As part of its plan to exit bankruptcy, PG&E would pay fire-victim claims through a trust funded with equal parts cash and stock. The trust would own 20.9% of PG&E’s shares upon the company’s emergence from chapter 11, PG&E has said, and would gradually sell the stakes over several years to compensate individuals who lost family members and property.
While share-funded trusts have been used before to settle claims from asbestos victims and others, some legal experts say the PG&E trust would pose an unusual set of risks for claimants, tying their payment prospects to a company still scrambling to reduce the threat that its aging electrical grid will start fires. Since the fall of 2017, state investigators have linked PG&E equipment to 18 wildfires that killed 107 people and destroyed more than 15,700 homes.
“There’s no question that for a period of two years, the wildfire victims will end up bearing the risk of future wildfires,” said Mike Danko, an attorney who represents fire victims.
The judge overseeing PG&E’s bankruptcy approved the settlement late last year, but fire victims and other creditors still have to vote on the company’s reorganization plan in the coming months, a critical step for its emergence from chapter 11. California regulators must also approve the plan before June 30 in order for PG&E to access a new state wildfire fund that the company says will help stabilize its financial health.
“Our focus is on getting victims paid and continuing to implement changes across our business to improve our operations for the long term,” PG&E said in a statement.
Fire victims are the only major class of claimants that PG&E is proposing to pay with shares. The company has agreed to pay more than $25 billion overall to compensate for losses from 2017 and 2018 wildfires, but the other major settlements—with California governments and insurance companies—would pay those parties entirely in cash.
That infuriates some fire victims, who note that the other settlements carry less risk. Some of the insurance claimants are hedge funds that purchased insurers’ claims at a steep discount and now stand to make millions.
“How is it that the hedge-fund investors are not taking stock? That says something,” said Jason Meek, who lost his home in the 2017 Tubbs Fire in California’s wine country.
Michael Carlson, a member of the committee representing fire victims in the bankruptcy case, said the $13.5 billion settlement came after months of negotiations with PG&E, which had initially offered $8.4 billion to compensate victims. That offer came days before PG&E struck an $11 billion deal with insurance claimants, reducing the amount of cash the company could offer for a larger settlement with fire victims.
“There’s some risk, but it’s on top of a very, very low offer,” Mr. Carlson said. “We know the value of what we can get out of PG&E without pushing them into liquidation.”
The trust structure also presents a challenge for PG&E’s primary regulator, the California Public Utilities Commission. When punishing the company for violations, it has historically sanctioned PG&E with fines and other penalties whose costs cannot be passed on to utility ratepayers and must be borne by shareholders instead. If victims become PG&E’s largest shareholders, they could end up bearing the regulatory costs of the company’s mistakes.
The CPUC recently reached a $1.68 billion settlement with PG&E for its role in the recent wildfires that will require its investors to fund certain fire-prevention efforts. The commission may have little choice but to impose similar penalties going forward if the company fails to make good on its safety commitments, said Mike Florio, a utilities consultant and former CPUC commissioner.
“I don’t see how you can suddenly flip and say we’re going to be very good to this company because it helps the fire victims,” Mr. Florio said.
The CPUC declined to comment on matters pending in bankruptcy court.
It is common for cash-strapped companies facing massive liability costs to pay claims through trusts funded with cash, stock and other assets. Dozens of companies that once manufactured asbestos products and sought bankruptcy protection, including W.R. Grace & Co., funded settlement trusts to compensate workers who developed cancer and other health problems, as well as others who would fall ill in the future.
Those trusts faced a risk because the future number of asbestos claims was uncertain. However, the companies had stopped manufacturing asbestos products, limiting their liability exposure going forward. PG&E still faces the prospect of having to pay additional damages if its equipment sparks more wildfires.
“Here, you have ongoing exposure to the risk that caused the problem in the first place,” said Lloyd Dixon, director of the Center for Catastrophic Risk Management and Compensation at the Rand Corporation, a nonprofit think tank.
PG&E has been working for months to repair electrical equipment, trim trees away from its power lines and build out a fire-detection network, but it has struggled to meet some of its targets for completing the work in the face of labor shortages and scheduling delays.
The company has taken to pre-emptively cutting power in large sections of its service territory when strong winds threaten to blow vegetation onto live wires. It blacked out millions last year and expects the practice to continue for years.
The prospect of holding stock in PG&E, even indirectly, has become a major point of contention among fire victims concerned that share prices could fall before their claims are satisfied. Many have now been waiting for years for the payments they need to rebuild homes.
Dennis Montali, the judge overseeing PG&E’s chapter 11 case, said last month that he has received an influx of letters from victims filled with concern and confusion about receiving stock through the trust. A number of them organized a protest late last month, arguing that equity interests should instead be given to the numerous hedge funds such as Baupost Group that own fire- insurance claims. A representative for the insurance claimants declined to comment on holding equity but said that they agreed to settle for less than they believed their claims were worth.
“Many of the victims feel, on principle, an unwillingness to be made owners of the company that burned their houses down,” said Howard Klepper, a protest organizer and Santa Rosa resident whose home was destroyed in a 2017 wildfire.