A second wave of planned Northern California electricity outages to reduce the risk power transmission equipment could spark wildfires may further spur efforts to convert the Pacific Gas & Electric into a customer-owned cooperative.
The outages may also encourage further offers from individual cities and agencies to purchase the bankrupt utility's electric distribution assets in their territory.
PG&E is one of the nation's largest investor-owned utilities. Its poorly maintained equipment was found to have sparked several wildfires in recent years, including the November 2018 Camp Fire, which all but destroyed the town of Paradise, California, and killed at least 86 people.
Its response this year is to turn off the grid in large swaths of its territory during wind and heat events with high fire risks.
San Jose Mayor Sam Liccardo has had preliminary talks with some city and county leaders to curry support for a proposal that would transform the company into a nonprofit electric and gas cooperative.
But he’s also keeping his options open amid PG&E's ongoing Chapter 11 bankruptcy.
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PG&E has already rejected a $2.5 billion bid from San Francisco for its assets. The Yolo County energy cooperative near Sacramento and South San Joaquin Irrigation District have also said they are interested in buying the distribution lines in their regions.
The electric and gas utility began 48-hour scheduled blackouts Wednesday afternoon of 179,000 homes and businesses in portions of 17 counties, concentrated in the foothills of the Sierra Nevada mountains and the region north of the San Francisco Bay Area. The decision was based on forecasts of up to 60 mph winds and “dry, hot and windy weather that pose a higher risk of damage and sparks on the electric system and rapid wildfire spread,” according to PG&E.
The risk was underscored late Wednesday night in northeast Sonoma County, when the Kincade Fire ignited and burned more than 10,000 acres before daybreak in an area that was part of PG&E's Public Safety Power Shutoff.
The California Public Utilities Commission gave PG&E wide leeway to schedule power outages in areas at high risk of wildfires during periods of high wind speeds.
PG&E’s handling of a planned outage to 738,000 customers in 35 counties from Oct. 9-12 drew widespread criticism, prompting
Liccardo’s memo went to the City Council’s Rules and Open Government Committee Wednesday.
The limitations of California’s investor-owned utility model “became all too apparent to 60,000 San Joseans in early October, when we experienced the first of likely many Public Safety Power Shutoff events,” Liccardo wrote.
PG&E Chief Executive Officer Bill Johnson told the CPUC during a hearing last Friday that the planned preventative outages could go on for a decade.
Liccardo asked that San Jose city staff compile a report weighing the benefits and risks of converting to a consumer-owned utility. He requested the City Council enable the city to strike agreements with other jurisdictions for joint advocacy before the Legislature, CPUC and bankruptcy court.
He also asked the City Council to approve polling to see if voter support exists for bond measures that would enable San Jose to acquire PG&E assets that provide power to the city. Such a measure would also include funding to develop renewable energy storage and generation facilities, such as microgrids.
If the customer-owned utility concept draws enough support, public officials would likely present the idea to the CPUC, which can veto a reorganization plan emerging from bankruptcy review if the board finds it doesn’t serve the public interest.
“We have not seen the proposal,” said Denny Boyles, a PG&E spokesman. “However, PG&E’s facilities are not for sale, and to do so would not be consistent with our charter to operate or our mission to serve Northern and Central California communities.”
San Jose and other cities are getting advice from a five-person group with utility experience on the potential of converting PG&E to a consumer-owned utility.
Members include Dan Richard, a senior vice president at PG&E from 1997 through 2006, and Alan Gover, an attorney who represented PG&E as outside counsel during its first bankruptcy in 2001 in the wake of a power supply crisis.
The coalition — soon to be a limited liability corporation — grew out of a meeting between Richard and Gover, who were discussing PG&E’s problems and wildfire liability in 2018 before it entered bankruptcy.
“I, like everyone else, think this is a huge problem that needs to be addressed,” Richard said. “I still care about the company I worked for and I certainly care about my state.”
