On January 29, 2019, investor-owned Pacific Gas & Electric Company (“PG&E”) declared bankruptcy, filing a Chapter 11 reorganization petition in the United States Bankruptcy Court for the Northern District of California. ((Catherine Blunt & Russell Gold, PG&E Files for Bankruptcy Following California Wildfires, Wall St. J. (Jan. 29, 2019), https://www.wsj.com/articles/pg-e-files-for-bankruptcy-following-california-wildfires-11548750142. )) This is PG&E’s second bankruptcy petition in as many decades, as the utility also filed for Chapter 11 bankruptcy in 2001. ((Laura M. Holson, California’s Largest Utility Files for Bankruptcy, N.Y. Times (Apr. 7, 2001), https://www.nytimes.com/2001/04/07/us/california-s-largest-utility-files-for-bankruptcy.html.)) For proponents of public utility ownership, this filing presents an opportunity to leverage a unique corporate structure modification – conversion to a “public beneficiary trust” – recently used in the Purdue Pharma bankruptcy to direct future profits towards repairing past harms.
Both PG&E petitions came on the heels of environmental phenomena that stressed the company beyond its financial ability to operate. In 2001, a draught dramatically limited the amount of “cheap” hydroelectric power the company could purchase under long-term contracts with dams; combined with an earlier regulatory shift that capped the rates the utility could charge customers, PG&E was forced to buy supplemental power at inflated market rates, which threatened its continued solvency. ((Rod Walton, Going Way Back to the Last Time PG&E Declared Bankruptcy, Power Engineering (Jan. 15, 2019), https://www.power-eng.com/2019/01/15/going-way-back-to-the-last-time-pg-e-declared-bankruptcy/.)) In 2019, the company blamed its imminent filing on “extraordinary challenges relating to a series of catastrophic wildfires that occurred in Northern California in 2017 and 2018.” ((PG&E Corp., Current Report, (Form 8-K) (Jan. 13, 2019). https://www.pge.com/pge_global/common/pdfs/about-pge/company-information/reorganization/reorganization-8-K.pdf)). Those “extraordinary challenges” took the form of, potentially, upwards of $30 billion in liability for claimed property losses as of the time of filing, interest, attorneys’ fees, fire suppression and clean-up costs, evacuation costs, personal injury or wrongful death damages and medical expenses. ((Id. at 4.)) That $30 billion figure did not include losses related to future claims or other costs, “such as potential punitive damages, fines or penalties,” which past experience indicated could be nearly three times the underlying liability. ((Id.))
The California wildfires (and the damage PG&E caused) that precipitated the 2019 filing have reinvigorated a national debate about investor-owned utilities (“IOUs”) and the benefits of public utility ownership. On one hand, activists concerned about climate change have long chastised IOUs for their resistance to renewable energy and their failure to invest in more efficient energy production ((See, e.g., Spencer Roberts, Socialize the Grid, Jacobin (Aug. 30, 2019), https://www.jacobinmag.com/2019/08/energy-for-all-socialize-grid.)), but the topic has received particular attention lately. Indeed, during a climate town hall for Presidential candidates in September 2019, Senator Elizabeth Warren was asked whether she would advocate for the public ownership of energy utilities ((Mark Paul & Johanna Bozuwa, Can Public Ownership Of Utilities Be Part Of The Climate Solution?, Forbes (Sept. 13, 2019), https://www.forbes.com/sites/washingtonbytes/2019/09/13/can-public-ownership-of-utilities-be-part-of-the-climate-solution/#2cdd8dc22296.)), and Senator Bernie Sanders’ climate plan includes an emphasis on developing a public utility option. ((Bernie Sanders, The Green New Deal, Berniesanders.com https://berniesanders.com/en/issues/green-new-deal/ (last visited Oct. 16, 2019).)) Even more, the City of San Francisco proposed municipalization of PG&E itself, offering $2.5 billion to purchase the reorganizing utility. ((Stephen Culp, San Francisco makes $2.5 billion bid for PG&E’s electric system, Reuters (Sept. 8, 2019), https://www.reuters.com/article/us-pg-e-us-bankruptcy-san-francisco/san-francisco-makes-2-5-billion-bid-for-pges-electric-system-idUSKCN1VT0NR. ))
