Realist, not conformist analysis of the latest financial, business and political news

Bang to Rights

California isn’t called the golden state for nothing. Well, it might be the good PR from the Beach Boys or the Eagles—Tim knows more about this than we do—but it is generally a place you might want to go. Chuck Berry, bless his little cotton socks, called it the Promised Land.* We’ve been there. It is stunning. Go to Malibu Beach and view the Bay Watch at work.

It’s Paradise on earth.

Sorry, that’s not in LA. Our bad.

Paradise is a small patch of California a little north of the Golden Gate Bridge. In what used to be beautiful forest. It ain’t any more. Paradise has been reduced to hell on earth. If you have been hibernating this winter—and, to be honest, we don’t blame you at all if you live in Chicago and the Midwest and missed it—there was a big, big fire in Paradise that had catastrophic consequences. A front page, send off the top reporter to sniff around, kind of disaster.

You remember it? Good. You might wonder what’s this got to do with that dismal science stuff that we keep barking on from our little pit. Well, quite a lot actually.

It’s all to do with the nexus of law and economics. We could go all heavy on you and say it’s the fault of those good folk in Chicago. Yes, those very same citizens freezing their butts off there. Well, it has to do with Chicago, but only its economists. Ah, you say, that makes perfect sense. Well, let’s just say it does to us.

So this is the bit bit in the New York Times caught our attention:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] California’s Largest Utility Says It Is Bankrupt. Here’s What You Need to Know. Pacific Gas and Electric has filed for Chapter 11 bankruptcy protection. The state’s wildfires are at the heart of its insolvency. [/perfectpullquote]


The good reporters than go on to explain to all those folk in the Big Apple why things aren’t so golden in the Promised Land:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Pacific Gas and Electric, California’s largest utility, serving more than 16 million people, filed for bankruptcy protection on Tuesday because it is facing tens of billions of dollars in liability for wildfires. The company’s equipment could be responsible for causing wildfires that killed dozens of people, destroyed thousands of homes and resulted in billions of dollars in damage over the past few years.[/perfectpullquote]

Now, we’re not here to cast aspersions on poor ol’ PG&E for being so negligent as to allow a giant Redwood to topple over and cause the odd spark to fly in a tinder-dry wood. No. That’s for the courts to decide (part of that law bit we mentioned earlier). One can say, however, PG&E has in the past been accused and—in their view—unfairly convicted of such activity. The NYT does point out, however:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Equipment owned and maintained by the utility sparked at least 17 of the 21 major wildfires that burned through California in 2017, according to the California Department of Forestry and Fire Protection, making the company responsible for some of the damage that resulted. The authorities recently cleared the company of responsibility in an 18th fire in 2017, a giant blaze that killed 22. State officials are still investigating the utility’s role in the fire of 2018.[/perfectpullquote]

Someone’s not being talking to Smokey!

There’s a comeback from being negligent. That little matter of the law. You’ll be pleased to know there’s a good supply of attorneys-at-law in the United States and we’re pretty confident that some of them, possibly a good many of them, like to live in the promised land. There’s a record, too, of said counselors-at-law putting the binds on negligent firms and getting their pounds of flesh. Make that tons. Our own energy icon BP learned about this interesting little tendency of our former colonials in this regard when they somewhat negligently went about searching for oil in the Gulf of Mexico. A mere $62bn later BP now knows the cost of that little mishap.

But back to sunny California and all those lawyers. Their first instinct, sparked (we hope you get our little and probably pathetic attempt at making this sad law and economics story come to light) by someone burning down Paradise through arsonist tendencies, is to sue. Sue. SUE! Until the miscreant is, well, pretty shaken down for all the harm they have done. Think BP.

