Jared Ellias

Before discussing what Governor Newsom is demanding, we should note the progress of the Chapter 11 to date. PG&E is controlled by its pre-bankruptcy shareholders and they have clearly run this process to try to maximize their own investment. (2/

However, in some ways this was a natural way for this bankruptcy to unfold. That's because we started with a political constraint: pre-bankruptcy wildfire victims needed to be paid in full, meaning this had to be a solvent debtor plan that didn't force haircuts on creditors (3/

That's different from the starting point for most Chapter 11s, which is: how much is this firm worth and what changes does it need to be successful in the future? This process became even more challenging when PG&E decided it also had to prioritize the state's climate goals (4/

Thus, we have the bankruptcy plan we might have predicted: the company wants to leave bankruptcy with settlements in hand for the 2017 & 2018 North Bay Fires and a bunch of additional debt to fund those settlements. But wildfire victims and clean energy goals were protected (5/

This plan is only remotely feasible because the state implemented AB1054, which provides an insurance fund for future wildfires. But if you follow the design of AB1054, it would seem to point towards this bankruptcy outcome, so it's not surprising that we are here (6/

PG&E was not required to give the Governor "one week to sign onto our plan" by bankruptcy law or AB1054. By making that demand, PG&E put him on the spot to take ownership of this moment and put his name on the plan. (I wonder if they regret that tactic now). (7/

Now, Governor Newsom has taken PG&E's invitation and taken this process over. Let's discuss each of his requests and discuss how easy it might be, in my view, for PG&E to satisfy them. (8/

First, Newsom wants the current board of directors to resign and be replaced by a more professional and safety oriented board. This IMHO is an easy one for PG&E to give on. And the optics will be good for everyone: "a new board of safety first directors!" (9/

(PG&E's current board is heavily populated by experts in restructuring/Chapter 11, and it makes sense that many of them would move on since their main body of expertise wouldn't be as helpful to the company anymore.) (10/

Second, the company needs to articulate safety metrics and publicly commit to them. This shouldn't be hard for PG&E to give on, and the experts at @californiapuc can make sure the metrics are sensible and make future adjustments (11/

Third - and now we get into the hard stuff - Governor Newsom seems to be asking for the equivalent of a "self-executing insolvency procedure" for PG&E. This is a form of "bankruptcy by contract" that feels kind of like banking "bail-in"proposals after the financial crisis (12/

WOW! In other words, he wants the company to agree that if it causes more fires, it will be put on regulatory probation and CPUC will have the option to force it to liquidate (at fire sale prices?) if certain things occur (presumably, fires?) (14/

AB1054 was a shareholder protection bill designed to placate the capital markets: it protected shareholders from suffering damages from future fires if PG&E wasn't negligent. This request undoes some of that, as shareholders must agree to self-destruct if things go poorly. (15/

In some ways, this is a good idea for avoiding a future Chapter 11 since PG&E would just liquidate through this mechanism if its equipment causes another batch of fires. But this is going to be really complicated and requires extensive analysis and negotiations! (16/

For example, what would the metric be and how do you not create a world where PG&E just turns off the power every time the wind picks up? How should employees think about stock options that might be worth zero if there is bad wind? (Or maybe we already live in this world?) 17/

Is Wall Street interested in investing in a utility with a "self-destruct button" instead of the flexibility that Chapter 11 creates? How will insurers treat California? What happens to creditors if self-destruct is triggered? What about future fire victims? (18/

Some of Twitter's energy gurus might be able to weigh in on whether other public utilities have "death triggers" like this, where bad performance triggers a state-led asset foreclosure. It's similar to a state law foreclosure proceeding after bad financial performance (19/

Also: How do you deal with with successor liability issues without Chapter 11? Are there costs associated with giving liquidation power to the government instead of an independent bankruptcy judge? Wouldn't PG&E just file for bankruptcy anyway and try to re-negotiate? (20/

Fourth, Governor Newsom wants "protection for California" if there is a future bankruptcy proceeding or bad acts. Even if PG&E made this promise, it could file for bankruptcy later and try to renege on it. (21/

Additionally, Governor Newsom wants PG&E to leave bankruptcy with less debt than it the current plan assumes. How much debt? Do we want so little debt that it puts the payment of wildfire victims and clean energy goals in jeopardy? Presumably not. (22/

These last three demands - a self-executing insolvency proceeding, "protection for California," and less debt - seem like challenging items to work through. Presumably, there have been negotiations on these issues so resolution may not be as far away as it seems. (22/24)