Pacific Gas and Electric (NYSE:PCG)
Historical Stock Chart
2 Months : From Oct 2019 to Dec 2019
By Rebecca Smith
Frustrated by PG&E Corp.'s California blackouts and its existing options to exit bankruptcy, the mayor of the state's third-biggest city is proposing to 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, and to do so would not be consistent with our charter to operate or our mission to serve Northern and Central California communities," the company said.
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 what it estimated at more than $30 billion in wildfire-related liabilities. The company's bondholders also will likely contest the idea after putting forward a rival reorganization plan in bankruptcy court.
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 must find that a plan of reorganization serves the public interest for it to proceed.
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 would 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.
The utility, like other electric cooperatives, would set its own rates but would remain subject to the California Public Utilities Code and other state and federal laws, 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.
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 helped shepherd Pacific Gas & Electric Co. through bankruptcy following the California electricity crisis of 2000-2001, 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 email@example.com
(END) Dow Jones Newswires
October 21, 2019 16:56 ET (20:56 GMT)
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