Now Newsom will have to navigate consumers’ complaints as well as what happens next — and that will be the ultimate test of his governing abilities. | Justin Sullivan/Getty Images California governor faces first major test navigating PG&E bankruptcy waters

SACRAMENTO — California Gov. Gavin Newsom, entering his second week in office, faces a major test of his leadership after PG&E said Monday it intends to declare bankruptcy — a development that will demand both a tough approach to the troubled company and sensitivity to growing public anxiety about the future of the state's largest utility.

Finding a politically palatable route to resolve the utility's financial woes will not be easy. Given that PG&E’s equipment sparked multiple wildfires in 2017 — and the company is being investigated for potentially igniting the catastrophic Camp Fire in November — it faces little sympathy in Sacramento. Channeling angry constituents, some lawmakers portray the utility as derelict in its duties.


“I can never trust what PG&E says or does, and I don’t know if they’re threatening bankruptcy in order to come to the Legislature for another bailout," said state Sen. Jerry Hill (D-San Mateo), who has been a leading critic of the utility.

PG&E’s stock plunged nearly 50 percent Monday after its filing on bankruptcy preparations that cited the potential for more than $30 billion in costs from the last two years of deadly wildfires. That includes November's Camp Fire, the most destructive inferno in state history that resulted in 86 deaths and destroyed 14,000 homes, 500 businesses and 4,300 other buildings, decimating the town of Paradise.

Beyond the imperative to keep the lights on, some formidable interest groups are invested in PG&E remaining solvent. Unionized workers who maintain electricity infrastructure are fearful for their jobs, and utilities’ procurement of renewable energy plays a central role in California’s climate goals. Local government leaders are insisting that victims get made whole, while insurers want to recoup costs.

PG&E's woes will force the governor to immediately show he can manage a crisis while navigating a special interest brawl.

"The first thing the governor needs to do is reassure customers in the service area that they’re not going to be adversely affected," said Garry South, the veteran Democratic strategist who advised Gov. Gray Davis through the last PG&E bankruptcy during the energy crisis. "The average person who is provided power by PG&E doesn’t give a crap about the corporate structure — or whether it’s profitable or not. They just want the electricity to flow."

Newsom is well aware of the risks in dealing with the issue today, "If the power doesn’t flow, guess who gets blamed for it: the governor," added South, who notes Davis was immediately targeted by opponents with a campaign that tagged the energy blackouts as "Grayouts," and morphed into bumper stickers in favor of Davis' ouster, demanding “Gray Out!”

Newsom’s office appeared to anticipate the PG&E news, responding before dawn with a press release virtually minutes after the company announced its bankruptcy. The governor’s statement aimed to allay fears — and assure Californians that they would not suffer ill effects.

The governor repeatedly rejected parallels with the last energy crisis during an afternoon press conference, saying California was in a far more stable position.

“This is not 2001. This is 2019,” he said. “We have an abundance of energy and our customers should not be concerned about turning on their lights.”

Meanwhile, representatives of California’s cities and counties are pushing lawmakers to ensure fire victims are fully compensated for their losses — and they’re warning against relieving utilities of their obligations by changing liability standards.

“What we care most about is ensuring communities continue to be protected and those folks trying to recover from a disaster can be made whole,” said Graham Knaus, executive director of the California State Association of Counties.

Lawmakers and former Gov. Jerry Brown last year hammered out a bill that allowed PG&E to recover some wildfire costs via ratepayer-backed bonds, but the legislation was explicitly written to exclude 2018 fires. In its securities filing, PG&E said one of its “fundamental issues and challenges” is “uncertainty regarding whether, when and to what degree the Utility will be able to recover costs related to wildfires through ratemaking.”

Utilities have also lobbied unsuccessfully to soften a legal standard, known as “inverse condemnation,” that leaves them on the hook for fires sparked by their equipment even when they have not been negligent.

They have allies in some environmental groups who warn that California will be unable to meet its aggressive climate goals if utilities have a diminished ability to purchase electricity from renewable sources and invest in clean energy infrastructure.