This creates an incy-wincy problem for PG&E. It has, naturally enough, taken out insurance against negligence and would have been negligent not to have. But not nearly enough. Oh, darn. We know this since, as a public company listed on the New York Stock Exchange, PG&E has a duty to keep investors informed of material events. A little fire in Paradise probably so qualifies, especially when some of the costs of negligence are going to have to be paid by said investors. PG&E therefore told the Securities and Exchange Commission in early November that it could face significant liability in excess of its insurance coverage. Naturally the stock plunged. We’ll tell you why in a moment.

In the US of A, firms that get into financial difficulties can seek bankruptcy protection. What? How can PG&E have financial difficulties, you say. Isn’t it earning money from selling leccy and that smelly stuff to good Californians? You’re darn right, they do. But given that providing energy to people tends towards being a natural monopoly, PG&E and other utilities operate in an oversight environment. Basically, in California and other states there’s a price cap. Sure, they’ve got to allow the company to earn that economics 101 return on capital that Tim is fond of mentioning, but not to shake down its customers. We, on our part, will just say that there’s a commission in California that likes to put their oar in and make sure that local voters get a good deal. Voters, after all, elect the commissioners.

Of course, as Tim will beat into you until you start screaming it in your sleep, putting politicians in charge of things isn’t always a good choice. But we economists realise that all that perfect competition stuff is great in theory, but it’s somewhat different in practice. Without some oversight good ol’ PG&E would operate as a monopolist and gouge its customers. Hence, having a nice bunch of politically minded commissioners with oversight of PG&E is probably a lesser evil. What we would call a second-best solution. It generally works until it doesn’t.

Now we have to understand that Californians aren’t like the rest of us. Sure, they’ve got a head (we think) arms, legs, that sort of thing, but there’s something about the sun there that makes them behave in ways that others don’t, or only do to a lesser extent. Or maybe it’s Malibu beach, or possibly some combination. To fess up, we haven’t done the research on this, so it’s all a pretty back-of-the-envelope conjecture. That another hot spot of sun, sea, and opportunity down under behaves the same way makes us think that the sun is to blame.

What California has decided is that they want a lot of that renewable energy in their production mix. To do this, they’ve required (that is the oversight commission mandated on behalf of the voters) PG&E to take on lots of contracts with renewable providers. At some pretty fancy prices, too.

Oh, did we say these are fixed price purchase power agreements (PPAs) for fifteen years or more at some fancy prices way above what you can buy and sell the leccy stuff for? We did? Great.

This brings us back to PG&E’s bankruptcy. They’ve gone into Chapter 11. No, not a branch of the Hell’s Angels. A bit less rowdy than that most of the time. But perhaps not in PG&E’s case. Chapter 11 is a section of the Bankruptcy Reform Act of 1978. All you need to know about this is what we’re going to tell you.

First, filing for Chapter 11 gives PG&E protection from its creditors. So what, you say. Well, those lawyers are now in a bind.

The second thing you need to know about how our former colonials like to reorganise their enterprises is that under the Bankruptcy Code (that law above), there’s a strict hierarchy of who gets to be paid out of what’s in the pot. The pot being the economic value of the firm—that is, PG&E. Stockholders are at the back of the queue. They’ll probably get nada or  a few crumbs to keep ’em sweet as they can cause trouble during the process.

Under the Code, there’s a presumption that what should come out of the other side is a viable business. Having lots of expensive supply contracts and plaintiffs seeking damages is going to make that rather difficult. Claims for negligence are now part of what PG&E owes to everyone. No special treatment.

Renewable suppliers and negligence claims are in the same boat as everyone who has a claim on that pot of value that is represented by the stock symbol PCG. They’re competing for who gets to do what once the bankruptcy proceedings are over, which did we mention are done in a court of law? Contracts in Chapter 11 can be set aside by the bankruptcy court and that’s it. No appeal. Ah, you see where we’re going. Expensive contracts might be rendered null and void in the reorganisation. All those hoping to milk PG&E for expensive leccy or negligence like poor ol’ BP might end up with less than what they started with once those attorneys-at-law have sent in their bills.

