PG&E Has a Survival Plan, and Newsom Has Plan B: A Takeover

Ferocious wildfires have inflicted several years of death and destruction on California. But they have also presented the state with an opportunity to radically overhaul the company prominently implicated in the fires, Pacific Gas & Electric.

The most powerful proponent of far-reaching changes, Gov. Gavin Newsom, is threatening a state takeover if the giant utility fails to reshape itself to his liking. With a key deadline approaching in PG&E’s bankruptcy case, the question is whether he is prepared to follow through — and what consequences could follow.

The state is technically on the sidelines in the San Francisco bankruptcy proceeding where PG&E is pressing forward with its own restructuring plan. The company achieved a breakthrough recently in uniting shareholders and creditors behind the plan, which it says would satisfy the claims of wildfire victims as well.

But PG&E has to emerge from bankruptcy by June 30 — on terms acceptable to the governor — in order to take part in a new $20 billion state fund designed to shield large utilities from large wildfire claims. Without that protection, PG&E’s restructuring plan would fall apart and its viability would be in question.

To Mr. Newsom, the company’s plan does not do enough to ensure its financial stability, its operational competence or its corporate integrity. “What I don’t want is a utility that comes out of bankruptcy limping,” he said recently.

It is not clear whether he actually wants to take over PG&E — a long-troubled company that could take years to fix — and make it a ward of the state. His threats could be a negotiating tactic, and the company has moved a little closer to his objectives.

Mr. Newsom said his administration had been conferring daily with PG&E to resolve issues including the governor’s authority in shaping the company’s board and measures to guarantee long-term financial stability. At the same time, he and allies have taken steps that suggest they are serious about a takeover.

The Democratic governor and about a dozen lawmakers have been meeting regularly to plot strategy. And state officials have worked to assure labor unions — a critical political bloc — that a takeover would not jeopardize jobs and benefits.

“We have not just rhetorically discussed a break-the-glass scenario, a Plan B, but we have laid out in detailed terms what that would look like, and we’re working with legislative leaders to advance it in real time,” Mr. Newsom said last week.

On Monday, State Senator Scott Wiener, a Bay Area Democrat, announced legislation to enable the state to take control of PG&E, which provides electricity and gas service to about 16 million people in the northern and central parts of California.

Over a five-year period, the measure would allow the state to revoke PG&E’s franchise agreement, stripping the power company of its utility customers and its core revenue source; to direct a state Power Authority to buy the utility’s electric and gas assets with money that ratepayers would repay over several decades; and to create a seven-member board appointed by local governments in each district.

“I personally believe PG&E has forfeited the privilege to operate as an investor-owned utility,” Mr. Wiener said. “This is a company that is unraveling.”

Exactly how such a solution would play out is unclear. Mr. Wiener’s bill, for example, would allow municipalities to break off pieces of PG&E to form their own utilities. Mr. Newsom has spoken of keeping the company whole.

Putting PG&E under the ownership of the state or its customers would lower its borrowing costs and free up money now spent on stock dividends, according to supporters of such plans. But a takeover would be costly, and it could face legal challenges from the company’s shareholders.

A long battle could in turn delay payments to wildfire victims, many of whom have been waiting more than two years for compensation. And politicians would risk voters’ wrath over management decisions — like the pre-emptive blackouts of millions of customers carried out last year in the name of fire prevention.

“I don’t think taking over PG&E without a plan is necessarily a good idea,” said Bruce Cain, a political-science professor at Stanford University. “It’s a thankless job for a politician to take this over. Most politicians run away.”

PG&E sought bankruptcy protection a year ago — its second Chapter 11 filing in two decades — with $30 billion in liabilities related to wildfires ignited by the utility’s poorly maintained electrical system. One of the blazes, the Camp Fire, killed 85 people in 2018 and destroyed the town of Paradise.

Local 1245 of the International Brotherhood of Electrical Workers, which represents 12,000 PG&E employees, said this week that it opposed a state takeover. The union has cited complex legal, political and operational challenges, including the development and maintenance of a safe electric grid at a time when climate change has heightened wildfire hazards.

