The California utility Pacific Gas & Electric (PG&E) filed for bankruptcy protection on Jan. 29, raising some immediate, and financially critical, questions for its customers, suppliers and investors. Answers to those questions—such as potential impacts on rates, power contracts and the company’s long-term financial viability—are unlikely to be answered anytime soon. PG&E has stated it anticipates bankruptcy proceedings to last up to two years, and court battles are sure to follow.
However, PG&E’s bankruptcy also raises some broader questions. For one, has the utility grown too large to maintain its transmission and gas pipeline networks? There’s also the question of whether long-term power-purchase agreements (PPAs) should be protected in bankruptcy proceedings, which could have an impact on the financial health of renewable energy investors. Finally, there’s the large question of who should pay for damage that might ultimately be caused by the effects of a changing climate.
How big is too big?
By some measures, PG&E is ranked as the nation’s largest single utility. It delivers both electricity and natural gas to 5.5 million customers across the northern two-thirds of California. Its assets include 18,000 miles of transmission line and 6,700 miles of gas transmission pipelines. That’s a lot of infrastructure, and some wonder if it’s too much for a single company to manage. California State Sen. Jerry Hill has called the utility “too big to succeed.”
The utility’s critics offer compelling evidence that PG&E has grown too large to maintain safe operations. There’s the 2010 pipeline explosion in the San Francisco suburb of San Bruno that killed eight and destroyed a neighborhood. In 2017, the North Bay fires killed 46 and burned 245,000 acres. Finally, last November’s Camp fire is believed to be caused by PG&E equipment. It was the nation’s deadliest in more than a century, killed 85, burned 153,000 acres and devastated the town of Paradise. In the face of these disasters, some say it’s time to either separate gas and electric operations into separate companies or turn over regional operations to new or existing municipal utilities.
PG&E, like all California utilities, is a major buyer of solar and wind energy, thanks to the state’s aggressive greenhouse gas reduction goals. Many of its power contracts go back a decade or more, and they’ve locked the utility into payments that are much higher than producers now are receiving. Allowing a bankruptcy court to renegotiate those contracts could have a big bottom-line impact—Credit Suisse analysts estimate annual savings could total $2.2 billion. Any bankruptcy judge seeking to enable such renegotiation could find themselves in a power struggle with the federal government.
Energy contracts typically fall under the jurisdiction of the Federal Energy Regulatory Commission (FERC). Under long-established legal precedent, FERC can modify contracted rates only if those rates are deemed to harm the public interest. Utilities across the country will be watching this issue closely, given how dramatically prices for solar- and wind-generated electricity have fallen in just the last five years.
Interestingly, this exact issue was argued in an Ohio bankruptcy court last year, and the judge found the bankruptcy court’s authority superseded FERC’s in such cases. However, the decision in favor of FirstEnergy Solutions’ efforts to renegotiate with its supplier, the Ohio Valley Energy Corp., is now the subject of an appeal.
Who pays for climate change?
The driving factor behind PG&E’s decision to file for bankruptcy protection is the estimated $30 billion liability the company could face for damages related to the Camp fire. California utilities are subject to a legal doctrine called “inverse condemnation,” which holds utilities responsible for all damages related to their equipment’s operation, regardless of whether negligence was involved. Last September, Gov. Jerry Brown signed legislation that essentially allowed PG&E to pass much of that liability for 2017’s fires back onto ratepayers. Proponents argued that forcing the utility to foot the bill would drain it of the resources needed to maintain safe operations. This January, however, a U.S. district judge overseeing PG&E’s compliance with probation requirements imposed after the San Bruno pipeline explosion pushed back on this argument.
These issues will only become more critical in the coming decades. The Fourth National Climate Assessment released in November by the National Oceanic and Atmospheric Administration (just as the Camp fire was being contained) warned the frequency of large fires could triple in the western United States. If this is the case, those states’ residents could be looking at much higher electricity bills in the years to come.