Thursday, February 21, 2019

Bankruptcy Only ‘Viable’ Option for PG&E, Lawyer says

By Robert Mullin

A lawyer for Pacific Gas and Electric said the embattled utility did not file for bankruptcy to evade financial responsibility for wildfires that ravaged Northern California in 2017 and 2018, but to ensure the company is able to compensate the victims of those fires.

During a Thursday court hearing to review the numerous motions PG&E quickly submitted when it filed for Chapter 11 on Tuesday, Attorney Stephen Karotkin said the company’s move was intended to maintain its status as a going concern.

“Simply stated, your honor, there was no way for PG&E to finance its way through years of litigation and finance its business,” Karotkin told U.S. Bankruptcy Court Judge Dennis Montali. “Chapter 11 is the only viable alternative.”

Judge Dennis Montali | Commercial Law League of America

During the half-day hearing, plaintiffs’ attorneys urged the judge to create a claimant class for fire victims and asked him not to make their clients’ claims subordinate to suppliers and other creditors.

The hearing was peppered with humorous remarks, a reflection of Montali’s relaxed style even in the face of an extremely complex bankruptcy case involving the nation’s largest utility.

Early in the proceeding, Karotkin assured the judge that, unlike in its 2001 bankruptcy during the Western Energy Crisis, PG&E was this time “seeking to work collaboratively” with the California Public Utilities Commission “to achieve a successful reorganization.”

“You don’t think they were collaboratively engaged 18 years ago?” Montali asked, drawing laughter from the courtroom.

“I wasn’t here 18 years ago, but from what I heard, I don’t think so,” Karotkin replied.

“I still have the boxing gloves,” retorted Montali, who also oversaw that case.

‘Comprehensive Review’

In his opening remarks, Karotkin told the court that PG&E decided to file Chapter 11 after a “comprehensive review” of its business, which confirmed the utility faced “a multitude of claims” from wildfire victims and “thousands yet to be filed.” He noted about 50 complaints have already been filed against the company for November’s Camp Fire, the costliest and deadliest fire in California history. The cause of the blaze is still under investigation.

Stephen Karotkin | Weil, Gotshal & Manges

Karotkin added that a recent finding by California fire investigators that PG&E equipment was not responsible for igniting the 2017 Tubbs Fire that destroyed part of the city of Santa Rosa did not significantly alter the company’s precarious financial position. (See PG&E Cleared in Fire that Burned Santa Rosa.)

“The fact is, the comprehensive review fully took into account being exonerated for the Tubbs Fire,” Karotkin said, adding that plaintiffs’ lawyers “also think they have other theories to hold PG&E accountable” for that fire.

PG&E says its problems have been exacerbated by California’s doctrine of inverse condemnation, which holds a utility strictly liable for property damage caused by a fire started by its equipment, regardless of whether the utility is found to have neglected maintenance.

The situation has left PG&E unable to access the capital needed to operate and service its debts, Karotkin said.

“PG&E believes Chapter 11 will more quickly and equitably address PG&E’s liability than though the state court system,” Karotkin said. One objective of the bankruptcy case would be to establish a trust fund for wildfire victims and restoration efforts, he told the judge.

Fire Victims Seek Standing

But attorneys representing those victims expressed concerns that bankruptcy would force their clients to line up behind creditors and suppliers before they could collect on their claims.

Attorney Dario de Ghetaldi, a lawyer representing 1,500 claimants affected by the North Bay, Butte and Camp fires, asked that Montali not give debt and supplier payments priority over payments to plaintiffs that had executed pre-petition settlement agreements with PG&E over the Butte fire.

“There are other firms who have other Butte Fire plaintiffs in the same position, and I represent, I think, their views as well,” de Ghetaldi said.

“We’re obviously very sympathetic to his clients and the victims of these wildfires, and we understand their concerns, but we don’t think it’s prudent to risk the operations right now and risk potential recoveries for them going forward, which is why we think it’s absolutely critical to maintain [PG&E’s] operations and sustain them going forward,” countered Karotkin’s colleague, Matthew Goren.

Saying he represents “several thousand individuals who are now told they are creditors” of PG&E, San Francisco attorney Khaldoun Baghdadi asked the court to create a separate claimant class for fire victims.

“We feel that the voice that our clients represent is unique and central to resolution of these claims,” Baghdadi said. “And with respect to the expeditious resolution [of the proceeding], I will just point to the court: In October 2017, several thousand people lost their homes and loved ones. Nearly every one of their homeowner insurance policies provided for two years of alternative living expenses, which means in October of this year, several thousand people are going to have a serious problem in finding a place to live.”

Thursday’s hearing may have also provided cold comfort to PG&E’s many power suppliers, who have already beseeched FERC to intervene in any attempt by the utility to abrogate supply agreements. As part of its bankruptcy filing, PG&E asked the court to issue an injunction confirming its exclusive jurisdiction over the debtors’ rights to reject power purchase agreements and other FERC-regulated contracts. (See FERC Claims Authority over PG&E Contracts in Bankruptcy.)

“Despite what has been written in the newspapers, there are not any motions on file at this time to reject any power purchase agreements or any other contract, and there is no current intention to file any of those motions in the immediate future,” Karotkin said. “Those will be evaluated as the case progresses.”

Karotkin’s statement left unanswered the question of whether PG&E would seek to reprice PPAs with any of its power suppliers, as suggested in the utility’s own filings with the bankruptcy court Tuesday. (See PG&E Wants to Undo Contracts, Re-vamp Biz in Bankruptcy.)

Marc Sacks, a U.S. Department of Justice attorney representing FERC, said Thursday that FERC has agreed to give PG&E 60 days from its bankruptcy filing to respond to the agency’s Jan. 25 order contending that the contracts fall under FERC’s jurisdiction — and that it must sign off on any changes. That agreement extends the original Feb. 24 response deadline and also provides Montali enough time to rule on the injunction request.

By the end of the hearing, Montali had approved all 17 of PG&E’s motions under review, noting the scattered objections to a few of them, including provisions related to bonuses in a motion covering employee compensation. All objections would be addressed by the final hearing, the judge said.

The next hearings in the PG&E proceeding are scheduled for Feb. 12 and 13, followed by an additional hearings two weeks later.

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