What Happens When a Utility Goes Bankrupt?

Recent years have seen several newsworthy bankruptcy filings, including one of the largest investor-owned utilities companies in the country after the 2019 California wildfires, as well as several companies in Texas after the 2021 cold snap.12

Unlike a retailer or other private enterprise, utilities are often heavily overseen by state regulators, even when privately owned. Price increases, for example, have to be approved by state regulators, a policy that exists to offset the natural monopoly of utilities services and protect consumers from paying unreasonable premiums.

Questions as to the right amount of investment into upgrading electrical systems rest ultimately in the hands of regulators because the cost is passed on to consumers, according to Theodore J. “Ted” Kury, director of energy studies for the Public Utility Research Center (PURC) at the University of Florida. However, writes Kury for the online news publication The Conversation, companies still have the duty to operate the systems responsibly, and they can incur liability if they don’t.3

Utility bankruptcies are affected by the Bankruptcy Reform Act of 1978, passed by Congress to update U.S. bankruptcy laws. The changes included then-controversial alterations in personal bankruptcy law.4 The act also removed requirements for regulator approval of restructuring plans, which previously were necessary for the court to confirm the plan. It did, however, still require rate changes to get regulator approval.5

Bankruptcy should not affect the delivery of services, as utilities are legally required to provide service to those who want it. However, it can affect lawsuits against those companies. It can also affect taxpayers, who may have to pay increased costs for services, and hurt investments in renewable energy and infrastructure updates.6

California’s PG&E Bankruptcy

The 2019 bankruptcy of Pacific Gas & Electric Co. (PG&E), which provides gas and electricity to Californians and is one of the biggest investor-owned utility companies in the country, is an example of a utility using bankruptcy to limit its losses from lawsuits.2

In his testimony before the California state Senate, Jared Ellias, an associate professor of business and bankruptcy law at the University of California Hastings College of the Law in San Francisco, explained that when PG&E declared Chapter 11 bankruptcy, it received a few advantages. These included an automatic stay of the lawsuits against it, which were numerous, and a chance to ditch bad assets and undesirable contracts and get billions in new financing, an unusually large sum with a long repayment period.7

PG&E has declared bankruptcy twice in 20 years. The 2019 filing was because of lawsuits over the Butte County fire, and the company climbed out from it in 2020. It was called the “first climate change bankruptcy,” because it was caused by liabilities stemming from California’s wildfires.8 PG&E also filed for bankruptcy in 2001 after the California power crisis, reemerging in 2004.9

Lawsuits are not the only kind of liability that a utility company can face if it is held to have mismanaged its responsibilities. Shasta County, which is located in northern California, announced in 2021 that it would file criminal charges against PG&E because of the lethal 2020 Zogg fire, which kindled when a pine tree connected with a PG&E power line.10

Proposed Solutions

Climate change has aggravated problems for utilities. California wildfires and droughts, in particular, have received a share of the blame for the fragility of the region’s utility companies. A report from Columbia University’s SIPA Center on Global Energy Policy said that wildfires could become as much as 900% more destructive by mid-century. The report also said that the debt and equity markets were not very concerned about the effect of climate risk on the utility sector in the wake of PG&E’s bankruptcy filing, which the authors attributed to the probable belief that the costs will either happen far enough into the future to not harm their investment or get passed on to taxpayers and insurance companies.6

In 2019, in response to several years’ worth of devastating wildfires, the California legislature passed several bills, known collectively as the 2019 Wildfire Legislation. Among the actions was establishing the California Wildlife Fund, an insurance fund that would reimburse utility companies for claims for which the utility companies are liable.11

At the national level, there are proposals to update outdated U.S. infrastructure, including the $1.2 trillion bipartisan infrastructure bill, which the White House has touted as an historic investment in clean energy and other infrastructure improvements.12 A version of the bill passed the U.S. Senate in August 2021, and Speaker Nancy Pelosi has promised a House of Representatives vote on it no later than Sept. 27, 2021.13 The deal proposes significant updates to much of the country’s infrastructure, such as a $73 billion investment in clean energy and other investments meant to make the infrastructure more resilient.12

Inspired by the infrastructure proposal, Adie Tomer, a senior fellow at The Brookings Institution’s Metropolitan Policy Program, has said that focusing improvements on climate resilience, digitalization, fiscal health, and workforce development would provide a relatively inexpensive way to modernize American infrastructure at scale. Tomer claimed in April 2021, for example, that $400 million in investments in weatherized improvements to the Texas power grid could have staved off the worst impacts of the Texas cold snap, which killed 246 people in 2021.1415

A Brookings report co-authored by Tomer estimated that the increase in “extreme climate” disasters has cost the United States $1.8 trillion since 1980. According to that report, the annual cost of climate disasters is increasing, as is their frequency. In the 2010s, such climate disasters were occurring 11.9 times per year at an annual cost of nearly $81 billion, a figure that had risen from about $17.8 billion annually in the 1980s, when an average of 2.9 disasters were occurring yearly.16

There are more localized efforts to reduce the risk of damage as well. PG&E, for instance, has begun burying 10,000 miles of electric lines to reduce the risk of wildfires, which the company has brought attention to in light of the recent criminal charges.17

The Bottom Line

An increase in the number of bankruptcies for utility companies is a perhaps surprising consequence of climate change. Some experts suggest that the PG&E bankruptcy in 2019 was the first in a new trend as climate change intensifies natural disasters.

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