Many Gridium customers opened the news on Monday to learn that the local utility, PG&E, filed with the SEC that it expects to head into Chapter 11 bankruptcy. If you’re responsible for energy in your organization, you’ve likely been on the end of many questions about what this means for you and your buildings.
First, the good news. Nothing about electric or gas service should be disrupted. PG&E, in addition to being a heavily regulated quasi ward of the state, is now going into even stricter control with a bankruptcy judge at the helm of all major decisions, along with the management team.
Understanding the problems that PG&E faces helps put the likely journey ahead into context. PG&E makes about $3B profit on about $17B in annual revenues, but estimates of damages and lawsuits from the 2017 and 2018 campfire now total about $30B–something that PG&E’s balance sheet can’t really handle. Part of the problem is the California law of inverse condemnation that provides full exposure to California utilities, regardless of negligence, if their equipment is involved.
This fight has been brewing for awhile, including legislation passed last year and a CPUC proceeding to establish methodologies to limit wildfire liabilities. And that’s kind of the rub. By heading into bankruptcy now, PG&E potentially circumvents glacial rulemaking and can restructure its debts in a way that preserves value. Shareholders might even escape with value–PG&E stock traded in the single digits all the way through the last bankruptcy.
If this makes your blood boil or seems unfair, then you have context for activists and government officials arguing against a PG&E “bailout” and admonishing them for not taking responsibility. But you also get a sense of the high stakes game here. PG&E’s filing cuts to the core of the regulatory construct–a regulated monopoly set up to secure private investment in our electricity system. The game here is war, and PG&E just pressed the nuclear option in the negotiations.
Ok, enough regulatory navel gazing. What does this mean for you?
First, have patience. The scope of this bankruptcy is quite unlike the 2001 bankruptcy. The last Chapter 11 process took three years, and was reasonably well organized with known liabilities of about $8B. And while not universal, at least some regulators viewed PG&E as the victim of poorly organized electricity markets. Today, the damages are likely four times as great. And PG&E is not a victim, instead the victims are the tragic 86 souls that lost their lives in the Camp Fire, at least partly due to PG&E negligence and poor practices. Our view is that we don’t expect full resolution of PG&E’s fate for at least two years, and possibly five. There will be lots of posturing, regulatory developments and gambits, including from wealthy cities seeing a path to municipalization. This process is going to make Brexit look like a game of speed chess.
Second, the bad news. It’s going to cost you. Look carefully at the PG&E tariffs and you’ll see the DWR bond charge ($0.005/kWh) that we’re still paying off from the last crisis and “bailout.” On a $20B package, even if securitized and tax free over 20 years, we estimate 1.5-2 cents on all kWh usage for for the next 20 years. Rates will increase on top of that as well–in 2001, the bankruptcy followed with a 40% rate increase. PG&E’s next rate case is already filed with a 12% increase, largely on wildfire related prevention costs. Whatever the existing negligence, as a system we still have to prevent the next camp fire, and that is going to take money. Lots of it.
Third, expect PG&E services to suffer. The lights will still stay on, but as commercial customers know, that is just part of the service. It’s easy to complain about PG&E, but compared to other utilities, their customer service is responsive and many talented people work at PG&E. Bankruptcy puts the brakes on everything, might upset retirement funds, and casts a shade of pallor in the workplace which will force a lot of people to leave while the economy is strong. Don’t expect any new programs or improvements to existing systems. Expect more billing problems, a decline in customer service, and general delay as processes break down. Our bill audit findings in PG&E territory exploded last year and we expect that to continue as problems continue.
Fourth, for those in construction, prepare for both extreme delays for new service and nervousness from all attorneys in all matters related to deposits. With investment grade debt, legal teams will tend to gloss over items and approve form agreements. But sending million dollar deposits into a Chapter 11 wormhole is going to raise a lot of questions and discussion of risks. As they say, bankruptcy judges are God, with a gavel.
Have we depressed you enough yet?
Well, fifth, let me tell you some good news. For those investing in energy efficiency, this reinforces everything you have been saying for years. Energy economics is a zero sum game, and all these expenses are going to be passed along volumetrically. The relative winners in this slow motion train wreck are the most efficient. Raising rates will improve your paybacks on every single project and the simplest and surest way to fight back is to do even more to use less.
We’re glass half full kind of folks, and while the drama erupts around us, that’s where we’re going to focus our efforts.
