Opinion | Ratepayers are already on the hook for PG&E’s liabilities. They should get a piece of the pie

The recently announced settlement of PG&E with wildfire victims — paying some $13.5 billion in cash and PG&E stock to claimants — put wind in the sails of PG&E executives seeking court approval of their bankruptcy plan. They seek to emerge from Chapter 11 with the anticipated approval of a bankruptcy judge.

Next, PG&E will urge the California Public Utilities Commission to hike rates on customers already saddled with the company’s past mismanagement and neglect.

As the saying goes, never waste a crisis. Bankruptcy presents a rare opportunity to transform PG&E to a more responsible — and responsive — utility, and PG&E shouldn’t be let out of bankruptcy in its current form. Governor Gavin Newsom and the CPUC should ask many questions before supporting PG&E’s plan.

Questions about this settlement should leave us all unsettled. PG&E will pay victims half in stock, and half in cash. Some victims may reasonably wonder whether this compensation will sustain its value — another wildfire season is imminent, and the share value declined 80% since the 2017 fires — or amount to a lump of coal in next year’s Christmas stocking.

The impact of the settlement on PG&E’s customers also merit scrutiny. Making shareholders out of wildfire victims — who would own more than 20% of the reorganized company — could pit the interests of victims against other PG&E customers.

In order to sustain stock valuations needed to properly compensate victims, PG&E will likely need to boost net revenues. That’s critical. In the context of a heavily regulated utility, profits can only increase by either pushing the PUC to hike rates on customers, or by cutting corners on costs, such as vegetation maintenance and infrastructure repair.

In either case, we’ve seen those movies before.

Issuing stock is also a very expensive way to pay wildfire victims. In April, PG&E sought the California Public Utility Commission’s approval to reward shareholders with a 16 percent return — which would have cost ratepayers an additional $1.2 billion. Although the CPUC may grant no more than a 10.25 percent return, that’s still a cost of capital much more than double that paid to bondholders.

The long-term financial condition of an investor-owned PG&E emerging from bankruptcy under the company’s current plan appears wobbly at best. Citibank recently warned that PG&E’s holding company can now issue only $4 billion of bonds before it faces credit downgrades that will leave the reorganized company’s debt in “junk bond” status.

The next wildfire season is only months away. A “junk bond”-issuing PG&E is not a utility that 16 million residents want to rely upon for the restoration of reliable, safe delivery of power.

For both victims and ratepayers, a coalition of more than 151 elected officials representing more than 9 million residents urge a better way: the transformation of PG&E into a customer-owned private company. A customer-owned PG&E has the best chance of restoring safe, reliable, and affordable delivery of power.

It would align the company’s financial interest with the public interest after a decade in which billions of ratepayers dollars have funded shareholder dividends, executive bonuses and pricey retreats, to the detriment of infrastructure maintenance and grid hardening. A customer-owned company can also access capital markets at a lower cost, enabling the reinvestment of billions of financing costs into improving grid safety and reliability.

The lower cost of capital of a customer-owned utility will also enable the company to pay off victims more cost effectively — in cash. In contrast to the double-digit returns demanded by shareholders, a typical customer-owned utility can capital at a roughly 4 percent interest rate from bondholders, and victims will know what they’re getting.

To be clear, we’re not urging a public takeover. Government ownership of PG&E faces enormous hurdles, and California’s constitution prohibits the state’s acquisition of company stock. PG&E can remain a private company, but with customer ownership — much in the way customers own credit unions or mutual insurance companies.

Whoever owns a post-bankruptcy PG&E, ratepayers collectively face a burden of many billions of dollars for PG&E’s long-overdue maintenance, infrastructure upgrades, and microgrids.

If customers are going to pay for it, they ought to own it.

Originally published at https://www.sacbee.com.