By Rebecca Smith
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (October 22, 2019).
Frustrated by PG&E Corp.'s California blackouts and its
existing options for exiting bankruptcy, the mayor of the state's
third-biggest city is proposing something radically different: turn
the company into the nation's largest customer-owned utility.
San Jose hopes to persuade other California cities and counties
in coming weeks to line up behind the plan, which would strip
PG&E of its status as an investor-owned company and turn it
into a nonprofit electric-and-gas cooperative, Mayor Sam Liccardo
said in an interview.
The buyout proposal by San Jose, the largest city served by
PG&E with more than a million residents, amounts to a revolt by
some of the utility's roughly 16 million customers as PG&E
struggles to keep the lights on and provide basic services while
preventing its aging electric equipment from sparking
wildfires.
Mr. Liccardo said the time has come for the people dependent on
PG&E for essential services to propose a new direction. A
cooperative, he said, would create a utility better able to meet
customers' needs because it would be owned by customers -- and
answerable to them.
"This is a crisis begging for a better solution than what
PG&E customers see being considered today," Mr. Liccardo said.
He said recent power shut-offs initiated by the company were poorly
handled, adding, "I've seen better organized riots."
PG&E in the past has repeatedly beaten back efforts on the
part of dissatisfied cities to form municipal electric utilities,
saying its energy systems aren't for sale -- a position it
reiterated Monday.
"We have not seen the proposal. However, PG&E's facilities
are not for sale," the company said. "We remain focused on the
safety of our customers and communities and will continue working
together with our state and local government partners and across
all sectors and disciplines to develop comprehensive, long-term
safety and energy solutions for the future."
The buyout idea represents a dramatic twist in the debate over
how PG&E can emerge from bankruptcy, compensate fire victims
and address its many safety problems. It likely will face stiff
opposition from PG&E, which in January filed for chapter 11
protection from an estimated $30 billion in wildfire-related
liabilities. The company's bondholders also will likely contest the
idea after putting forward a rival reorganization plan that the
bankruptcy court agreed to consider.
Instead of taking their proposal to the bankruptcy court
weighing PG&E's fate, proponents say public entities will
likely take their case directly to the California Public Utilities
Commission, which can veto a reorganization plan emerging from
bankruptcy review if in its eyes it doesn't serve the public
interest.
California officials are running out of patience with PG&E
after the company shut off power to roughly two million
Californians in 34 counties earlier this month to ensure that its
power lines, transformers and fuses didn't ignite fires that could
spread quickly amid expected high winds. PG&E warned Monday
that winds could trigger another round of shut-offs for parts of 17
counties later this week.
PG&E may have inadvertently galvanized support for the
public-buyout proposal last week when Chief Executive Bill Johnson
told state regulators that the utility may need to rely on power
shut-offs for up to 10 years. That is a horrifying prospect for
public officials, who note that the blackouts affect public safety
and the delivery of other basic services such as clean water.
"We need to align the financial interest with the public
interest," Mr. Liccardo said. "We hope there will be recognition
that this structure better addresses the public need and we're
looking to start the drumbeat to enable all of us to march
together."
An ad hoc group of experts began shopping around the idea of a
customer-owned utility several months ago. It includes Dan Richard,
a former senior vice president of PG&E, Alan Gover, a retired
lawyer who helped shepherd the company's utility arm, Pacific Gas
& Electric Co., through its first a bankruptcy from 2001 to
2004, and D.J. "Jan" Baker, a lawyer who has worked on more than
150 company restructurings.
If converted into a not-for-profit, customer-owned utility,
PG&E could use low-cost borrowed money to pay off claims from
creditors and victims of wildfires. If equity has any remaining
value at the end of the bankruptcy process, the company would buy
out those holders, too, and retire all public shares, according to
Mr. Richard.
More than 900 electric cooperatives operate in the U.S. Some of
them are on the forefront of innovation, offering their
customer-owners electricity at low cost with high reliability and
additional services like high-speed broadband. Most are in rural
areas, formed after passage of the Rural Electrification Act of
1936.
PG&E would be a radically different sort of cooperative
given its scale. The company provides gas and electric service to
roughly one in 20 Americans across a sprawling 70,000-square-mile
service territory in Northern and Central California that includes
San Jose, San Francisco, Fresno and Oakland.
As an electric cooperative, PG&E would have more leeway than
for-profit utilities in setting customer rates, while remaining
subject to the California Public Utilities Code and other state and
federal authorities, proponents said.
Co-ops have advantages and disadvantages when compared to
investor-owned utilities. They pay no federal taxes or shareholder
dividends, and that gives them extra money they can use to make
system improvements or pay down debt.
PG&E paid out $1.9 billion in shareholder dividends in 2016
and 2017, according to court papers. It suspended its dividend in
late 2017, when it was clear wildfire liabilities would stress the
company's finances. Elimination of Wall Street profit pressures
would silence the accusation coming from some public officials that
the utility "puts profits over safety."
Formation of a single, big electric-and-gas cooperative would
eliminate the possibility that the most lucrative parts of PG&E
territory could be removed through formation of municipal utilities
and all but guarantees that cities would continue to subsidize
rural regions. PG&E, earlier this month, rejected a $2.5
billion proposal from San Francisco to buy PG&E assets within
it 49-square-mile area.
One disadvantage of cooperatives: they can't tap equity markets
because they don't have shareholders.
Mr. Richard, who left PG&E in 2006 and has since worked for
a high-speed rail initiative in California, said his team is
bracing for a showdown with PG&E and hedge funds and other
investors who have amassed the distressed company's shares and
bonds in recent months, seeking to profit from the bankruptcy.
"We could see a situation where customers are left with a
weakened hulk that would eventually fall back into bankruptcy" if
PG&E's plan or the bondholder plan is implemented, he said.
In September, the utility proposed a reorganization plan that
garnered the backing of large shareholders but disappointed victims
of the blazes because it appeared to chisel down the amount they
would receive. In early October, U.S. Bankruptcy Judge Dennis
Montali opened the door to consideration of a competing plan
crafted by PG&E bondholders, chiefly because the bondholders
had courted wildfire victims with the offer of a potentially larger
payout.
Meanwhile, California Gov. Gavin Newsom, who has been very
critical of the utility, has said he wants more ideas about
financial reorganization and governance to be considered. His
stance could make the climate more inviting for options like
customer or community ownership, said Cecily Dumas, a lawyer for
the official committee representing wildfire victims in the
bankruptcy case.
Fresno Mayor Lee Brand, who was briefed on the buyout proposal,
said, "We feel it's an idea worth exploring further to see if it
makes sense."
The proponents of the buyout intend to send letters to
PG&E's board of directors and the utilities commission in
coming days laying out their proposal, in rough outline, and urging
that they allow a fair hearing.
Mr. Gover, who represented Pacific Gas & Electric Co. in its
first bankruptcy brought on by the California electricity crisis,
said neither of the existing reorganization plans would result in a
utility strong enough to face its current and future challenges
without massive rate increases. Both plans count on pledging
PG&E assets as collateral for debt, risking a descent into junk
bond territory, he said.
"They create a financially burdensome structure," Mr. Gover
said. He said the public-entity proposal would result in a utility
with a lower cost of capital that would have an investment-grade
credit rating.
Peg Brickley contributed to this article.
Write to Rebecca Smith at rebecca.smith@wsj.com
(END) Dow Jones Newswires
October 22, 2019 02:47 ET (06:47 GMT)
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