Gover and Richard also brought in Eric Lowrey, a principal with Griffin Advisors Inc., an investment banker with expertise in corporate restructurings and power utilities; D.J. “Jan” Baker, former partner and global chair of Latham & Watkins insolvency practice; and Jacob Worenklein, founder and chief executive officer of US Grid Co. and chairman of Ravenswood Power Holdings.
“The bankruptcy law requires that plans of reorganization cannot be confirmed unless they can show that the entity that will emerge is financially stable,” Richard said. “The bankruptcy lawyers on my team believe strongly that neither of the two plans (on the table) will be able to meet that test.”
PG&E filed its Chapter 11 reorganization plan in September, nine months after it filed for bankruptcy. In an unusual move, bankruptcy judge Dennis Montali decided in early October to allow an alternative exit plan proposed by PG&E’s corporate bondholders, partly because that plan offered wildfire victims a larger payout.
One of the plans relies heavily on sub-investment grade debt, and the other represents a strong effort to hold onto equity value, Gover said.
The group came to the conclusion that a consumer-owned utility would be the most viable path after weighing the options, Richard said. They decided the traditional path out of bankruptcy of adding up all the claims to see if the company had the ability to pay would lead to a weakened company. The municipal approach of breaking the company into pieces and arguing over the value seemed problematic, he said.
The idea of a cooperative utility “seemed to have the benefit of addressing not only the financial needs of the company, but also the need to change the dynamic with respect to the legislators' and regulators' loss of confidence in the company,” Richard said.
An electric co-op would result in a lower cost of capital for the enterprise, because it wouldn’t have to worry about paying dividends to shareholders, Lowrey said. It also, like municipal utilities, would not have to have rate increases approved by CPUC, which would make it a better credit risk from a ratings standpoint, he said.
“The bankruptcy court is open to any idea that works provided it does two things: pays all of the claims, or as much as the company can afford, and it comes out of bankruptcy in a structure and condition that will let the bankruptcy judge say it looks like a good bet that the company will not end up back in bankruptcy,” Baker said. “We think when the bankruptcy court and the CPUC look at the benefit of an IOU compared to a co-operative utility, they are going to conclude a cooperative utility is a much better vehicle.”
Though his group has decided that co-op is the best path forward, Richard said, it is not ideological.
“We want to make sure what comes out of the PG&E bankruptcy is a solid, advantaged entity,” Richard said. “We just want to get the best long-term, sustainable, public utility for California."
He described PG&E’s bankruptcy reorganization plan as one developed by a board brought in when the stock was declining and the alternative plan as one developed by distressed-asset bond investors.
“While the battle is fascinating as a matter of spectacle in the bankruptcy process, there has been very little discussion as to what entity would emerge if either of those plans were to go forward,” Richard said. “We think there are grave concerns about the ability of the entity to go forward.”
Nothing PG&E has said indicates the utility would be willing to allow itself to be converted to a consumer-owned utility or sell off assets for municipalization.
PG&E wouldn’t necessarily have to agree in order for the utility to be converted to consumer-owned, but a lot of things need to happen, said A.J. Sabatelle, an associate managing director in the Global, Project, & Infrastructure Finance Group for Moody’s Investors Service.
They are going to have to come up with a proposal that Judge Montali believes provides the best value and the proposal would have to involve something similar to the other plans for the judge to consider them, Sabatelle said.
Both plans pay creditors 100 cents on the dollar, said Jeff Cassella, a Moody’s analyst who covered PG&E until the rating was withdrawn when bankruptcy was declared.
“I think the two plans proposed would allow the company to operate as a going concern after it exited bankruptcy,” Sabatelle said.
The analysts pointed to the fact that PG&E’s stock is trading around $8, which works out to be a $4.3 billion market valuation. Despite being in bankruptcy, the business is still operating, Sabatelle said.
The biggest roadblock to conversion to a consumer-owned utility is that the company has to meet a June 30 deadline for bankruptcy to qualify to participate in the $21 billion
Many different cities and organizations would need to agree to create a cooperative utility and that isn’t something that happens overnight, Sabatelle said.
“If they don’t exit bankruptcy by June 30 then all the options are on the table,” Sabatelle said.