“A collateral victim of the bankruptcy could be the diversion of funding from PG&E’s nation-leading clean energy initiatives that fight the effects of climate change like these wildfires,” Ralph Cavanagh, energy co-director at the Natural Resources Defense Council, told POLITICO. “If they are financially disabled, if they are operating under the supervision of federal bankruptcy judges who don’t understand or share those priorities, we are all at risk.”

Depending how the bankruptcy proceeding plays out, International Brotherhood of Electrical Workers Local 1245’s Business Manager Thomas Dalzell told POLITICO, it could be “very disruptive” for the 12,000 unionized employees who work on PG&E’s infrastructure.

Companies in bankruptcy can alter labor agreements, raising the prospect that workers’ pensions could be on the table — although Dalzell said he thought that unlikely given the Legislature’s labor-friendly composition.

“We never go fight for PG&E because we want to protect PG&E — to the extent we’re aligned with PG&E, it’s to protect their employees, our members,” Dalzell said.

The Legislature has to take the same approach by acting in the interests of California residents first and foremost, said state Sen. Bob Hertzberg (D-Los Angeles), who was Assembly speaker during the energy crisis that derailed former Gov. Gray Davis' tenure.

"Their role is not our role," Hertzberg said of bankruptcy overseers. "Our role in state government is to protect victims, it is to protect the environment and it is to protect ratepayers. They only care about creditors, and that’s their only objective in a federal bankruptcy court."

Assemblywoman Eloise Gomez Reyes (D-Grand Terrace), who co-sponsored 2018 legislation requiring California to derive 100 percent of its energy from clean sources by 2045, said a bankruptcy filing would be "consequential" for the state's alternative energy goals.

“We were looking for ways to get off the grid, for a clean energy grid, and we have [to] make sure we continue with that," she said Monday in Sacramento.

But, she added, "We have to protect the ratepayers, and we cannot forget the fact that there are victims who need to be made whole.”

Newsom's comments Monday made clear that his team was closely in touch with PG&E heading up to the filing, a clear contrast to how the company handled its troubles in 2001 — when South said the utility blindsided Davis by declaring bankruptcy the morning after he had delivered a statewide address to California consumers about what had become an ominous energy crisis. “The governor was furious," he recalled.

Sean Walsh, a Republican strategist who advised GOP former Govs. Pete Wilson and Arnold Schwarzenegger, said that is evidence Newsom is in a much better spot than Davis during the dark days of the 2001 crisis.

“I just don’t see a serious political impact for Gavin Newsom ... He’s just walking onto the job, so it’s not like he was in negotiations with the company for months, like Gray Davis was,’’ Walsh said. “He’s inherited this, so being new minimizes his problems there.”

Similarly, Hertzberg said that part of the struggle under Davis flowed from the governor's reluctance to raise rates.

"He was worried that would be deemed a tax increase," Hertzberg said. "I don’t detect any fear in the eyes of Gavin Newsom."

Newsom’s biggest plus in this turn of events is that the power is unlikely to go out on Northern California consumers, Hertzberg noted. "The bottom line is it is a regulated utility so there are process and procedures in place to make sure the electricity still flows," he said.

And, he added, the crisis “can be an opportunity” for Newsom to immediately show his level of concern and response to the victims of the fire, hundreds of whom still are without permanent housing.

South said the past experience shows that Newsom will still have to address Northern Californians’ intense negative feelings and distrust towards their majority utility, PG&E. In repeated focus groups that he’s run, South said that the overwhelming sentiment among customers is that "they’re bad players," he said.

Now Newsom will have to navigate consumers’ complaints as well as what happens next — and that will be the ultimate test of his governing abilities.

A big issue, Walsh said, will be how to address future potentially huge investments that will minimize wildfires, including the huge price tag to place electrical lines underground. The governor also will likely reach out to the Federal Energy Regulatory Commission, also known as FERC, and the office of the State Insurance Commissioner Ricardo Lara "to make sure claims are getting paid," he said.

"The real challenge for the governor may not be what he does publicly, but privately, working with the Legislature," said Hoover Institution fellow Bill Whalen, who advised former Gov. Pete Wilson. "The Legislature would love to exact a pound a flesh from PG&E, not only because they’re upset about the fires — it’s a big, juicy corporation," he said.

The smartest thing for Newsom "is just to be very measured, and not to pile on," he said. “There’s enough blame to go around.”