Gov. Gavin Newsom Rejects PG&E's Bankruptcy Plan

California Gov. Gavin Newsom in September. Gov. Newsom rejected PG&E's bankruptcy plan, part of a $13.5 billion settlement the company struck just last week. (Justin Sullivan/Getty Images)

California Gov. Gavin Newsom has rejected Pacific Gas & Electric's bankruptcy plan, part of a $13.5 billion settlement struck just last week with thousands of people who lost homes, businesses and family members in a series of devastating fires.

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

The San Francisco-based company needs to pull a deal off to be able to draw from a special fund created by the Democratic governor and state lawmakers to help insulate utilities if their equipment sparks other catastrophic fires. The risks have escalated during the past few years amid dry, windy conditions that have become more severe in a changing climate.

In his letter, Newsom said the proposed settlement announced last week does not achieve the goal of addressing what he considers its most important elements, providing safe and reliable power to PG&E customers.

Read the entire letter here.

"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," he said.

He went on to say that PG&E's problems are the result of decades of mismanagement that must be addressed before he will sign off on any proposed settlement.

"PG&E's board of directors and management have a responsibility to immediately develop a feasible plan," the governor said. "Anything else is irresponsible, a breach of fiduciary duties, and a clear violation of the public trust."

Pacific Gas and Electric

State Sen. Bill Dodd, who represents much of the fire-ravaged 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," the Democrat from Napa said. "Gov. Newsom has been standing up for the interests of ratepayers, victims and communities from day one."

Bankruptcy expert and UC Hastings professor Jared Ellias said that he is surprised about one aspect of Newsom's letter: the fact that he has asked PG&E to put together a mechanism where they agree to give up their assets to the state or to a third party if their financial condition again becomes dire.

"As an insolvency scholar, I have never seen anything quite like that," Ellias said. "Where a company, as a condition of leaving bankruptcy, is asked to make a promise where they say that in the event that things don't go well in the future, we're not going to file for Chapter 11."

Newsom also requested that PG&E reduce their debt as they exit bankruptcy, which Ellias described as a large ask. "This feels like a lot," he said.

Dodd said he is glad that Newsom has focused on reducing the company's debt, since he is concerned PG&E would otherwise not be able to maintain the safety and quality of their infrastructure.

Newsom played a pivotal role in prodding Pacific Gas & Electric to work out a settlement with the fire victims instead of sticking to its original plan to earmark about $7.5 billion for them.

That $7.5 billion became particularly galling to the governor and other critics after the company agreed to pay $11 billion to resolve a potential $20 billion liability with insurers. Those insurers had already paid their policyholder claims in the fires that killed more than 120 people and destroyed nearly 28,000 homes and other buildings during 2017 and 2018.

The proposed settlement agreed to last week by the utility 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.

Victims' lawyers have estimated at least $20 billion is owed in potential uninsured damages, according to an attorney familiar with the court discussions and depositions.

U.S. Bankruptcy Judge Dennis Montali would have to approve a settlement by Dec. 20 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 thousands of fire victims said Friday night he hopes PG&E can still pull together a revised proposal that will satisfy the governor before that deadline.

"I'm hopeful that adjustments can be made so that all the parties can move forward to obtain compensation for the victims who have suffered so much over two years," said Rich Bridgford of Bridgford, Gleason & Artinian.

Although he praised the proposed settlement just last week, Bridgford said he understands Newsom's concerns.

"The governor's heart is in the right place in 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," Bridgford said. "It's a delicate balancing act."

Ellias, the bankruptcy expert, said that meeting the Dec. 20 deadline may difficult for PG&E. "Unless the governor is prepared to back off on some of these, or perhaps there's other things going on that we don't know about, the timeline the company was working with may in fact be in jeopardy," Ellias said. "With that said, I'm sure everybody's working really hard to avoid that outcome."

San José Mayor Sam Liccardo, who has called for PG&E to turn into a customer owned utility, praised Newsom's decision. "Clearly, the governor gets it," he said.

Liccardo said Newsom's letter may "provide an opening" for PG&E to transition from private to public hands.

In a statement, PG&E referred to AB 1054, the bill Newsom signed in July that creates the fund to cover wildfire property damage caused by utility companies.

"Under our settlement with individual wildfire victims, it must be determined whether our restructuring plan meets the requirements of Assembly Bill 1054. We believe it does and is the best course forward for all stakeholders."

KQED's Julie Chang and Associated Press writers Michael Liedtke, Adam Beam and John Rogers contributed to this story.

Correction: The original Associated Press story stated Gov. Gavin Newsom rejected the entire $13.5 billion settlement. Newsom did not reject the entire settlement. He rejected the bankruptcy plan as part of the settlement. Also, the original AP story stated $36 billion as the amount lawyers estimated owed to victims. That number is closer to $20 billion.