On the other hand, there is staunch opposition to public utility ownership. Opponents tend to believe that private industry is a more efficient and better provider of services than would be the government. While activists point to Nebraska’s success with a species of public utility ownership (“statewide community-owned utilities”), ((Thomas M. Hanna, Community-Owned Energy: How Nebraska Became the Only State to Bring Everyone Power From a Public Grid, Yes! Magazine (Jan. 30, 2015), https://www.yesmagazine.org/commonomics/nebraskas-community-owned-energy.)) proponents of deregulation highlight the continued issues with public-ownership that precipitated the deregulation wave of the 1980s and 1990s: higher prices, lower efficiency and overall worse outcomes. ((John B. Goodman & Gary W. Loveman, Does Privatization Serve the Public Interest?, Harv. Bus. Rev., Nov.-Dec. 1991. )) In fact, pro-privatization academics counter notions that public utilities can better accommodate improvements to energy infrastructure by highlighting the pitfalls of the political process, arguing that constituent sensitivity to rate hikes results in less revenue with which to fund those very infrastructure improvements. ((Laura Bliss, The Privatization of Public Utilities Has One Major Upside, Citylab (Jul. 17, 2015), https://www.citylab.com/life/2015/07/the-privatization-of-public-utilities-has-one-major-upside/398828/.)) For publicly-owned utilities, politicians and voters view rate hikes like increased taxes; IOUs, on the other hand, are not constrained in the same manner. ((Id.))
Whether or not public ownership of utilities leads to better outcomes is outside the scope of this post. However, proponents of public ownership may have a new tool to achieve their goal to make utility providers that have harmed citizens operate in the public benefit: the public beneficiary trust.
A public beneficiary trust, unsurprisingly, is a creature of trust law. The concept is relatively simple: a trust is created, assets are granted to the trust, and interests in the trust are distributed to effect a change in the economic benefit derived from the trust’s asset(s). In the case where an income generating asset is granted to the trust, the ongoing economic benefit is passed along to those that own interests in the trust. ((FindLaw, Trusts: An Overview, https://estate.findlaw.com/trusts/trusts-an-overview.html (last visited Oct. 16, 2019).)) In contrast to typical trust arrangements, where trust interests (and therefore economic benefits) are held by private parties, interests in a public beneficiary trust are held by a trustee for the benefit of the public. ((Cassidy Morrison, Purdue could become a trust funded by sales of the same drug blamed for the opioid crisis, Wash. Examiner (Sept. 4, 2019) https://www.washingtonexaminer.com/news/purdue-could-become-a-trust-funded-by-sales-of-the-same-drug-blamed-for-the-opioid-crisis.)) The trustee administers the assets for public benefit, allowing the economic benefits generated to accrue to the public (typically through predetermined allocation of ongoing income to certain causes) rather than private parties. ((Id.)) Charitable trusts, typically endowed to provide lasting benefit for a certain charitable organization, may feel similar in spirit to a public beneficiary trust in that both are trusts created to accrue benefits for charitable purposes. ((HowStuffWorks, What is a charitable trust?, https://money.howstuffworks.com/economics/volunteer/starting-a-charity/charitable-trust.htm (last visited Oct. 16, 2019).)) However, the interests in the trust are still held by a private party, notwithstanding that party’s mission or non-profit status. Public beneficiary trusts are truly public.
Public beneficiary trusts are relatively rare creatures. In fact, my search only revealed one example of a proposal to convey a corporation to a public beneficiary trust: the Purdue Pharma bankruptcy.
