February 28, 2019 Feature

Chair’s Column

By Mark C. Darrell

This fall’s issue of Infrastructure focuses on the impact of a variety of government policies promoting investment in infrastructure. Andy Emerson’s article discusses recent FCC actions taken to foster the investment in and development of 5G wireless infrastructure. The article jointly authored by Ben Haas and Martha Pugh discusses the creation of investment opportunities created by the corporate rate reduction embodied in the Tax Cut and Jobs Act of 2017. Chuck Patrizia’s article discussing the history of maritime law demonstrates the important role government policy played in the development of the American maritime industry. Each of these articles validates the notion that constructive government policies encouraging investment in infrastructure can have positive impacts on the development of those industries.

Recent events in California will test government’s role in infrastructure development in a significant way. On January 29, 2019, PG&E Corporation and its utility subsidiary, Pacific Gas and Electric Company, filed petitions to reorganize under Chapter 11 of the U.S. Bankruptcy Code. With assets exceeding $71 billion, a total capitalization of over $38 billion, and over $12 billion in annual revenues, PG&E is one of the largest combination electric and gas utility companies in the United States. Ironically, it will be the second time that PG&E has undergone Chapter 11 bankruptcy. In 2001–2004, PG&E sought bankruptcy protection due to PG&E’s inability to recover wholesale power costs in its retail rates that resulted from, most observers would say, the flawed design of the California electricity market.

The primary reason for seeking bankruptcy protection this time is the staggering potential liabilities associated with the 2017–2018 California wildfires. Liabilities are estimated to amount to more than $30 billion, which far exceeds any insurance coverage PG&E would have carried (although just recently, Cal Fire concluded non-PG&E equipment was the cause for the 2017 Tubbs fire). Recent statements by Moody’s and PG&E itself emphasize the important role that government policymaking will play in the resolution of PG&E’s current financial situation. Moody’s, the corporate credit rating agency, recently stated that “[t]he company is increasingly reliant on extraordinary intervention by legislators and regulators, which may not occur soon enough or be of sufficient magnitude to address these adverse developments.” In its press release announcing its intent to file for bankruptcy, PG&E stated that the bankruptcy process will “[a]llow the Company to work with regulators and policymakers to determine the most effective way for customers to receive safe natural gas and electric service for the long-term in an environment that continues to be challenged by climate change.”

Both statements acknowledge that policymakers will have to make important decisions that will affect the near-term operation of PG&E as a going concern. I do not know what actions California legislative and regulatory authorities will take in response to a bankruptcy filing. Legislation enacted in 2018 by the California Legislature to address the 2017 wildfires does not appear to adequately address PG&E’s current financial situation. Clearly, PG&E does not think so. Will California legislative and regulatory authorities develop constructive policies in response to PG&E’s bankruptcy that will enable PG&E to weather the current storm and return to financial solvency? Notably, PG&E’s press statement very explicitly cited climate change, expressing concern about its ability to provide utility service in the long run in an environment impacted by climate change. California policymakers have been at the forefront of those states promoting policies that respond aggressively to climate change. How will a utility company such as PG&E operate successfully and profitably in an environment in which greenhouse gas emissions are being targeted for significant reductions?

The articles in this issue of Infrastructure illustrate ways in which government can develop policies that encourage investment in infrastructure industries. While they do not answer the questions raised by the PG&E bankruptcy, they do show the need for thoughtful policies by government to help resolve the issues faced in California. I would like to thank Bill Drexel, the editor of Infrastructure, for presenting a fine set of articles that address the intersection of government policy and infrastructure investment.

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By Mark C. Darrell