How lawsuits and natural disasters drove PG&E to Chapter 11

On January 14th, 2019, Pacific Gas & Electric announced that it was preparing to file for Chapter 11 bankruptcy. Fifteen days later, despite last minute efforts by investors to steer the company away from the filing, the utility officially filed for Chapter 11 bankruptcy.

The move comes in the wake of two years of incredibly destructive wildfire seasons. In 2017 and 2018, 17,660 wildfires burned more than  3.25 million acres (5,118 square miles) of California. Subsequently, survivors of the 2017 Tubbs Fire and 2018 Camp Fire sued PG&E, alleging that the company instigated the disasters.

In early 2019, CAL FIRE investigators concluded a 16-month investigation that found that PG&E’s equipment did not cause the Tubbs fire, which has offered the company some reprieve. But the utility was found responsible for all 17 of the other major wildfires of 2017, and investigations into the Camp Fire are ongoing. PG&E has estimated that its total financial liability for 2017 and 2018 may exceed $30 billion, before considering fines, penalties, and punitive damages. Facing thousands of potential plaintiffs, and a state government unwilling to bail the company out, Chapter 11 was likely the inevitable outcome .

This is not the first time PG&E has entered Chapter 11.

During the Enron-fueled California energy crisis of 2000 and 2001, PG&E found itself crushed between soaring energy costs and the inability to raise their rates sufficiently. Consequently, the company was taking on debt at the rate of $300 million per month. To stem the bleeding, PG&E filed for Chapter 11 bankruptcy in April 2001.

Two and a half years later, a settlement was reached that put the bulk of the financial burden on utility customers by keeping the company’s rates artificially high. The cost to consumers was estimated at $7 to $8 billion.

With consumers still unhappy with the consequences of the energy crisis, and already lukewarm public support for utilities flagging in the wake of the fires, state legislators have been less than keen to offer financial support to PG&E Instead, the state’s focus has been on how to prevent rate hikes and help fire victims recover compensation from the company.

This paints a stark contrasts to even a year prior, when state legislators passed new laws allowing the company to pass on much of the costs of 2017’s fires to its customers through rate increases. That same leniency does not appear to be getting extended to cover the 2018 fire season.

PG&E’s safety record is tainted by more than 60 years of negligence that has inflicted harm, illness, and death on California residents.

The deadly Tubbs and Camp fires are not the first disasters have been blamed on PG&E, The company has previously been accused of harming and even causing the deaths of consumers through negligent and unsafe practices. While advocates for the utility have argued for understanding, their pleas have fallen on increasingly less receptive ears with each successive disaster.

The Hinkley groundwater contamination

Between 1952 and 1966, PG&E dumped 370 million gallons of contaminated wastewater around the town of Hinkley, California. The water was tainted with chromium-6, a carcinogenic chemical used to control corrosion in a cooling tower system that was part of a natural gas pipeline. The wastewater from the cooling system was released into unlined wastewater ponds near Hinkley, from which it leached into groundwater aquifers, contaminating the drinking water of the town’s residents.

PG&E did not disclose the dumping of the tainted water until 1987, the same year that chromium-6 was linked to increased cancer rates. Residents of the town filed a class action lawsuit against PG&E, and six years later, legal clerk Erin Brockovich was assigned to investigate the impact of the contamination on residents. Her efforts ultimately resulted in a $333 million-dollar settlement in 1996. By 2013, PG&E had spent an additional $700 million on efforts to clean up the site, but  mitigation efforts were only half-complete by 2016.

1994 Sierra Blaze liability

In 1994, the Trauner fire was sparked by PG&E power lines near Rough and Ready, California, destroying 12 homes and a schoolhouse. In the aftermath of the blaze, state forestry investigators were able to pinpoint where a tree limb contacted a 21,000-volt power line. Additional investigations in PG&E’s service territory revealed hundreds more safety violations, with vegetation making direct contact with power lines and other PG&E equipment.

Three years after the fire, the company was found guilty of 739 counts of criminal negligence for failing to properly trim trees near its power lines. Internal memos revealed the company was actively seeking to cut tree-trimming costs, evidence that likely swayed the jury against PG&E. Subsequent investigations revealed a pattern of similar violations which contributed to other fires, including the 1990 Campbell fire, which burned 125,000 acres in Tehama County.