The Purdue Pharma bankruptcy is notable for several reasons. Privately-owned (and until recently, operated) by the Sackler family, Purdue Pharma manufactures, markets and sells, among other drugs, the opioid painkiller OxyContin, a drug that fueled the opioid epidemic. Facing roughly 2,000 lawsuits brought by local governments, states and tribes alleging deceptive marketing practices and contributions to thousands of opioid-related deaths, Purdue agreed to settle the majority of the suits by filing for bankruptcy, disgorging the Sackler family of at least $3 billion and converting to a public beneficiary trust. ((Jan Hoffman & Mary Williams Walsh, Purdue Pharma, Maker of OxyContin, Files for Bankruptcy, N.Y. Times (Sept. 15, 2019), https://www.nytimes.com/2019/09/15/health/purdue-pharma-bankruptcy-opioids-settlement.html.)) In addition to the intense public scrutiny and lawsuit liability the company faced as a result of its role in the national opioid epidemic, the company’s bankruptcy plan includes unique decision to convert its ownership to a public beneficiary trust structure in the Chapter 11 reorganization plan. ((See, e.g., Jared S. Hopkins, Purdue Pharma Preparing Possible Bankruptcy Filing, Wall St. J. (June 30, 2019), https://www.wsj.com/articles/purdue-pharma-preparing-for-possible-bankruptcy-filing-11551721519; Sarah Randazzo & Jared S. Hopkins, OxyContin Maker Purdue Pharma Files for Bankruptcy Protection, Wall St. J. (Sept. 16, 2019), https://www.wsj.com/articles/oxycontin-maker-purdue-pharma-files-for-bankruptcy-protection-11568604141.))
While Chapter 11 bankruptcy often results in new corporate ownership, occasionally involving trusts, the conversion of the privately-held Purdue Pharma to a public beneficiary trust is revolutionary. According to one long-time practitioner and professor, this is the only example of a public beneficiary trust in a private corporate bankruptcy he has ever seen in fifty-three years of practice. ((All Things Considered: Purdue Pharma Considers Converting To A Public Trust Amid Lawsuits Over Opioid Crisis, National Public Radio (Aug. 28, 2019), https://www.npr.org/2019/08/28/755177086/purdue-pharma-considers-converting-to-a-public-trust-amid-lawsuits-over-opioid-c.)) The post-bankruptcy Purdue public beneficiary trust would divest the Sackler family of ownership and would continue to operate the business. ((Emily Field, Purdue To Settle Thousands Of Opioid Suits, File Bankruptcy, Law360 (Sept. 11, 2019) https://www.law360.com/articles/1197977/purdue-to-settle-thousands-of-opioid-suits-file-bankruptcy-.)) The profits of that business would be bifurcated along product lines; those deriving from the continued sales of opioid products, such as OxyContin, would go to state and local governments to combat the opioid epidemic, and those deriving from sales of non-opioid products would pay pre-filing creditors. ((National Public Radio, supra note 21. https://www.npr.org/2019/08/28/755177086/purdue-pharma-considers-converting-to-a-public-trust-amid-lawsuits-over-opioid-c.)) In addition, the company will donate its drugs for treating opioid addiction. ((Field, supra note 22. )) The public beneficiary trust structure removes the company’s profit-motive and begins to pay back past harm.
This bankruptcy resolution offers a potential template for those who prioritize public-benefitting incentives and governance structures for IOUs. If PG&E were converted into a public beneficiary trust, its investor-driven profit motive would be removed, freeing up future profits to pay back losses caused by the California wildfires. In addition, just as a portion of Purdue’s future profits will fund policy initiatives to combat the opioid epidemic generally (separate from recompensing losses caused by OxyContin addiction and overdose), so too could PG&E’s future profits be earmarked to fund infrastructure development, green technology research and other, broader initiatives designed to reduce future harm. Upon successfully repaying its tort judgment holders, the entirety of the corporate organization could be marshalled “for the public benefit”; improving infrastructure, lowering utility prices, or any other objective that serves the public rather than shareholders.
