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?
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 Exit:
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.
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 many 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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Do fines have to be paid before Bonds?
IIRC, the waterfall is:
Fixed charge secured creditors (loan is secured by a specific asset). Mortgage is a prime example, fixed charge is on the property.
Floating charge secured creditors (loan is backed by all and any assets that do not have a fixed charge as per above).
Then come government (taxes, fines etc.), employees, liquidator fees etc. – but I’m not sure in what order.
Then other unsecured creditors (including unsecured bonds).
Shareholders.
What I do NOT understand is why PGE stock (PCG) has risen from around $7.50 at around 12/1 to $11.37 now. What kind of game is being payed here?
Makes you wonder who’s buying it? That maybe revealing.
The stock price rise is due to speculation. If and when PG&E comes out of bankruptcy there is an opportunity to make good money buying PG&E low and selling later high. For all we know, Governor Newsom and his wife may own a few hundred thousand shares of PG&E.
PG&E deliberately engineered the shape and timing of this bankruptcy, specifically to gain negotiating leverage by putting fire victims and the State of California at the end of the payout queue. It is exactly what they did in the wake of their last unforced error in 2001, when badly conceived legislation championed by PG&E led to a meltdown in state energy markets. It worked out really well for them last time.
They miscalculated this time. Nevertheless, their extraordinary political influence remains. I still give them 60% odds of emerging from bankruptcy as a privately held, vertically integrated utility. That would be the worst possible outcome.
PG&E’s immediate problem is avoiding having the fire victim claims go to trial in a couple of months. They also need to beat out a predatory bondholder proposal that would fully compensate the fire victims, but wipe out the group of predatory shareholders that have moved in on the company.
Agencies of the State of California and the Federal Government have claims of 7.5 Billion against the proposed settlement trust fund of 13.5 billion. Thus one may infer that PG&E proposed to settle the claims for the uninsured damages of the wildfire victims for the difference between the those claims of the government entities and the original 8 to 8.5 Billion proposed settlement amount. The larger 13.5 Billion proposal was advanced by PG&E after that amount was proposed by the hostile takeover group of bondholders.
The people who were burned out, the estates of the deceased, the lawyers, are looking at about 6 Billion to cover the uninsured losses, health, death, and emotional distress claims and lawyers fees.
Many of those people are still not whole and many are still not residing within permanent housing and are in desperate straits dealing with extraordinary expenses from the wildfires inflicted upon them by PG&E’s attitude
of “Run to Failure, until we will get around to upgrading sometime in the Future.”
I do support the mayor’s plan as I understand it so far.
https://www.mercurynews.com/2019/11/06/editorial-liccardo-plan-to-take-control-of-pge-merits-further-study/
For those who want to follow this story (and are suspicious of corp. media’s reportage) I would recommend a SF-based news blog that takes up the cause of public ownership of PG&E from the 60s when it was pioneered by the SF Bay Guardian –> https://48hills.org/2019/09/sfs-pge-buyout-makes-political-and-economic-sense/
Also as of last week: “The mayor’s plan has been endorsed by more than 110 elected officials from 58 cities and 10 counties across the state.” This is from ABC News.
I don’t think anyone in CA believes Gov. Newsom will eagerly endorse this plan. The cooperative sector in CA is largely ag-based and corporate, but there is a significant worker-cooperative and housing sector in the SF Bay area that has considerable popular support. AND several cities own their utilities, like the capital, Sacramento (!), so Mayor Sam Liccardo’s plan could garner lot’s of popular support. btw the Mayor is an announced supporter of Mike Bloomberg (!).
Thanks for this link – my post was more of a hot take rather than a deep dive, and I appreciate being pointed toward useful sources, for I will undoubtedly be posting on this topic again.
San Jose Mayor Sam Liccardo’s Bloomberg support doesn’t surprise. Liccardo was also a Hillary Supporter. Much like Newsom , Liccardo has a reputation of being a too sexy for his shirt (hat tip to ewmayer for the descriptor), duplicitous Pay to Player (the norm in California), unconcerned with the increasing inequality and impoverishment of San Jose residents and signing NDAs while selling out San Jose to Google for his own profit.
I suspect, given the state of corruption in California Government, that there’ll be dirty deals written in even if the ideally needed public utility ownership comes to pass. SIGH.
Never mentioned is this little detail that PG&E would love to foist off on the taxpayers, and should have never been built, or, given more life until 2025, thanks to Newsom’s vote on the State Lands Commission, a sinecure handed to him by the state Democratic Party, while they figured out how to get into a higher holding pattern office, a-la-Kamala:
“with construction already under way, oil company geologists discovered another earthquake fault – the Hosgri Fault, just three miles out in the Pacific from the plant site and linked to the San Andreas Fault. In 2008 yet another fault was discovered, the Shoreline Fault – just 650 yards from the Diablo Canyon plants.The Shoreline Fault, and concerns about the vulnerability of nuclear plants to earthquakes in the wake of the 2011 Fukushima Daiichi disaster, are integral to a 42-page report written by Dr. Michael Peck.”
For five years Peck was the lead inspector on-site for the US Nuclear Regulatory Commission at Diablo Canyon.”
https://theecologist.org/2014/aug/27/earthquake-risk-makes-californias-diablo-canyon-fukushima-waiting
“Dr. Peck’s findings led him to conclude that the homework required for Diablo Canyon to continue operating safely had not been completed satisfactorily and therefore neither the company nor the NRC had adequate legal basis for the plant’s operation.”
https://allthingsnuclear.org/dlochbaum/diablo-canyon-nrc-insiders-dissent
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.
Even W got tough with Enron and sent its execs to jail.
