PG&E Under Investigation by SEC Over Wildfire Losses

Bankrupt utility Pacific Gas & Electric faces up to $1.4 billion in costs in 2019, and more than $14 billion in expected liabilities, associated with the deadly Northern California wildfires of 2017 and 2018 and its subsequent descent into bankruptcy protection.

It also faces a federal Securities and Exchange Commission (SEC) investigation into its “public disclosures and accounting” for these wildfires. 

These were some of the key details from PG&E’s first-quarter 2019 report. Quarterly earnings plunged 69 percent year-over-year, to $136 million. The drop was driven not by a change in revenue, which remained stable across both quarters, but by costs associated with the deadliest of the wildfires attributed to the utility’s grid infrastructure, the November 2018 Camp Fire. 

PG&E reported $192 million in first-quarter Camp Fire costs, the vast majority for cleanup and recovery in the nearly completely devastated town of Paradise and the surrounding region. It also reported $127 million in Q1 bankruptcy-related costs, $114 million of that in costs related to its debtor-in-possession financing.

PG&E filed for Chapter 11 bankruptcy protection in late January, under the weight of a projected $30 billion in liabilities from wildfires in 2017 and 2018 believed to be caused by its power lines and equipment. 

As of April 30, the utility had $1.5 billion in outstanding borrowings under the $5 billion debtor-in-possession financing, with undrawn commitments of $500 million and $3.2 billion on the its Delayed Draw Term Loan Facility and the Revolving Facility, respectively. That money is in place to keep the utility running as it works its way through a bankruptcy process that’s become California’s most pressing energy and climate change policy crisis. 

PG&E declined to provide revenue or profit guidance for the rest of 2019. But its “2019 Items Impacting Comparability Guidance” did note that its wildfire cleanup and recovery, bankruptcy-related and legal and other costs could add up to between $1 billion and $1.4 billion over the course of 2019. This includes $205 million to $300 million in Camp Fire-related costs over the year, $36 million to $65 million in costs from the 2017 wildfires it has been found responsible for causing, and from $432 million to $648 million on “electric asset inspection costs,” or the crash-line-inspecting and vegetation-clearing program it’s struggling to complete before the start of the 2019 fire season. 

New SEC investigation underway

Meanwhile, PG&E representatives declined multiple news outlets’ request for comment last week on this single paragraph of its 10-Q: “On March 20, 2019, PG&E Corporation learned that the SEC’s San Francisco Regional Office is conducting an investigation related to PG&E Corporation’s and the Utility’s public disclosures and accounting for losses associated with the 2017 and 2018 Northern California wildfires and the 2015 Butte fire. PG&E Corporation and the Utility are unable to predict the timing and outcome of the investigation.”

PG&E also noted that the Butte County District Attorney’s Office and the California Attorney General’s Office have opened a criminal investigation into the Camp Fire. California fire investigators and PG&E have reported that an equipment failure on a high-voltage transmission tower was the most likely cause of this fire, and PG&E records show that the tower was part of a transmission system with long-running and unaddressed maintenance needs. 

PG&E’s estimated wildfire liabilities have shifted in the months since it filed for bankruptcy. In Thursday’s filing, the utility reported estimated liabilities of $14.2 billion for wildfire claims in 2017 and 2018, about $10 billion of that from the Camp Fire. That figure has dropped from the $30 billion in estimated liabilities cited by PG&E when it filed for bankruptcy protection in January, as the utility has since been cleared of fault for the 2017 Tubbs Fire, the state’s deadliest before the Camp Fire, which carried an estimated $15 billion in liabilities. 

But PG&E also acknowledged that its $14.2 billion figure is lower than the California Department of Insurance’s estimate of $18.4 billion in insurance claims for the 2017 and 2018 fires believed to have been caused by PG&E equipment.

California's "inverse condemnation" legal doctrine holds utilities liable for damages from fires caused by their equipment, even if they were following all safety rules and regulations — an unusual situation that could threaten the state's other investor-owned utilities.

But PG&E’s bankruptcy is likely to lead to most of these claims being reduced, as well as driving billions of dollars of costs onto ratepayers and the public. 

No settlement over renewables contract renegotiations

PG&E remains locked in a legal struggle with the generators that supply it electricity under legacy power-purchase agreements (PPAs), particularly utility-scale solar farms built at prices much higher than those prevalent today. That battle is set to continue without a settlement, according to bankruptcy court filings on Friday. 

On Friday, Reuters reported that PG&E and PPA counterparties such as NextEra Energy Resources filed court documents indicating that they have failed to reach a settlement over their conflict, throwing the issue back to U.S. Bankruptcy Judge Dennis Montali, who is overseeing PG&E’s bankruptcy case. 

PG&E has asked the bankruptcy court for permission to force the renegotiation of these contracts, a move that could save it billions of dollars in energy costs. But the specter of such renegotiations has already led to credit downgrades for several of these legacy solar PPAs, and could undermine the financing environment for continued growth of solar in the state.

That’s why the California Public Utilities Commission has joined PPAs in asking the Federal Energy Regulatory Commission to intervene to prevent the bankruptcy court from changing the contracts. 

Montali had asserted the bankruptcy court’s general authority over FERC on such decisions, but set a May 3 deadline for PG&E and its counterparties to settle their differences and avoid a complicated legal battle.

Other federal courts have ruled on similar jurisdictional challenges, largely in favor of the bankruptcy courts in question. But those rulings aren’t binding to California, which means that the conflict will have to be adjudicated separately from those precedents, with an unclear outcome on appeal.