Powerless Against Climate Change: The Consequences of Government Intervention in Investor-Owned Utility Bankruptcies on Creditor Recoveries and Incentive Alignment

PG&E is widely regarded as the first climate-change caused Chapter 11 bankruptcy. Since then, numerous other investor-owned utility companies have declared bankruptcy due to climate disasters. Historically, due to the wide-reaching consequences of utility service disruptions to broader economic activity, state and local government officials have involved themselves in utility bankruptcies to ensure services continue and ratepayers are protected from drastic rate spikes. This paper will explore what effect, if any, government involvement in utility Chapter 11s has on creditor recoveries, moral hazard, and incentive alignment. An event study of bond trading prices around the time of PG&E’s bankruptcy elucidates investor sentiment regarding climate and political economy risk present in the region. The study suggests that government intervention in PG&E caused investors of peer companies to view their investments as less risky. Finally, this paper explores potential solutions to manage climate damages in a way that decreases moral hazard.