In a surprise move late Friday, Governor Newsom rejected PG&E’s plan to pay Northern California wildfire victims and exit bankruptcy. In a letter to PG&E Chief Executive Bill Johnson, the governor declared that the company’s proposal doesn’t go far enough to make it “positioned to provide safe, reliable and affordable service.”

The decision announced Friday in a five-page letter to PG&E CEO Johnson marks a major setback in the utility’s race to meet a June 30 deadline to emerge from bankruptcy protection.

In his letter, Governor Newsom also said, “The resolution of this bankruptcy must yield a radically restructured and transformed utility that is responsible and accountable.”

Among other things, he demanded an entirely new slate of directors who are subject to state approval, and a structure that would allow PG&E’s operating license to be transferred to the state or a third-party when circumstances warrant.

Just a week ago, PG&E announced what it believed was a breakthrough that would ease its way out of bankruptcy: a $13.5 billion settlement agreement with lawyers for more than 70,000 wildfire victims.

Newsom’s letter goes on to say that, “PG&E’s board of directors and management have a responsibility to immediately develop a feasible plan. Anything else is irresponsible, a breach of fiduciary duties, and a clear violation of the public trust.”

Senator Bill Dodd, who represents much of the fire area, praised Newsom’s action.

“We all know that we can’t trust PG&E to do the right thing or even follow the law,” Dodd said.  “Governor Newsom has been standing up for the interests of ratepayers, victims and communities from day one.”

The proposed settlement agreed to last week by PG&E and attorneys representing fire victims would have paid $6.75 billion to the victims in installments ending in early 2022, and $6.75 billion in company stock that would give them close to a 21% stake in the reorganized PG&E.

The settlement also required significant concessions from the victims, whose lawyers had been contending that they were owed at least $36 billion and were likely to seek even larger amounts had they pursued their claims in a state trial and federal court hearing that had been scheduled for early next year.

U.S. Bankruptcy Judge Dennis Montali would have to approve a settlement by December 20, 2019, for the deal to become part of the utility’s official plan to regain its financial footing. If that happens, bankruptcy experts believe the utility’s preferred reorganization plan will have a clear-cut advantage over a competing proposal from a group of bondholders and a potential bid from a group of cities and counties who have been mulling an attempt to turn the company into a customer-owned cooperative.

One of the attorneys representing fire victims said Friday night that he hopes PG&E can still pull together a revised proposal that will satisfy the governor before the deadline. Although fire victim’s attorneys praised the proposed settlement just last week, on Friday night they said they understood Newsom’s concerns. They suggested that Newsom’s heart is in the right place, seeking to ensure that PG&E emerges from bankruptcy in such a way as to guarantee it can adopt the safety measures necessary to avoid catastrophic wildfires in the future.

PG&E Reaction to Newsom’s Letter

In reaction to Governor Newsom’s letter, PG&E released a statement late Friday expressing that the utility will continue to seek resolution.

“We’ve welcomed feedback from all stakeholders throughout these proceedings and will continue to work diligently in the coming days to resolve any issues that may arise.”

As previously noted in earlier reports, without the added protection of the California Wildfire Fund (AB 1054), PG&E will likely find it more difficult to borrow money to pay for ongoing operations and necessary upgrades if it remains mired in bankruptcy proceedings beyond June 30, 2020.

If PG&E can’t get a revised deal with the fire victims approval, it also will face the specter of navigating through two other legal proceedings early next year that would be used as an alternative way to estimate how much the company owes for the wildfires of 2017 and 2018 that killed nearly 130 people and destroyed more than 27,000 structures across its service territory.

The first legal proceeding is a California state trial to be held in January, which will determine whether PG&E is liable for a 2017 fire in Sonoma County that the company hasn’t accepted full responsibility for.  The trial would also award damages to the victims if PG&E is found responsible.

The second proceeding is an estimation hearing that is scheduled for February before a federal judge to determine PG&E’s total bill for all the fires that could have been covered in the settlement that had been worked out with the victims.

So far, Attorneys for the fire victims have collectively lodged claims of about $36 billion against PG&E, according to court documents. But that figure could rise even higher after the state trial and estimation hearing, which would likely leave PG&E unable to meet its financial obligations — a development that could lead U.S. Bankruptcy Judge Dennis Montali to declare the company insolvent.

If that were to happen, it would automatically void a separate $11 billion settlement deal PG&E has reached with insurers who say they are owed $20 billion for the fire insurance claims they expect to pay their policyholders in the wildfires blamed on the utility. The insurance settlement, though, is also being opposed by Newsom, and is still awaiting Montali’s approval.

Where does this leave the coalition seeking to turn PG&E into a co-op?

As we reported last week, San Jose Mayor Sam Liccardo is leading 113 elected officials, representing 58 cities and 10 counties, in support of a plan to turn PG&E into a customer-owned cooperative. While PG&E will work hard in the next few days to secure the support of Newsom for a going-forward plan, Newsom’s letter seems to breathe life into the push for a co-op.

Again, the settlement is still subject to a number of conditions involving PG&E’s Chapter 11 bankruptcy reorganization plans, which must be completed by June 30, 2020.  As previously outlined in an earlier report, the road to convert the utility to a co-op would be long and arduous at best. The next few days will be very interesting. Clearly, Newsom’s letter has set off a very delicate legal situation for everyone involved.

Is it possible that the entire Newsom exercise is to get PG&E to offer more money? If so, that’s quite a political gamble.