The predictable business and steady dividends of local utilities earned them the nickname "widow and orphan actions." Not in California. Pacific Gas & Electric Company (PG&E), its largest electric company, filed for bankruptcy in January, citing $ 30 billion in potential liabilities arising from its role in causing fatal fires. Its stock price has fallen by almost 90% since 2017. It has recently turned off the power of millions of Californians to prevent their facilities from sparking new flames. Customers and politicians were smoking. Meanwhile, a battle for control of the company continues.
PG&E management is supported by large funds (mainly Abrams, Redwood and Knighthead), which hold just over half of their shares. Its restructuring plan favors current shareholders. He proposes the raising of new debt and equity. A rival bid by bondholders (including big asset managers like Elliott, Apollo and PIMCO) would destroy current assets. This scheme appeals to fire victims because it offers more compensation than the management plan.
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The bondholders seemed to have the upper hand. Then the politicians entered. On November 4, Mayors of Oakland, San Jose and other counties said they want to buy PG&E and turn it into a cooperative. They are pressuring Gavin Newsom, California governor and state regulators to back their proposal. If approved, it would allow PG&E to take advantage of rules that exempt California municipal taxes, such as those of Los Angeles and Sacramento, from federal tax, set their own tariffs, and also obtain cheaper capital than is available to the private sector. Utility services. If PG&E is not restructured within June 30, Newsom, which is critical of management, has threatened a state takeover.
Meanwhile, PG&E will continue to oscillate. After years of underinvestment, your network needs a massive upgrade. Stephen Byrd of Morgan Stanley Bank estimates that burying its transmission and distribution lines in the most vulnerable underground areas to reduce the risk of fire would cost $ 100 billion. Lawrence Makovich of IHS Markit consultancy points out that the dealership is burdened with another cost. A state law passed last year requires half of electricity to be renewable by 2025, up from about one-third in 2017. Like other utilities, PG&E has signed some expensive clean energy contracts. Moving away from those who charge a premium for dirtier energy could save $ 1.4 billion a year as part of the restructuring, estimates Moody's, a rating agency – but the hyper-green politicians and activists of California would probably prevent this action.
Then there's California's "reverse conviction": an idiosyncratic state law holds utilities liable for damage to their equipment during fires, even if they follow safety rules and are not negligent. The reckless expansion of housing in fire-prone areas has put nearly $ 110 billion on high-risk properties in California. Climate change is making the dry climate drier and forest fires more violent. By creating untold potential liabilities, the statute has rendered public services virtually insecure.
Last July, the state created a $ 21 billion fire insurance fund, to be funded equally by private companies and clients. Fortunately, the scheme groups risks. But it is too small. It limits the pool to California, notes Joseph Scalise of Bain, a consultancy. States in which utilities have access to insurers and reinsurers can spread risks globally.
The unfortunate dealership can still be hit with huge fire-related expenses in this dry season, which ends in December. This could end up with the remaining equity. Bondholders can then give up on promised capital injections. The government can get on the hook. Whoever wins the battle for PG&E control, ordinary Californians will pay – through higher taxes or electricity bills. ■