(Reuters) - California utility PG&E Corp PCG.N is exploring filing some or all of its business for bankruptcy protection as it could face billions of dollars in potential liabilities if it is held responsible for fatal wildfires in 2018 and 2017, people familiar with the matter have told Reuters.

FILE PHOTO: A PG&E truck carrying an American Flag drives past PG&E repair trucks in Paradise, California, U.S. November 21, 2018. REUTERS/Elijah Nouvelage

Trouble for PG&E also means trouble for California, which relies on PG&E to provide power to 5.4 million customers and make the investments necessary to shore up its system of wires and poles and mitigate the risk of future fires. PG&E is also a key player in helping California meet its ambitious climate goals.

Here are a few of the options California could consider to shore up the utility:

A DO-OVER OF LAST YEAR’S WILDFIRE LEGISLATION

California policymakers could extend assistance provided in a bill passed last year that allows utilities to raise rates to recover some of the costs related to wildfires. The law mitigates liability from fires in 2017 and others starting in 2019, but made no provision for fires last year.

The move would give PG&E an outlet for recovering billions of dollars in potential liabilities from last year’s fires, but might not be enough to assuage deep investor concerns about its long-term financial health given the increasing regularity of catastrophic fires. Insurance claims from the Camp Fire that erupted on Nov. 8 in PG&E’s service territory have topped $7 billion and are expected to grow.

“I don’t know that that would be enough to put the company in capital markets access, which is where they need to be,” said Michael Wara, a scholar focused on climate and energy policy at Stanford Law School.

It also may be a challenge politically, particularly since public and legislative sentiment has soured since the California Public Utilities Commission (CPUC) said last month it is considering penalties against PG&E for falsifying safety documents for natural gas pipelines.

“I am not interested in another piece of legislation that allows them to pass cost off to the ratepayers for these liabilities,” Assemblyman James Gallagher said in an interview on Saturday. “We need a much bigger shake-up and reform.”

Ratepayers are already bracing for higher rates due to the increased risks from wildfires. PG&E last month asked the CPUC for a $1.1 billion rate increase, more than half of which would be for wildfire prevention and risk reduction.

The CPUC could possibly interpret last year’s law to include 2018, or new legislation could be passed. A legislative solution would likely be faster.

Asked about PG&E’s fate at a news conference on Tuesday, California’s new governor, Gavin Newsom, said, “I’m not going to make news on that.” But he said he’d had a meeting on the subject at 8:00 a.m.

State lawmakers said they are leery of responding to PG&E’s bankruptcy threat too quickly, saying they have lost their trust in the company.

“I don’t know if I can trust this information,” State Sen. Bill Dodd said in an interview. “It’s really too bad that their credibility has been shattered so gravely. That just puts us and the legislature in a position where we are going to take the time that’s necessary to do this and to do it right.”

DIRECT SUPPORT

California could intervene directly by providing credit support for future debt financings or municipalizing all or some utility assets, Morgan Stanley analyst Stephen Byrd said.

If the utility became state-owned, California would assume all future wildfire risk, Byrd wrote in a client note last week. One scenario would be that the state takes over ownership of all of the electric distribution business and leaves the remaining businesses with shareholders. Byrd said this was the most bullish scenario for shareholders but added that it was unlikely that California would insulate shareholders from future wildfire liability while also giving them full value of the non-electric distribution businesses.

State ownership would not necessarily result in better maintenance of the utility’s distribution system, said Catherine Sandoval, a professor at Santa Clara Law School and former CPUC commissioner.

“If you change to municipal control without changing the underlying dynamics of the maintenance and operation of the utility and its transmission network, you haven’t really solved the problem,” Sandoval said.

State support for debt financing would result in a lower impact on consumer bills because all future wildfire liabilities would be absorbed by the remaining equity rate base in PG&E. This option would be less favorable for shareholders due to the threat of future fire liabilities.

A perceived bailout of PG&E is losing luster among legislators and regulators and is far from assured, S&P Global said when it stripped the company of its investment-grade rating late on Monday.

“Previously, we assumed that given California’s robust renewable portfolio standards and the increasing risks of climate change, legislators and regulators would proactively work with the utility to preserve credit quality to achieve these goals,” S&P Global analysts said in a note. “However, based on recent developments, we no longer believe this to be true given the utility’s own missteps.”

RESTRUCTURING VIA THE CPUC

The CPUC last month said it was considering a range of options for addressing PG&E’s safety problems, including replacing some or all of its directors, splitting the utility’s gas and electric divisions into separate companies, and reforming it into a publicly owned utility.

Since then, PG&E has said it is shaking up its board and reviewing its structure and corporate governance, but has not filed a specific plan with the CPUC.

The CPUC did not return a request for comment.

UTILITY FAIL

California could allow PG&E to go bankrupt, for the second time in its history.

Under that scenario, shareholders would be the big losers. But California could benefit if the utility installs new management and can rebuild trust in Sacramento and on Wall Street. The state would also have time to consider how to reduce the risk from the cost of increasingly devastating wildfires over the long term.

“The fundamental problem is the utility at the current rate structure doesn’t generate enough revenue to cover expenses” from catastrophic wildfires, Stanford’s Wara said. “The utility’s management has gotten understandably very focused on the short term... The most important thing the state could do is slow things down. One way that happens is in bankruptcy.”

Though PG&E can continue to operate in bankruptcy, ratepayers could still see higher bills. When PG&E went bankrupt in 2001 amid the state’s energy crisis, California customers had to pay higher bills for years to help repay $13 billion owed to creditors. Another bankruptcy today could potentially lump individual claims from wildfires in with Wall Street’s claims, possibly ballooning the payout and leaving victims to compete with creditors.

Dodd, the state senator, said on Monday that he would ask the state’s Legislative Analyst’s Office to assess the impact of a PG&E bankruptcy on ratepayers and fire victims.

“I wouldn’t be surprised if a PG&E bankruptcy would lead to much higher rates for ratepayers and devastation for victims of previous wildfires,” Dodd said. “What we need to do is get some independent verification of what those numbers are and that will lead to a determination if legislation is necessary or not.”

PG&E spokesman Andy Castagnola said the utility would not comment.