Now remember, there’s that pot. The commissioners might help enlarge this by allowing whatever emerges from bankruptcy proceedings, say PG&E Mark 2, for instance, to raise its rates. That’s going to go down with Californian voters (sorry, should read energy consumers) like that proverbial lead balloon. There’s some wriggle room, so prices may go up a little, especially if the new cash is earmarked to do something to stop future wildfires. But that doesn’t help creditors much, does it?

Back to the pot. You’re a nice little rent earner having locked in a great PPA with PG&E and now someone’s threatening to rain on your parade. You’re going to lose big time if the court decides that your contract is void. Cue much gnashing of teeth and hiring of those attorneys to find a loophole.

We read this in the San Francisco Chronicle:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] PG&E has agreements to purchase power from about 350 energy suppliers representing $42 billion, according to Bankruptcy Court papers. The company says it entered into most of the agreements to satisfy California’s renewable energy requirements, and the contracts typically last for 15 to 20 years or more. Renewable energy prices have fallen significantly since the contracts were put in place, creating an opportunity for PG&E. [/perfectpullquote]

That $45bn isn’t exactly loose change. But it’s the last bit that makes you think that saving PG&E might involve tearing up those high priced PPAs. It isn’t looking good for those juicy renewables’ contracts, is it?

As an attorney, you’re being handsomely paid to help win your client’s case, so you’d better come up with something to save their hide. So, what do those fancy lawyers do? Find some small print to save the day? Been tried and hasn’t worked in other cases. No. Be creative. We’re talking California here! Land of giant Redwoods and Hollywood megastars. Hence, bring in something big, real big, so big that all those Californians who voted for that high renewable mix can’t resist going for. Enter stage left: Global warming. We need those renewable contracts to combat climate change! Leave ‘em alone!

You can just hear the cui bono (that’s lawyer speak for “who benefits?”) from the suggestion that to prevent climate change renewables PPAs shouldn’t be subject to annulment or renegotiation. The beneficiaries aren’t those Californians worried about wildfires or going to hell in a hand-basket as the world warms. It’s those firms sitting on a pile of juicy cash flow from PG&E in the form of those PPAs. Keeping them in the game means they get more of the pot. But there’s only the one pot. Give more to renewables and there’s less for other claimants, those other suppliers (that smelly stuff to begin with), lenders and the deserving victims of wildfires seeking redress.

One should say claiming economic advantage from global warming probably won’t work as it will drive a coach and horses through the whole purpose of Chapter 11 which is for PG&E Mark 2 to exist as a viable business. But who knows? We’re talking US of A here. Then there’s those wildfire claimants who are voters, right?

It’s going to be a bun fight, trust us.

We’re selling tickets and passing out peanuts at US Bankruptcy Court for the Northern District of California at really good rates for those interested.

Who was that who said law and economics are dull? Go to the back of the class!



* You can watch Chuck do his moves here

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Quentin Vole
Quentin Vole
5 years ago

There is science, logic, reason; there is thought verified by experience. And then there is California.
Edward Abbey (1927-89)

Dodgy Geezer
Dodgy Geezer
5 years ago

A little bird on the net told me that one problem PG&E had was that when they wanted to clear and fell all vegetation around the power lines (which is standard practice for minimising fire risk) the environmentalists got up in arms and prevented this precaution.

Of course, you can’t believe every little tweet that you hear on the net….

Peter Moles
Peter Moles
5 years ago
Reply to  Dodgy Geezer

sorry for delay here

Tony Carden
Tony Carden
5 years ago
Reply to  Dodgy Geezer

Yes, I’d read that too. The Californians have decided that the best way to protect the environment is to make it into a tinder box. I read that Finland has a similar problem of wildfires and they “manage” their forests so as to minimise the risk. Not something that’s been going on in Calif.
I don’t personally see a conflict between environment and managing it. But then…

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