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Is SB 901 Constitutional?

posted by Adam Levitin

PG&E filed a notice that it was preparing to file for bankruptcy in around 15 days.  Companies don't usually make this sort of announcement willingly; it's an invitation to a creditor run.  PG&E filed the notice because it's required to under a recently enacted California law, SB 901.  SB 901 requires public utilities to file notice of changes of control at least 15 days in advance, and "change of control" is defined to include filing a bankruptcy petition.  That strikes me as really problematic--it is a state law conditioning and interfering with the exercise of a federal right.  (Imagine how this would work with a financial institution bankruptcy process...)  I can't believe that the law would hold up if challenged.  Yet PG&E filed the notice.  Maybe there's just not a meaningful run possibility for a power utility.


Isn't this a variant on the "golden share" issue (i.e., whether a corporate structure can give a shareholder a blocking position to prevent a bankruptcy filing)? I suppose the golden share blocks the bankruptcy filing altogether and this law just requires notice.

Here is an academic question in two senses of the term. What would happen if PG&E simply ignored the requirement? SB 901 is not a condition to a bankruptcy filing. Presumably there might be some enforcement under state law, but if the costs of notice were too high, couldn't they just file?

The golden share issue goes to whether the bankruptcy filing is authorized; a filing without the SB 901 notice would violate the statute, but presumably not affect the authorization of the filing.

Presumably a violation of the statute is just a pre-petition claim.

Does SB 901 open the directors/company up to other problems/litigation surrounding the choice of when and how to file? For instance, BlueMountain's challenge of the choice to file at all, due to the unliquidated claim nature of PG&E's liabilities, as being an unnecessary destruction of value? It seems the challenge of their filing as unnecessarily destructive could either to extend to or morph into a challenge of PG&E's adherence to the clearly problematic CA law here and the destruction of value it entails.

Maybe there's an O/D liability issue lurkign here, but I don't see it. There's certainly no requirement that liabilities be liquidated in order to file for bankruptcy. Most mass tort bankruptcies (and that's what PG&E's inverse condemnation liability is) involve primarily unliquidated claims. PG&E's problem is that this huge debt overhang is preventing it from raising capital--it's already had to curtail dividends because insolvent companies aren't allowed to pay dividends.

What seems interesting to me about the PG&E bankruptcy is that while PG&E might be insolvent today, it could readily earn its way out of insolvency by charging higher rates...if the California Public Utility Commission were to permit it to do so (such as recovery for IC liabilities for which there was no negligence). But there's no guaranty that the CPUC will approve such a recovery. Bankruptcy is essentially being used to avoid having to have a rate hike. As a result, only those consumers with harms from the wildfires will bear the costs, rather than having them spread over all consumers. Viewed ex ante, I've got to say that a rate hike for non-negligent IC liability seems like the fairer approach.

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