Via Naked Capitalism

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She is currently writing a book about textile artisans.

California Governor Gavin Newsom rejected  PG&E’s plan to exit bankruptcy in a letter to the company Friday.

As the NYT reports in California Governor Rejects PG&E’s Restructuring Plan:

A law the California Legislature passed this year gave Mr. Newsom the authority to approve any restructuring plan PG&E submits to the United States Bankruptcy Court. Mr. Newsom’s letter indicates that the company will have to engage in further negotiations with the governor before it can end its bankruptcy and participate in a state wildfire fund.

On Thursday, PG&E filed an amended reorganization plan with the federal Bankruptcy Court, after reaching a $13.5 billion settlement with wildfire victims. The utility needed to reach that deal to escape bankruptcy by a state imposed deadline of June 2020 in order to participate in the wildfire fund.

According to the WSJ, California Governor Threatens to Block PG&E Bankruptcy Exit:

California Gov. Gavin Newsom is demanding changes to PG&E Corp. ’s plan to pay wildfire victims and exit bankruptcy, saying the company’s current proposal “falls woefully short” of a law outlining requirements that would allow the utility to receive state assistance.

In a letter Friday to PG&E, the Democratic governor said the company’s plan “fails to address most of the issues we previously raised,” including a transformed corporate board and sufficient financial stability to make major safety investments.

PG&E has until Tuesday to respond and make changes to the plan, under a deal it struck last week to settle claims with wildfire victims for $13.5 billion.

“For too long, PG&E has been mismanaged, failed to make adequate investments in fire safety and fire prevention, and neglected critical infrastructure,” Mr. Newsom said in the letter. “PG&E has simply violated the public trust.”

The current plan put forth by PG&E would result in a “company that, in my judgment, will not be positioned to provide safe, reliable, and affordable electric service,” he added.

Newsom wants PG&E to restructure its board to include more directors with extensive safety experience, and a majority of Californians. The company overhauled its board earlier this year, to include a majority of directors with Wall Street experience, according to the WSJ, California Governor Threatens to Block PG&E Bankruptcy Exit:

Mr. Newsom also raised concerns that the reorganization plan, which contemplates issuing a substantial amount of debt to pay billions of dollars in wildfire claims, would restrict the company’s ability to raise capital and invest in safety improvements.

Newsom alone may decide whether PG&E’s plan meets the requirements to draw on California’s newly-created wildfire fund. As the LA Times reports in PG&E’s future is in doubt after Newsom rejects bankruptcy plan

In order to access the wildfire fund, Assembly Bill 1054 requires PG&E to exit bankruptcy by June 30, 2020, satisfy wildfire claims, preserve its efforts to meet the state’s climate goals and establish a governance structure that prioritizes safety.

What Is to Be Done

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If PG&E fails to produce a plan that satisfies Newsom,  what comes next?

Newsom has flirted with the idea of a public takeover of the utility (see WSJ, California Governor Threatens State Takeover of PG&E). He’s in a tough political position, to be sure. PG&E’s decision to shut off power to huge swathes of California to mitigate wildfire risk proved extraordinarily unpopular, to say the least. So coming down hard on the utility would seem to carry little political cost.

According to the LA Times:

Newsom has become a vocal critic of PG&E during his first year in office, taking the company to task in October as public anger swelled in Northern California over power shut-offs that left millions of customers in the dark for days on end. He has committed to increasing state oversight of the troubled company and has said the state’s ongoing intervention in the bankruptcy process would help ensure the utility that emerges from bankruptcy prioritizes safe, reliable and affordable service.

The governor held a news conference in early November and threatened to craft his own reorganization plan unless PG&E quickly reached settlement agreements with wildfire victims and other parties in the bankruptcy, and came up with a proposal that fulfilled the requirements of AB 1054. Newsom has charged his cabinet secretary Ana Matosantos to lead a task force to develop a state-backed proposal.

But, those who have been watching closely wonder whether Newsom can be trusted to do so – as opposed to making noise about doing so, which isn’t the same thing – given the contributions he has in the past accepted from the company. As the Washington Post reports in PG&E helped fund the careers of Calif. governor and his wife. Now he accuses the utility of ‘corporate greed.’:

But over the past two decades, Newsom (D) and his wife have accepted more than $700,000 from the Pacific Gas & Electric Co., its foundation and its employees as the utility has supported his political campaigns, his ballot initiatives, his inauguration festivities and his wife’s foundation, including her film projects, according to records reviewed by The Washington Post.

Two other options are on the table, according to a Sacramento Bee account,Gavin Newsom rejects PG&E bankruptcy plan, demands ‘radically restructured’ California utility:

PG&E had been on the defensive for months after a group of bondholders made their own alliance with wildfire victims and mounted a hostile takeover bid for the utility. The bondholders, led by Wall Street hedge fund Elliott Management, insisted their takeover plan is still better for California and said PG&E’s proposal would burden the company with billions in new debt.

With Newsom rejecting PG&E’s plan, the bondholders’ effort gets new life.

In addition, a consortium of local officials led by San Jose Mayor Sam Liccardo has been trying to engineer a customer-owned buyout of PG&E. Liccardo says a customer-owned structure would save money for ratepayers and free up more money for wildfire safety and grid reliability.

Liccardo applauded Newsom’s decision to reject PG&E’s plan, saying, “We’re ready to get to work to ensure that our residents get what they deserve: a safe, reliable, responsive utility.”

The WSJ elaborates in California Governor Threatens to Block PG&E Bankruptcy ExitJ:

The bondholder group said in a statement Thursday that PG&E’s latest plan failed to meet the standards set forth in the wildfire fund legislation, saying it would leave the company “substantially more levered and more vulnerable, with an inferior governance and oversight structure.”

Elliott’s proposal involves paying off wildfire debts with equity, while the company and its shareholders would rely more heavily on debt financing.

There are other significant options to fix at least what ails PG&E that wouldn’t necessarily require changing ownership (or, alternatively, that are not exclusive and could be pursued following an ownership change). See this recent crosspost, PG&E Failed California. Here’s How the State Could Turn Things Around., for a further discussion. Some of these include: better management; improved oversight; greening the grid.

Newsom’s action Friday to get tough with PG&E enjoys broader support. According to the LA Times:

“We all know that we can’t trust PG&E to do the right thing or even follow the law,” state Sen. Bill Dodd (D-Napa) said. “We need to achieve systemic change in the structure and governance of PG&E to ensure safe, reliable power. The stakes for California are too high to leave it to PG&E executives and their narrow self-interests.”

Dodd is the author of the wildfire fund legislation.

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The WSJ has documented PG&E’s inability to do the right thing or follow the law. See my September post. While PG&E Played a ‘Cat and Mouse Game’ With California Regulators, Where Was Kamala?, which summarizes some of this sad and story tale for those who lack a WSJ subscription.

The LA Times reports that Californians are skeptical of PG&E’s ability to craft an adequate solution to its problems.

A UC Berkeley Institute of Governmental Studies poll conducted last month for the Los Angeles Times shows Californians share Newsom’s concerns — fewer than 1 in 8 likely voters surveyed want PG&E to fix its own problems and maintain its current structure once it emerges from bankruptcy.

Pass the popcorn.


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