by Jeff St. John
December 19, 2019

This week has seen a whirlwind of developments in the Pacific Gas & Electric saga, highlighting the deadline-driven stakes for competing Wall Street financial concerns seeking control of the state’s biggest utility as it seeks to emerge from bankruptcy. 

Meanwhile, work has just begun on the looming long-term challenge of creating a utility that can reverse a broken safety culture, renovate under-maintained infrastructure, and deploy cutting-edge technologies to combat grid-caused wildfires and keep customers safe during fire-prevention power outages. 

These short-term and long-term problems were reflected in California Gov. Gavin Newsom’s Friday letter rejecting PG&E’s bankruptcy reorganization plan and demanding key safety and accountability changes before it will comply with AB 1054. That’s the law that created the $21 billion wildfire fund that PG&E will be able to access to bolster its long-term financial stability if it can emerge from bankruptcy by June 2020, which makes Newsom’s demands an existential threat. 

But analysts were quick to point out that Newsom’s letter included some potential deal-breakers for PG&E, from both short-term and long-term perspectives. In the short term, Newsom’s demand that investors backing PG&E’s bankruptcy plan reduce their reliance on debt financing could weaken their hopes of retaining shareholders’ value in a post-bankruptcy company, as compared to a rival plan from a competing group of bondholders, which would largely wipe them out.

In the long term, Newsom’s demand for an “escalating enforcement process” for failures to comply with AB 1054, including “a streamlined process” to hand control “to the state or a third party if circumstances warrant,” carries a tangle of legal and financial complications for would-be investors in a post-bankruptcy PG&E. But according to Newsom and a growing chorus of California political leaders, this kind of extreme step is needed in the face of PG&E’s decades-long record of mismanagement and deadly safety lapses.

Fire victims get help, but other issues still unresolved

In response, PG&E simply undid its promise to get Newsom’s approval of its $13.5 billion settlement with wildfire victims — a self-imposed requirement meant to gather political support — before submitting it to U.S. Bankruptcy Judge Dennis Montali, the true master of PG&E’s fate.

In a Tuesday hearing, Montali approved the settlement, a critical success for PG&E since it matches the bondholders’ offer to fire victims. He also approved an $11 billion settlement with insurers, which along with a previously approved $1 billion deal with cities and counties, checks off the key creditor groups PG&E must satisfy as it moves into the next stage of bankruptcy.

But as Tuesday’s hearing made clear, the key parties to these settlements are still very much at odds over the issues raised by Newsom’s letter – and ready to change their minds if things change. As related by the Wall Street Journal, Cecily Dumas, a lawyer for the official panel representing fire victims, noted that the group could switch its support to the rival bondholder plan from PG&E’s plan, if it loses Newsom’s support or if financing collapses. 

Nancy Mitchell, a lawyer for Newsom, said the settlement with victims of fires caused by PG&E equipment, including the 2018 Camp Fire, the state’s deadliest to date, should go forward. But she reiterated that PG&E’s plan does not meet Newsom’s approval — and neither does the bondholders’ plan. 

“We do believe that an AB 1054-compliant plan can be developed in these cases,” she said, but added,“I’m not going to tell you that it’s this plan.” 

Disconnect between short-term financial pressures, long-term safety needs

One of the disconnects between PG&E and Gov. Newsom, and by extension the California populace, is over the question of short-term versus long-term goals.

In simple terms, PG&E is under the gun to present Wall Street backers with a plan that can promise them a return on their investment, while satisfying all creditors and maintaining or increasing spending on safety, infrastructure and clean energy — all in the next few weeks. 

California’s political leaders, on the other hand, are facing public demands for a top-to-bottom reform of a PG&E that has already gone bankrupt once, during the 2001 energy crisis, and whose safety lapses include federal criminal convictions in association with the deadly 2010 San Bruno gas pipeline explosion. While Newsom's demands reflect this public will within the confines of a PG&E that remains a publicly traded, investor-owned utility after it emerges from bankruptcy, other California politicians are calling for its breakup or public takeover.