On another point: Letting Elliot Management hedge fund take over PG&E would be the worst outcome, imo. I think a hedge fund run PG&E would be like letting the old Enron (“eff grandma Millie”) back into the CA energy market. Bond holders might like the idea, but the public that PG&E serves would be eff’ed again. imo.
On your first point: I hope that Newsom realizes that he can’t get away with saying one thing and doing another on this issue.
On your second point: I agree. Let’s hope Elliot Management gets nowhere near being able to run PG&E. I can see no good for the people of California arising from that option.
adding: from a 20093 Molly Ivins column
https://www.laconiadailysun.com/opinion/colums/molly-ivins/article_e32fc0ae-e9e5-5559-a87d-451e71f82bc0.html
Before we all get lost forever in the finger-pointing, let me point out the fundamental question here. Given that our economy, security and basic services are totally dependent on the electric grid, do we really want to turn our electric system over to those who only seek short-term profits?
As Public Citizen argues, the blackout is “a strong argument against the electricity provisions in the federal energy legislation that would promote the kind of deregulation that brought us the West Coast energy crisis. These flawed policies are destined to worsen the dangers of overly centralized, profit-driven electric generation and distribution systems.”
Or to point the finger up into the wind: Do we really have to suffer through another blackout or two before we re-regulate these guys?
And, yes, a lot of t<his traces bank to rewriting FERC regulations.
See this 2002 Ivins' column, starting at para 3 about what Enron bought with its campaign contributions.
https://products.kitsapsun.com/archive/2002/05-09/0001_molly_ivins__it_s_all_news__but_i.html
California Gov. Gray Davis said Tuesday: “About $30 billion was extorted from this state. Those who claimed that there was no price manipulation here were just plain wrong.” But then, Gray Davis has no sense of humor.
Turning PG&E over to a private hedge fund is a terrible idea. The California model of energy deregulation doesn’t work for the public and the customers. Makes a ton of money for the private companies that are running a degregulated utility monopoly though. So there’s that.
typo: 2003 (not 20093).
“Makes a ton of money for the private companies that are running a degregulated utility monopoly though. So there’s that.”
More like, “Makes a ton of money for the private companies that are running the state government”
Wonder what happens when the silicon valley big IT companies get tired of the CA electrical grid? Note to said companies: check out the currently dismissed flyover states that have regulated public utility electricity monopolies. No price gouging, and when you flip the switch the power comes on. What a concept! (We also have good roads and good schools. )
Already happened. Nobody who cares about their data in Silicon Valley relies on PG&E.
Silicon Valley Power, which you linked to – previously called the Santa Clara electric department – only serves residents of the City (not County) of Santa Clara, not the entire Silicon Valley. Google and Apple, neither located in the City of Santa Clara (yet), have their own FEC Utility Licenses, so they can buy and sell energy from/to whomever they like.
To some extent, all of above, located in Northern California, still have to rely on PG&E Transmission Lines though.
sorry, FERC Utility Licenses, not FEC.
Wonder what happens when the silicon valley bit IT companies get tired of 3rd world electrical grid? Note to said companies: check out the currently dismissed flyover states that have regulated public electricity monopolies. No price gouging ,and when you flip the switch the power comes on. What a concept!
adding: I remember Gov Davis was the first governor successfully recalled in CA history and just the second in US history, though attempts to recall earlier CA governors were tried. Davis was recalled in 2003.
I can’t say why his recall was successful. Lobby money counts for a lot but it doesn’t vote in the voting booth. (note to Gov. Newsom. adding: I know a few CA die hard dems who voted for recall then voted for GOP Swarzenegger over Davis because the saw the state poorly run. )
Another comment in moderaton. Maybe it will appear. Several quotes from Molly Ivins’ columns in 2002 and 2003 about the Enron generated California energy crisis, and the deregulation – ‘the California model’ – that caused it. If it doesn’t appear you can search Molly Ivins enron and california.
I miss Molly Ivins. She had a gift for reducing complex issues to essentials – and she was funny.
Ivins also had a a way of taking down the pretentious types without seeming mean-spirited. Quite a gift, and I miss her, too.
Enough is enough. How many more ratepayers have to die before PG&E shareholders are wiped out in bankruptcy court, and the utility is placed under public ownership? Because regulatory capture has been a real problem, nothing will change until the perverse incentives of private profit are removed from the equation.
I am a long time PG&E customer. Their customer service is terrible and maintenance of their power lines a joke. Even before fire prevention power outages were introduced as a standard business practice this year, extended power outages were not unusual. Nor were shifting explanations for the causes. Just last weekend in a Bay Area city, 13 families (mine included) were without power for 36 hours because we were on the wrong side of a city street. Across the street, Christmas lights were blazing but not for us. I didn’t see a serious work crew on the job until 24 hours after we lost power. Typical. Also typical is the fact the I received notice of a rate increase this week.
It’s been ages, and I mean ages, since I’ve seen a tree/brush clearing crew around here on the Central Cal Coast, where is was once an everyday occurrence.. we’ve had some rain now, but if the Santa Ana winds come through soon, and they likely will, the tinder through the powerlines ten feet from my bedroom window can go up in an instant.
Damn lucky it hasn’t happened yet. Then there’s Diablo Canyon a half-dozen miles
south..
PG&E is demanding a 16% return on new shareholder capital investments. You cannot build critical public infrastructure at hedge fund rates.
Paul Singer/Elliott in an alliance with the wildfire victims doing a hostile takeover of California PG&E? You’re kidding, right? Is he buying up their awarded compensation for pennies on the dollar?
You can’t make this stuff up!
Time for chapter 7! And the transition to public ownership. Screw the bondholders and the share holders. Public utilities should be owned and run by the people who use them.
The governor ought not allow Elliot Management anywhere near PG&E. That hedge fund has a very sordid past; effectively ruining businesses it “invests” in as it strips assets from them to line its own pockets.