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Happy Saturday! Last night, I caught "On the Basis of Sex," the drama based on Ruth Bader Ginsburg's early career over at the Tower. It's a great flick that I highly recommend.
We are looking at a windy, wet weekend in Sacramento. The inauguration events on Sunday are indoors, but there is a question about the weather during Monday's formal swearing-in scheduled to occur at 11am on the West Steps of the State Capitol. There is a 50% chance of rain Monday morning.
It is day 14 of the federal shutdown and Friday's payday for federal employees is quickly approaching. Politico's Quint Forgey reports:
"Trump previewed the weekend’s talks in a news conference Friday, telling reporters after meeting with Democrats in the Situation Room: “We're going to be very productive over the weekend. I think some tremendous things will happen.”
He also claimed without evidence that past presidents had encouraged him to build a border wall, and confirmed that he threatened Democratic leaders with a shutdown that could last “months or even years.”
Well, the biggest question of the Gavin Newsom gubernatorial reign has been answered--he, First Partner Jennifer Siebel Newsom, and their four children are moving in to the governor's mansion on H Street. Jerry and Anne Gust Brown moved out yesterday. Joining them will be two dogs and a bunny rabbit, reports Alexei Koseff for the Bee.
The Browns moved in to the residence in 2015 after a significant renovation, ending a 48-year absence of first families. The Reagans moved out in 1967 after only a few months after Nancy famously and accurately claimed it to be a "fire trap." And, that was before the Americans with Disabilities Act, signed by George H.W. Bush in 1990. The mansion has since had significant health and safety renovations, which let to the return to occupancy by the Browns.
NEWS DUMP: Governor Brown made several appointments late Friday, with the most notable being:
On Thursday, Brown appointed his appointments secretary, longtime Capitol player Mona Pasquil Rogers to the State Personnel Board (compensation: $48,789).
On the former GOP state senator appointments, Berryhill was the only Senate Republican to vote for the cap-and-trade extension in 2017. Cannella voted for the gas tax for road construction and repaid, while Berryhill was out with illness for much of 2018 with hip problems. He was narrowly elected to the Stanislaus County Board of Supervisors in November, succeeding former GOP state senator Dick Monteith and joining former Assembly Republican Leader Kristin Olsen.
TRANSITION: The LAT's John Myers reports Gavin Newsom issued the following staff picks:
While Newsom has ownership interest in wineries, Mendonca owns the Half Moon Bay Brewing Company. I think Governor Schwarzenegger's "smoking tent" in the courtyard adjacent the governor's office in the center of the Capitol is now a tasting room.
PE, WITH NO MORE G, OR BANKRUPTCY??? Speaking of Friday news dumps, PG&E issued a press release after the market close yesterday to state that it was seeking to "refresh" its board of directors, both of the PCG mothership and the PG&E investor-owned utility. There are two most widely rumored options on the table to meet expected liability of billions that is currently not covered by the final-day-of-session SB 901 (Dodd), which covered liability for wildfires prior to January 1, 2018 and those that start after January 1, 2019. That leaves 2018 as the wildfire liability donut hole.
SB 901 is very complicated and, frankly, few lawmakers or staff let alone journalists and whatever the heck I am understand all of it. There are many components, but for our purposes today, the issue is the financial viability of California's largest utility, Paciific Gas & Electric. In early 2018, policy leaders knew that PG&E was facing billions in damages from 2017 fires, most notably the Tubbs Fire in Napa and Sonoma counties. That October fire burned 5,636 structures and took 22 lives, which much of the destruction in the city of Santa Rosa.
The cause of the fire is still officially under investigation but is widely speculated to have been at least attributable to PG&E equipment during a windstorm. If the cause is confirmed as such, PG&E is liable wholly or in part under the law of "inverse condemnation." As a public utility, PG&E is essentially acting as government providing an essential public service.
You can understand that under the Takings Clause of the Fifth Amendment to the United States Constitution, when farm land is taken to provide a path for high-speed rail, government must compensate the property owner. Usually, this is a simple negotiation, while other times it ends up in court to determine valuation but at the end of the day government has the right to "take" property for a legitimate public purpose with fair market compensation.
So, "inverse condemnation" provides the a governmental or quasi-governmental entity "takes" property in the conduct of, and not necessarily for, a stated public purpose, it is responsible, regardless of whether or not negligence is proven. So, when power equipment owned by a government entity or an investor-owned utility, most notably high-voltage lines, causes destruction of private property, it is a "taking." In normal civil liability, negligence or malfeasance would be required to be proven by an injured party, but that's not necessary in the inverse condemnation.
