PG&E Corporation (“Holdco”) and its subsidiary, Pacific Gas & Electric Company (the “Utility” and together with Holdco, “PG&E”) announced on Jan. 13, 2019 that it expects to file for Chapter 11 bankruptcy protection on or around Jan. 29, 2019, right around the conclusion of a mandatory 15-day notice requirement under California law. See Form 8-K of PG&E Corp. and Pacific Gas & Electric Co. (Jan. 13, 2019). Such a filing would represent the second time PG&E resorted to protection under the U.S. Bankruptcy Code. PG&E filed for bankruptcy on April 6, 2001 and emerged three years later, on April 12, 2004. See Case No. 01-30923-DM (Bankr. N.D. Cal.). The challenges PG&E has faced since wildfires began consuming large swaths of California are well-known and has fueled speculation about a bankruptcy filing. But less well-understood and appreciated are the legal and regulatory issues confronting PG&E and other similarly-situated California utilities. As we'll see, those legal and regulatory issues present critical complications in a potential second PG&E bankruptcy.

Background on PG&E

PG&E, incorporated in California in 1905, is one of the largest combined natural gas and electrical energy companies in the United States. Based in San Francisco, it employs nearly 20,000 people. Its primary business is the transmission and delivery of energy—both natural gas and electricity—to nearly 16 million customers in Northern and Central California. The rates PG&E charges its customers are predominantly set by its principal regulator, the California Public Utility Commission (“CPUC”).

As noted above, PG&E has previously been through Chapter 11. In 2001, PG&E filed for bankruptcy after it piled on too much debt acquiring electricity as a result of a deregulation initiative under which PG&E was forced to buy more electricity, no matter the cost. As the market for natural gas drove electricity prices up, PG&E (and other California utilities) were placed under enormous financial strain. PG&E was ultimately forced into bankruptcy amid rolling blackouts and accusations of market manipulation. PG&E emerged from bankruptcy in 2004, but ratepayers saw higher electric bills for years after PG&E's emergence from Chapter 11.

Fast-forward to 2017, and PG&E's balance sheet has ballooned again. It currently has about $18.4 billion of debt, through a combination of bonds, fully-drawn revolvers, and term loan debt. The bulk of that debt—approximately $17.8 billion of it—was issued by the Utility, not the publicly-owned Holdco. All of the debt is unsecured and none of it is guaranteed. According to PG&E's January 13 Form 8-K, PG&E has approximately $400 million and $1.1 billion of cash and cash equivalents on hand.

How Did PG&E Come to Be Distressed?

PG&E's recent issues largely stem from a California judicial doctrine known as “inverse condemnation,” which imposes on utilities such as PG&E a form of strict liability for damages caused by any fires that may be traceable to utility-owned equipment. Inverse condemnation is derived from the California Constitution, which provides that “[p]rivate property may be taken or damaged for a public use … only when just compensation … has first been paid to … the owner.” Cal. Const., art. I, §19, subd. (a). A private property owner can seek compensation for damages caused to property by “public use” through an inverse-condemnation action, which, unlike ordinary negligence claims, generally requires no showing of fault on behalf of the public entity. See, e.g., Holtz v. Superior Court, 3 Cal. 3d 296, 302-304 (1970) (noting that, with limited exceptions, inverse condemnation is a strict liability cause of action). The doctrine is premised on the notion that the costs of public improvements—including the damages caused by them—should be “distribute[d] throughout the community” rather than “inflicted on the individual.” Id. at 303 (internal quotation marks omitted). California courts have held that inverse condemnation applies not only to government entities and publicly-owned utilities, but also to privately-owned public utilities like PG&E. Pacific Bell Tel. Co. v. S. Cal. Edison Co., 208 Cal. App. 4th 1400 (2011); Barham v. S. Cal. Edison Co., 74 Cal. App. 4th 744 (1999).