To be sure, California can’t afford to ignore Wall Street’s demands. The primary goal of AB 1054’s $21 billion wildfire fund was to forestall credit downgrades and financial crises for California’s other investor-owned utilities, Southern California Edison and San Diego Gas & Electric. But another goal of the bill is to prevent a post-bankruptcy PG&E from repeating its past errors, a principle reflected in Newsom’s demand for an enforcement mechanism that could return it to state control if violated. 

At the same time, PG&E’s biggest challenge remains preventing its power grid from sparking wildfires. That mission will take years of labor and billions of dollars. And PG&E has a larger and more forested and mountainous territory to maintain, and more investments to make to catch up to its southern brethren, in terms of sectionalizing circuits, installing weather stations and lookout cameras, and other technological solutions. 

Wildfires, blackouts and the private vs. public debate 

This helps explain the unprecedented scope of PG&E’s massive public safety power shutoff (PSPS) events of this autumn, which left millions without electricity for hours or days at a time. While turning off the grid to reduce fire risk is a statewide practice, PG&E’s PSPS events were much bigger — and less well coordinated — than those conducted by its fellow investor-owned utilities. 

The public backlash to PG&E’s power outages has bolstered arguments from some opponents that its challenges may best be solved by the public sector. Community-choice aggregators, which already control electricity procurement for more than half of PG&E’s customers, are seeking to take over portions of PG&E’s grid, or else to relegate it to being a “wires-only” utility

On the more radical front, dozens of municipalities have joined San Jose Mayor Sam Liccardo’s proposal to convert PG&E to public ownership through “mutualization,” essentially creating what would be by far the country’s biggest electric cooperative. 

But with climate change creating more dangerous fire conditions across California and more people living in fire-prone places, the utility isn’t solely to blame for the fact that de-energizing portions of the power grid may be the safest choice when winds are high and vegetation dry. Nor will it be able to bear the costs of the "safest" options before it, such as burying all power lines in high-risk areas — at least not without raising rates to a point likely to cause a public backlash of its own.  

These same constraints will apply to any public entity that ends up taking over some or all of PG&E’s assets and responsibilities. Proponents say that public ownership offers tax-free status to free up money to invest in infrastructure, as well as freedom from Wall Street’s short-term financial demands. Opponents warn that it could saddle the public with the costs of fixing PG&E’s mistakes, or leave poorer or more rural parts of the state underserved if richer cities and counties depart. 

To-do list for 2020: Solar-storage, microgrids 

In the face of this systemic challenge, California regulators and lawmakers are looking at some short-term options. Chief among them: whether distributed energy resources like solar-plus-storage systems can meet the needs of people most at risk from wildfires or blackouts. 

In the past month, the California Public Utilities Commission has delivered a scathing report on PG&E’s grid investment failures leading up to the 2018 Camp Fire and opened an investigation into the communications breakdowns and other failures of its PSPS events this fall.

It also carved out $100 million in behind-the-meter battery incentives for customers in high-fire-risk regions and proposed directing another $513 million through 2024 toward the effort. 

This week, the CPUC reached a proposed settlement that will force PG&E to pay $1.63 billion in community recovery and grid repair costs from the 2017 and 2018 fires, along with $50 million in shareholder-funded system enhancements. This latter category includes up to $5 million for a pilot project to aid disabled or medically vulnerable people for whom an extended power outage can be a life-threatening event, as well as up to $10 million to “aid in the development of non-diesel generators capable of meeting a range of use cases including (but not limited to) planned outages, unplanned outages, and temporary micro-grids for PSPS events.” 

PG&E had built a few microgrids with private partners and state grant funds before the wildfires of 2017 and 2018. As part of last year’s wildfire safety plan, it built two “resilience zones,” or clusters of public and private buildings that can be islanded and self-powered during PSPS events, both of which successfully ran through this fall’s outages.   

Earlier this month, PG&E kicked these plans into high gear, issuing a request for offers seeking to turn up to 20 substations in fire-prone regions into hubs for battery-backed community microgrids. The scale of the project could dwarf most U.S. microgrid deployments in scope, with between 5 megawatts and 70 megawatts of energy storage per substation.

PG&E still needs CPUC and bankruptcy court approval to move ahead, and there’s no guarantee that it will succeed in its goal of delivering backup power for the 2020 fire season. But given the lack of other short-term options for action, this may be one of the few PG&E proposals that could expect a welcome hearing from California’s option-strapped leadership.