In fact, the same mechanism that drove Purdue to accept conversion to a public beneficiary trust is available in cases like PG&E’s. Both Purdue and PG&E exposed themselves to billions of dollars in tort liability; in Purdue’s case, this liability provided the plaintiffs leverage to structure a settlement that converted Purdue’s corporate status. Similarly, PG&E’s massive liabilities following the California wildfires could operate in the same way, allowing local governments, insurance companies or the state to dictate a similar mass lawsuit settlement.
There are some notable differences, however, between Purdue’s and PG&E’s situations. First, Purdue is a privately held company, while PG&E is publicly listed, which may impose regulatory burdens different than those Purdue faced. Secondly, PG&E is much larger than Purdue; while detailed financial information on the latter is more difficult to find because it is privately held, 2019 revenues are estimated to be below $1 billion. ((Jared S. Hopkins, At Purdue Pharma, Business Slumps as Opioid Lawsuits Mount, Wall St. J. (June 30, 2019), https://www.wsj.com/articles/purdue-pharma-grapples-with-internal-challenges-as-opioid-lawsuits-mount-11561887120.)) In comparison, PG&E’s revenue for the six-month period ending on June 30, 2019 was $7.95 billion. ((Press Release, PG&E Corp., PG&E Corporation Reports Second-Quarter 2019 Financial Results (Aug. 9, 2019) (http://s1.q4cdn.com/880135780/files/doc_financials/2019/q2/Q2-2019-earnings-news-release_080819-FINAL.pdf).)) While top-line revenue is definitionally not a good proxy for a business’ net income, it provides a helpful tool to calibrate comparative size relative to tort liabilities. The third reason is the geographical scale; Purdue faced 2,000 lawsuits brought by 48 states, Washington D.C., and hundreds of local and tribal governments across the country. ((Berkeley Lovelace Jr., Nearly every US state is now suing OxyContin maker Purdue Pharma, CNBC (June 4, 2019), https://www.cnbc.com/2019/06/04/nearly-every-us-state-is-now-suing-oxycontin-maker-purdue-pharma.html; Georgea Kovanis, Michigan involved in settlement talks with OxyContin maker Purdue Pharma, Detroit Free Press (Sept. 12, 2019) https://www.freep.com/story/news/health/2019/09/12/michigan-purdue-pharma-settlement/2303618001/ (noting that while Michigan has not sued Purdue, they are engaged in settlement talks); Grant Schulte & Geoff Mulvihill, Nebraska’s AG is lone holdout in pursuing opioid cases, Associated Press (June 12, 2019), https://www.apnews.com/2ca3e7d1501643b7aea0feeb2bed3929; Vince Sullivan, Purdue Files Ch. 11 Suit Seeking Stay Of Opioid Litigation, Law360 (Sept. 19, 2019), https://www.law360.com/articles/1200806/purdue-files-ch-11-suit-seeking-stay-of-opioid-litigation (noting that hundreds of local governments, individuals and tribes are not participating in the settlement).)) In contrast, PG&E’s wildfires were comparatively contained; while they ravaged communities across Northern California, the resulting liability is contained to claims stemming from one state. Perhaps the political pressure brought to bear on Purdue by almost every state attorney general was a decisive factor in striking the unique settlement terms.
While this avenue may no longer be available in PG&E’s case (Purdue’s Chapter 11 filing and conversion to a public beneficiary trust were negotiated pre-bankruptcy as a way to settle lawsuits; PG&E’s bankruptcy filing has already occurred, removing any pre-bankruptcy leverage), the possibility remains for future IOU bankruptcies. PG&E has taught us that IOUs can be common filers, and as climate change makes more common and magnifies potential financial strife, the next several decades may see more IOUs entering Chapter 11.