, claiming more than $50 billion in total debts. Given that PG&E power lines might have sparked the wildfires amid a prolonged drought, estimates put the company’s potential liabilities from the disaster at $30 billion. In the aftermath, The Wall Street Journal called PG&E’s bankruptcy the “first major corporate casualty of climate change.”
The Chapter 11 filing was not without controversy, though, and some are raising questions about the hastiness of the move into bankruptcy. For starters, PG&E received pitches at the eleventh hour from brand-name investment firms such as Elliott Management Corp. and Apollo Global Management LLC to stave off the Chapter 11 filing. Elliott’s proposal reportedly would have given PG&E $4 billion backed by bonds to keep the utility afloat.
Meanwhile, hedge fund BlueMountain Capital Management LLC, which owns roughly two percent of PG&E’s equity, took exception to the utility’s decision. In a scathing letter issued on Jan. 24, BlueMountain called on PG&E shareholders to replace the company’s board of directors en masse, contending that the bankruptcy filing is “voluntary, costly, and unnecessary.” Moreover, PG&E is “is solvent and has ample liquidity,” according to BlueMountain.
BlueMountain’s condemnation didn’t stop PG&E from proceeding with the Chapter 11 filing on Jan. 29. But the market reaction may have bolstered BlueMountain’s argument. In fact, shares of the California utility’s stock rose after the bankruptcy filing, a show of confidence from the investing community in PG&E’s overall financial health. Dissecting the mystery of PG&E’s post-bankruptcy surge, the Wall Street Journal also pointed out that the utility could benefit from government intervention that eases the damage and further brightens its financial outlook. It’s possible; the California legislature previously allowed PG&E to pass the costs of 2017 wildfires on to consumers through a process called “securitization.”
The WSJ posed a number of possible explanations for PG&E’s post-bankruptcy surge. They included skepticism that the company’s liabilities would reach estimated amounts and the potential that government intervention could ease the damage.
But before you go assuming it’s nothing but blue skies in PG&E’s future, consider one more variable: inverse condemnation. Under this old rule in California, utilities assume some liability for wildfires so long as their equipment is involved, regardless of whether or not they can be called negligent. For PG&E to avoid liability, then, lawmakers may need to amend the Golden State constitution. From there, voters would have to pass the amendment nullifying inverse condemnation.
Alternatively, there’s the possibility that utility companies could take the state to court over the rule. When the easiest solution to a problem may be asking politicians for relief, there is no “easiest solution.” Needless to say, the way forward for PG&E remains cloudy at best.