“It’s not an optimal solution for anybody,” said Tom Dalzell, the union’s business manager. “You’re assuming a lot of exposure, and there’s going to be fires.”

It is also not clear that the public would support such a drastic move. In a recent survey for The Los Angeles Times by the Berkeley IGS Poll at the University of California, just 17 percent of voters said they favored a state takeover of PG&E, while an additional 20 percent supported nonprofit city and county cooperatives.

“Certainly the governor can exert his power to effect changes at PG&E,” said Mark DiCamillo, who oversees the polling organization. “A state takeover, that’s a stretch that would be a huge change in public policy. It’s pretty much a long shot.”

The latest version of PG&E’s own proposal includes a shake-up of its board and a safety plan to help prevent wildfires caused by its electrical equipment, both meant to address Mr. Newsom’s concerns.

The utility has reached settlement agreements that include a $13.5 billion fund for wildfire victims, $1 billion to compensate local governments for wildfire expenses and a deal with bondholders, approved Tuesday by the federal bankruptcy judge, Dennis Montali.

PG&E’s proposal has inspired a growing sense of confidence among investors, prompting the company’s stock price to surge to around $17 from a 12-month low of $3.55.

The shares are soaring in part because investors have placed their faith in a regulatory framework that allows utilities to raise rates so that they can earn a set profit margin each year. Over the past decade, PG&E has fallen short of its authorized profit, known as return on equity. PG&E’s supporters say that the last decade was an aberration, marred by disasters and poor management, and that new executives, an overhauled board and an improved safety performance will enable the company to earn its authorized return.

But some question whether the financial strategy is sound.

“The numbers do not add up, unless the money that ratepayers pay increases,” said Loretta Lynch, a former president of the California Public Utilities Commission, which regulates PG&E and other shareholder-owned utilities.

“There’s no way for PG&E to pay off all of the people without raising rates,” she added. “The shareholders aren’t taking a haircut. That’s why Wall Street is excited about this deal, because they don’t have to pay for it.”

PG&E said its reorganization plan met the state requirement that the effect on ratepayers be “neutral on average.”

The financial performance of PG&E will also affect wildfire victims. Under the bankruptcy plan, half their payment would come in PG&E shares. If the company struggles, the shares could fall in value, reducing the amount the victims ultimately receive. (The shares could rally, however, and give the victims a windfall.)

And PG&E’s plan would leave the company with more debt than it had before it filed for bankruptcy protection, in theory making it more vulnerable to financial stress.

To address that risk, PG&E could sell more stock and take on less debt as part of its reorganization, an approach favored under a rival plan that no longer has backers in the bankruptcy proceeding.

PG&E is proposing that its parent company, PG&E Corporation, issue billions of dollars in debt. The cost of this borrowing would have to be paid with earnings from Pacific Gas and Electric Company, the entity that provides customers with gas and power, in theory leaving it with less money to improve its network.

PG&E is also seeking to use a tax windfall from its wildfire-related losses to back $7 billion in new debt, an offering known as securitization bonds. A share of rate revenue is designated for taxes — payments the company will be spared for some time — and PG&E wants to use that revenue to finance the bonds. Mr. Newsom has criticized these financial moves, saying they could impair the company’s ability to raise additional money for safety improvements.

Energy policy has been a political crucible for California in the past — most notably in the crisis that followed the bungled deregulation of the state’s electricity market two decades ago, unleashing events that ended in the recall of Gov. Gray Davis in 2003.

Michael Sweet, who has known Mr. Newsom for decades, feels the current governor is up to the challenge. Mr. Sweet, a San Francisco lawyer whose firm represents a few creditors in PG&E’s bankruptcy, said that on Mr. Newsom’s watch, the utility might finally face a reckoning.

“If PG&E and Wall Street are not giving his concern a significant amount of credence, they’re underestimating him,” Mr. Sweet said, citing Mr. Newsom’s forceful advocacy for legalizing marijuana and gay marriage early in his political career. “He’s not afraid to go out on a limb.”

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