California governor rejects PG&E bankruptcy settlement

California Gov. Gavin Newsom has rejected a Pacific Gas & Electric (PG&E) bankruptcy settlement, saying in a Dec. 13 letter to the CEO of PG&E Corporation that the plan “falls woefully short” of requirements set out in a wildfire law enacted earlier this year.

Newsom in July signed into law legislation that aims to reduce wildfire risks while establishing a system to lower the exposure investor-owned utilities have for liabilities from wildfires. The California Assembly approved the wildfire bills — AB 1054 and AB 111 — on July 11, three days after they cleared the Senate. The bills create two wildfire liability funds for IOUs that could grow to $21 billion and require wildfire mitigation investments.

San Francisco-based PG&E and its parent, PGE Corporation, filed for bankruptcy Jan. 29 in the face of about $30 billion in estimated wildfire-related liabilities.

PG&E Corporation and PG&E on Dec. 6 said that they had agreed to a settlement with the Official Committee of Tort Claimants and with firms representing individual claimants who sustained losses from the 2015 Butte Fire, 2017 Northern California Wildfires and 2018 Camp Fire. The settlement agreement is valued at approximately $13.5 billion and has the support of the TCC. The settlement will resolve all claims arising from those fires, including the 2017 Tubbs Fire as well as all claims arising from the 2016 Ghost Ship Fire in Oakland, PG&E Corporation and PG&E said.

On Dec. 12, PG&E Corporation and PG&E filed an amended plan of reorganization with the bankruptcy court in its Chapter 11 cases. “The plan reflects PG&E's settlements with all major groups of wildfire claimants and keeps PG&E on track to achieve regulatory approval and Bankruptcy Court confirmation in advance of the June 30, 2020, statutory deadline for participation in the state’s new wildfire fund,” they said.

Newsom rejects settlement

But Newsom rejected the amended plan in his Dec. 13 letter to William Johnson, CEO of PG&E Corporation.

Newsom’s approval was not required under state law, but PG&E asked him to weigh in after reaching the settlement, the Los Angeles Times noted in a Dec. 13 article. “The request for the governor’s blessing forced Newsom to take a public position on the company’s reorganization long before state regulators perform an extensive review and must formally sign off on the PG&E proposal or a competing plan next year,” the newspaper reported.

“Since the day PG&E decided to file for bankruptcy protection, I have been clear about the state’s objectives,” wrote Newsom in his letter to Johnson. “Californians must have access to safe, reliable and affordable service. Victims and employees must be treated fairly. And California must continue to make forward progress on our climate change goals.” He noted that these objectives were codified into law in AB 1054 “and must be satisfied as part of any emergence from bankruptcy.”

Newsom said that he had determined that the amended plan “and the restructuring transactions contemplated therein do not comply with AB 1054. In my judgment, the amended plan and the restructuring transactions do not result in a reorganized company positioned to provide safe, reliable, and affordable service to its customers, as required by AB 1054.”

The governor said that PG&E’s Chapter 11 cases “punctuate more than two decades of mismanagement, misconduct, and failed efforts to improve its safety culture.” Newsom argued that PG&E’s recent management of public safety power shutoffs “did not restore public confidence. Instead, PG&E caused extreme uncertainty and harm for Californians who rely on power for their health care and their livelihoods. PG&E has been mismanaged, failed to make adequate investments in fire safety and fire prevention, and neglected critical infrastructure.”

Governance and management requirements

Newsom said that the resolution of the bankruptcy must “yield a radically restructured and transformed utility that is responsible and accountable. To that end, my office previously informed you that any acceptable plan under AB 1054 must provide for major changes in governance and incorporate enforcement mechanisms. PG&E has failed to address most of the issues we previously raised on governance.”

Newsom said that the governance and enforcement mechanisms that he believes are necessary include the following:

  • Changes that will result in a more qualified an independent board of directors that understands its obligation to achieve the goals of AB 1054;
  • Strict, clearly defined operational and safety metrics to which the reorganized company will be held accountable;
  • An escalating enforcement process that provides greater oversight that provides for greater oversight of the reorganized company if it fails to meet the defined operational and safety metrics. “Because of this company’s history, the license to operate should be conditioned on it agreeing to this process,” Newsom said in the letter. “This should also include a streamlined process for transferring the license and the operating assets to the state or a third party when circumstances warrant”;
  • Escalating enforcement should include governance changes that protect California in the event that a reorganized company fails to meet the operational and safety metrics or commits other bad acts including a subsequent bankruptcy filing

“The amended plan does not incorporate any mechanisms to address these issues. Thus,  I believe the amended plan falls woefully short of the requirements of AB 1054,” wrote Newsom.

Capital structure

The governor also said in his letter that in order to achieve safe and reliable service and make critical safety and infrastructure investments, “the emerging company’s capital structure must be stable, flexible and position the company to attract long-term capital.”

But Newsom said that based on the financial information provided by PG&E, “the reorganized company would not compare favorably to its peers on critical financial metrics. The amended plan also leaves the company with limited ability to withstand future financial and operational headwinds.”

He said that PG&E’s current plan is not feasible without access to the wildfire fund established under AB 1054.

“It’s clear that Governor Newsom is looking our for the people of California by standing up to PG&E,” said Barry Moline, executive director, California Municipal Utilities Association. “He wants to see a truly re-imagined utility. I don’t know if PG&E is capable of doing that, but others are standing by with good ideas.”

Newsom said California was scoping plan for PG&E, including possible publicly owned option

In early November, Newsom called on various stakeholders to meet in order to accelerate a consensual resolution to PG&E’s bankruptcy cases that will lead to the creation of a new entity.

At the same time, Newsom warned on Nov. 1 that if the parties failed to reach an agreement quickly “to begin this process of transformation, the state will not hesitate to step in and restructure the utility” and said that “all options are on the table.”

Newsom’s call for action came against the backdrop of a series of major power shutoffs implemented by PG&E aimed at mitigating the risk of wildfires.

Newsom noted at the time that AB 1054 requires PG&E to make fundamental changes. “It forces PG&E to make massive investments in safety, ties executive compensation to the utility’s safety record and demands that every year the utility earn a safety certification from the state,” he wrote in a Medium post.