2010 San Bruno Gas Explosion

How lawsuits and natural disasters drove PG&E to Chapter 11
Pictured at center is a section of the natural gas pipe that exploded in San Bruno in 2010.

On the evening of September 9th, 2010, a 30-inch natural gas pipeline exploded in San Bruno, California’s Crestmoor neighborhood. The resulting fire destroyed nearly 40 homes killed eight people, and injured 58 more.

In the following years, PG&E settled with 499 victims of the explosion for a total of $565 million dollars. California Public Utilities Commission (CPUC) investigators revealed in 2012 that PG&E had illegally diverted more than $100 million from safety programs over a 15 year period. Instead of being used to pay for safety efforts, the money was used to fund executive bonuses and shareholder profits. Meanwhile, in the three years prior to the San Bruno explosion, the utility had designated pipeline safety as a low priority.

In 2015, PG&E was fined $1.6 billion for its failure to keep gas pipelines safe, and a year later  a federal jury convicted the utility of five counts of pipeline safety violations and one count of obstructing investigation into the San Bruno explosion.

Recent investigations by CPUC revealed that the utility had falsified “locate and mark” reports from 2012 to 2017. Under California law, utilities are required to respond within 2 to 14 days to requests by builders and excavators to locate and flag underground utility construction. Instead, it appears that PG&E backdated their “locate and mark” records in order to avoid having to file “late tickets” indicating that they had not performed necessary location operation within the required time period. CPUC found that this resulted in the undercounting of tens of thousands of late tickets per year.

 

How does Chapter 11 bankruptcy impact lawsuits filed against PG&E?

Over 100 lawsuits related to the Camp fire alone have been filed by victims. While CAL FIRE has concluded that the massive Tubbs Fire was not PG&E’s fault, attorneys representing those affected by the 2017 wildfire season insist that they will press on with litigation. Thanks to California’s inverse condemnation rules, the utility is on the hook for 17 other major fires that happened in 2017, as PG&E equipment was determined to be a contributing factor.

Under the circumstances, it is little surprise that PG&E would file for Chapter 11 bankruptcy protection. As a rule, after filing Chapter 11, any ongoing lawsuits are halted through an automatic stay. This ostensibly allows PG&E a chance to reorganize their financial affairs, and potentially limit the utility’s financial exposure.

However, some critics believe that declaring bankruptcy is primarily part of a strategic effort to put a stop to litigation. For fire victims seeking financial compensation, any damages awarded from successful lawsuits could go unpaid for an extended period of time. When PG&E went bankrupt in 2001, the company did not emerge from Chapter 11 for three years. It stands to reason that this bankruptcy filing won’t be resolved anytime soon. While a lawsuit could technically proceed during Chapter 11, any settlement would have to be court-approved.

 

Chapter 11 bankruptcy may also delay expensive infrastructure upgrade proposals, putting consumers at further risk.

How-lawsuits-and-natural-disasters-drove-PG&E-to-Chapter-11-2
Power lines pass near, and sometimes through forested areas, requiring regular maintenance to ensure trees are not too close to the high-voltage wires.

On January 9th, 2019, a federal judge ordered PG&E to begin a renovation of existing electrical infrastructure throughout California. The order was made under the terms of the utility’s ongoing criminal probation, the result of convictions related to the San Bruno explosion.

PG&E (and the US Attorney’s Office) claimed the order was unreasonable, projecting such efforts would cost $75 and $150 billion dollars, and estimated that ratepayers’ utility bills would quintuple. The utility’s Chapter 11 filing puts this and other infrastructure improvement projects on hold as the company reorganizes its finances and sells off assets.

Regardless of the actual reasons for the filing, PG&E’s bankruptcy is only the latest chapter in the drama surrounding the largest utility company in California. Some attorneys representing fire victims are hopeful for swift outcomes, but other experts are less optimistic, predicting reduced settlements as the bankruptcy plays out. While the majority of PG&E’s customers have been unaffected by the fires, they are expected to see rate hikes as the utility struggles to cover its debts and legal obligations.

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