Pacific Gas & Electric announced an accord with a key group of Wall Street bondholders this week, bringing it one step closer to its goal of emerging from bankruptcy by midyear.
But the California utility still lacks one key partner: Governor Gavin Newsom, who has already rejected PG&E’s plan as insufficient to meet the state’s needs for a safer and more sustainable utility. And while Newsom can’t directly block the plan from being approved in bankruptcy court, the state does have some bargaining chips, including withholding regulator approval for access to its $21 billion wildfire insurance fund — or even the threat of a state takeover.
This week's deal between hedge funds backing PG&E’s plan and the rival bondholder group, which includes Elliott Management Corp. and Pacific Investment Management Co., is an important step for the utility to maintain some shareholder value post-bankruptcy. The bondholder group’s rival plan, initially supported by fire victims’ groups, would have wiped out current shareholders to support higher payments to creditors and a bolstered future financial position.
PG&E was able to bring key fire victims’ groups over to its plan by raising its promised payout to them from $8.4 billion to the $13.5 billion proposed by bondholders. Winning over the groups of fire victims put pressure on the bondholder group to settle its differences with PG&E, which under Wednesday’s agreement will provide them set terms for future interest and make-whole payments in return.
But even before PG&E reached its deal with fire victims, Newsom had rejected the underlying plan, saying it would fail to “provide safe, reliable and affordable service.” Newsom’s objections included PG&E’s reliance on debt financing to reach solvency, which he said would saddle the utility with $1 billion in excessive fees.
Newsom also criticized the lack of key safety and accountability measures, and demanded an “escalating enforcement process” to hold it to account for future safety failures or broken promises, including “a streamlined process for transferring the company’s license and operating assets to the state or a third party when circumstances warrant.”
These demands could saddle PG&E and its future shareholders with uncertain legal obligations and complications, making it difficult to sustain its financial recovery. But according to Newsom and a rising chorus of public opinion in California, these kinds of strictures are needed to hold PG&E to account for decades of safety failures, mismanaged investment and deadly disasters caused by its insufficiently maintained equipment.
U.S. Bankruptcy Judge Dennis Montali, who is overseeing PG&E’s Chapter 11 bankruptcy proceeding, is not under obligation to consider Newsom’s demands. But California does have a powerful lever to force PG&E to consider its demands: AB 1054, the law that created the $21 billion wildfire fund PG&E must be able to access to achieve long-term financial stability.
PG&E needs the approval of the California Public Utilities Commission to be able to access the wildfire fund, and the CPUC could withhold approval if it finds the bankruptcy plan is not in the public interest. In the past month, the CPUC delivered a scathing report on PG&E’s grid investment failures leading up to the 2018 Camp Fire and opened an investigation into the utility’s botched fire-prevention power outages this fall.
PG&E will need to exit bankruptcy by June 2020 to gain access to the $21 billion fund, giving it incentive to work quickly to resolve the state’s demands. The utility responded to Newsom’s comments this week with a statement saying that it was taking them into account, also saying that “additional changes to the plan are forthcoming.”
At the same time, utility industry analysts say that PG&E and its Wall Street backers may well balk at some of Newsom’s more aggressive demands. PG&E’s plan calls for $12 billion in equity commitments and $34.4 billion in debt commitments. Those investors and lenders will be leery of sinking their fortunes into a business that comes with a “self-destruct button” for being turned over to the state if it causes another disaster, Jared Ellias, a law professor at UC Hastings, noted last month.
Newsom has publicly threatened a public takeover of PG&E if the utility won’t meet the state’s terms of safety and accountability. A growing number of city, county and state government officials are calling for breaking up PG&E, municipalizing parts of its grid, or even converting the entire utility into a publicly owned cooperative.
In a Wednesday news conference, Newsom said that a state takeover is “not the preferred strategy, but it is a strategy we’re pursuing, and we’re working with legislative leaders to codify that,” the Los Angeles Times reported.