Hedge funds’ proposal to ‘rescue’ PG&E is probably too good to be true

The Legislature and Gov. Gavin Newsom are grappling with the most significant utility-related public-policy issue our state has faced in some time — California’s wildfire vulnerability and the bankruptcy of Pacific Gas & Electric Co.

Crafting a legislative solution is challenging. Add an active bankruptcy court proceeding and billions of dollars at stake, and the stage is set for a complicated mess.

Recently, Wall Street bondholders made an unsolicited proposal full of promises: they would get PG&E out of bankruptcy quickly, pay the victims rapidly, and even rename the company.

Upon evaluation, the proposal isn’t good for the millions of Californians who rely on PG&E for power, the wildfire victims desperately in need of compensation, or the state as a whole.

Let’s start with some healthy skepticism.

I find it suspect that these Wall Street bondholders cast themselves as altruistic. Indeed, the consortium’s leader, Elliott Management Corp., is known for things like trying to seize an Argentine naval ship due to that struggling nation’s missed bond payments.

So I feel comfortable assuming it’s no knight in shining armor for California, and that its proposal has but one purpose: make as much money for the Wall Street consortium as quickly as possible, from our pockets.

Moreover, it could turn PG&E into a zombie company, laden with debt. The consortium wants PG&E to replace the bonds it owns with new debt, costing billions more, while hedge funds and bankers reap hundreds of millions in fees to underwrite and secure that debt.

And get this: the group would also take control of PG&E and install its hand-picked board of directors. Therefore, it’s safe to conclude that this proposal would end up similar to the leveraged buyouts we’ve seen in the past: a new master demands juicy returns, which lead to higher costs for customers, diminished service quality, and future worker layoffs.

But it gets worse.

In addition to the costs of these financial machinations coming directly from PG&E customers, who will pay higher rates, Elliott’s plan would have other consequences. It would diminish PG&E’s ability to invest in safety measures to prevent future wildfires.

It would hurt PG&E’s ability to meet our clean-air goals. And it distracts from the Legislature’s difficult task of trying to fix the wildfire mess once and for all. Each of these results would be bad for California.

I’m no fan of PG&E. Indeed in the past, I have been one of its sharpest critics. But the company recently underwent a much overdue house-cleaning after it filed for bankruptcy, and the new team has been willing to work with Gov. Newsom and the Legislature on comprehensive safety measures — something we never saw during my tenure in the Assembly.

It has followed the proper legal process, and it seems to recognize that it must compensate wildfire victims fully. Thus, at this point, I see no point in substituting in a set of distressed-debt profiteers for the current board.

A quick fix from a firm with a history of exploiting bankruptcies is analogous to a sugar high. Sure, there may be a short-term boost, but I worry about the ensuing crash.

Additional litigation, delay, and higher costs are the last thing California ratepayers need. If a proposal sounds too good to be true, it probably is.