Professor Catherine Sandoval’s Blog
Associate Professor
Co-Director, Santa Clara University Law High Tech Law Institute
Former Commissioner, California Public Utilities Commission
The federal government shutdown limits PG&E financing options. To protect safe, reliable, affordable, and environmentally friendly electric and gas service, PG&E should file asset transfer requests with the CPUC.
The federal government shutdown compromises PG&E’s ability to refinance and reorganize through federal bankruptcy proceedings, and serve its 16 million California customers. PG&E has yet to apply to the California Public Utilities Commission (CPUC) for approval to sell assets such as its headquarters building in San Francisco’s financial district to raise cash to cover operating and capital expenses. The CPUC is open for business during the federal government shutdown. The CPUC is charged with ensuring that utilities under its jurisdiction provide safe reliable service at just and reasonable rate consistent with California’s environmental laws. California Public Utilities Code 851 requires that the CPUC approve any sale, lease, or encumbrance of a utility asset. PG&E should immediately file an Advice Letter requesting CPUC approval for a sale of the utility’s headquarters building which is valued at over $1 billion. If PG&E had filed such a request in November, the CPUC could have taken public comment and voted on this item as soon as its mid-February meeting.
The “debtor in possession” financing PG&E hoped to obtain through the federal bankruptcy process depends on a functioning federal court and Office of U.S. Trustee, a division of the US Department of Justice. Federal courts this week announced they have enough cash to operate through January 25, 2019. The federal government shutdown may continue through the State of the Union speech on January 29. The shutdown’s size and scope may grow by that date. While PG&E may be able to file an electronic request for Chapter 11 on January 29, efforts to schedule bankruptcy case hearings may hit a wall during the shutdown.
Credit rating agencies downgraded PG&E credit to junk status in early January and the company now faces a cash crunch. PG&E reported to the SEC in its January 17, 2019 8K filing that it has $1.5 billion in cash. The utility spends more than $14.2 billion a year to provide electric and gas service. With outlays of $39 million per day, PG&E has 38 days of cash on hand. On January 14, 2019, PG&E announced its intention to file for Chapter 11 bankruptcy in federal court by January 29. PG&E reported that it anticipates liabilities of up to $30 billion stemming from 2017 fires in California’s Wine Country and the 2018 Camp Fire in which 86 people perished while the town of Paradise, California burned.
No judge has determined liability or awarded damages from the Wine Country or Camp Fire. Yet, credit rating agencies downgraded PG&E’s credit to junk status in early January 2019, fearing no regulatory, legislative, or management solution to balance PG&E’s potential liabilities and assets. The California Department of Forestry and Fire Protection (Cal Fire) is still investigating the causes of the Camp Fire, as well as the Tubbs Fire in Santa Rosa. Cal Fire determined that PG&E caused 17 of the Wine Country fires through its electric infrastructure maintenance and operation. Cal Fire found that PG&E’s faulty vegetation management near power lines, fallen utility wires, and utility pole failures were the primary causes of those 17 fires.
PG&E announced its intention to seek “debtor in possession” financing available to Chapter 11 bankruptcy filers after federal bankruptcy hearings, conferral by a committee of secured and unsecured creditors, input from the Office of US Trustee, a division of the U.S. Department of Justice, and approval by the assigned federal bankruptcy judge. “Debtor in possession” financing, once approved, is given priority over other secured debt and post-bankruptcy administrative expenses. The goal of debtor in possession financing is to secure working capital while the company reorganizes its debts through Chapter 11 bankruptcy proceedings. The priority given to such financing often leads to vigorous debate among other creditors. The U.S. Trustee scrutinizes the financing proposal prior to the bankruptcy judge’s decision.
The Office of U.S. Trustee protects the bankruptcy estate and property, coordinates meetings of debtors and creditors, and provides input to the bankruptcy judge on proposals including debtor in possession financing. Two-thirds of Office of U.S. Trustee workers are currently furloughed. In bankruptcy cases, if the Office of U.S. Trustee’s participation is delayed, the bankruptcy case is delayed. The Justice Department’s shutdown contingency said the trustees will attempt to “curtail or postpone” bankruptcy court appearances while the shutdown is in effect.
Once the federal court budget runs out on January 25, 2019, courts will likely hear only criminal cases. The federal courts anticipate that the electronic filing process will remain available (at least for the near future). Bankruptcy filings submitted after the federal court’s constriction of its functions on January 25 will likely face growing difficulties in scheduling a hearing, convening creditor committees, securing U.S. Trustee input, and in the judicial decision-making process. The shutdown has already delayed payments to creditors including employees who have first priority among unsecured creditors. The shutdown’s impact on bankruptcy filings and the creditors including employees who depend on that process underscore the damage to the U.S. economy of curtailment of important federal government functions.
PG&E should immediately file a request for CPUC approval of its headquarters building sale. A tier 3 advice letter which requires full CPUC Commission approval may be decided within 90 days or more, depending on whether protests are filed. Prompt PG&E filings at the CPUC can help restore creditor and credit rating agency confidence. Improved credit ratings can open access to capital markets without resort to a bankruptcy filing that attempts an end-run around the state regulatory process. PG&E should immediately file requests at the CPUC for sale of its headquarters building to maintain safe and reliable electric and gas service needed to fuel California’s economy.