The 2017 fires are believed to have incurred billions in liability for PG&E in inverse condemnation, plus additional millions in wrongful death and personal bodily injury claims if negligence is shown. This pressured the Legislature to provide a stopgap for PG&E on the last day of session. When the Legislature approved SB 901 on August 31, 2018, there had been one significant wildfire in 2018--the Carr Fire. That fire is the 8th most destructive wildfire in California history, destroying 1,602 structures. However, the cause was identified as a malfunctioning vehicle on I-5 that started a hillside fire that led to the destruction of west and north Redding along with many other communities.
As the gavel came down on August 31, most policy makers thought the book had also closed on the 2018 fire season. Thus, SB 901 was crafted in the last couple of weeks of session to require new state-approved wildfire safety plans and activities for public utilities. In exchange, utilities were given the authority to request rate increases from the Public Utilities Commission to cover incurred liability, which wasn't an allowed rate component in the previous rate structure.
With PCG/PG&E cash poor and largely tapped out on its borrowing facilities, the plan was to securitize the 2017 liability and pay it off over decades, in the same manner the state pays for infrastructure bonds. Because the debt service would be paid for by ratepayers of PG&E or successors (important), the liability bonds would be treated more favorably than junk status.
It was a sticky and some might say yucky deal, but it is what it is. No, PG&E is not currently paying dividends to shareholders. They are paying employees, bondholders, and costs for procuring electricity and gas to meet customer needs. We can all point to swag at a county fair or executive salaries or television commercials and claim waste, but none of that is a drop in the bucket relative to the liability it faces from 2017. That's why the Legislature approved SB 901, eased by $1 million from the state amalgamated union of electrical workers to the California Democratic Party in the middle of the bill's final negotiations.
Of course, the SB 901 legacy did not go as planned after it was signed by Governor Jerry Brown on September 21, 2018.
At 6:30am on November 8, two days after the general election, the deadliest and most destructive wildfire in California history broke out in a canyon northeast of the town of Paradise. It leveled most of the town within the first twelve hours.
Before the fire was extinguished with help from rains that finally arrived in December, it destroyed 18,804 structures and took 86 lives. A Cal Fire station chief saw the fire shortly after it started beneath high-voltage lines across the canyon from the station, but he has stated there was no way he could get a crew safely up the canyon's dirt road in time to stop the spread and had to rely on air support, which was delayed by darkness and high winds.
I'm writing mostly about PG&E today because PCG is in the most financially precarious position and issued the warning late yesterday. However, the Woolsey Fire in Los Angeles and Ventura counties during the same month is believed to be caused by Southern California Edison electrical lines, and it destroyed 1,643 structures and caused 2 deaths. While a home is someone's home and tragic regardless of value, from a liability standpoint, it is worth noting that Woolsey burned through areas of multi-million dollar homes in the Santa Monica mountains and into Malibu, many of which had significant art collections. The same liability analysis would apply.
In short, the SB 901 balancing act for PG&E that penciled out on August 31, 2018 is no long worth the paper it is written on. Sure, once the PUC provides a process, PG&E can seek rate approval for bonds for the 2017 liabilty, but those bonds won't be sellable on the market until the 2018 question is answered. That is because that, even if the 2017 liability is securitized, the new 2018 liability can not be without further legislation. That means the B word, bankruptcy. The threat of bankruptcy and thus cents-on-the-dollar payments to bondholders turns the bonds into junk status and makes the rate increases required to service the principal and interest on the debt un-stomachable to PUC members and thus the Legislature and Governor.
Obviously, some then ask why not fill the 2018 with the SB 901 structure and allow further securitization? Well, the 2017 liability still isn't known and is subject to many factors that range from courtrooms to market costs of construction. Before you assume this is a fight between aggrieved property owners and PG&E, there's a huge other factor--insurance companies. Houses in Santa Rosa are rising from the ashes as insured homeowners rebuild. However, insurance companies don't end the story there. They take care of policy-holders on the front end and chase any possible responsible pocketbook on the back end.
When the ledger is complete on both the 2017 and 2018 fires, it may be possible that PG&E could borrow enough money to remain liquid, even if the Legislature and Governor approved an expansion to allow rate recovery for securitization of liability for 2018. While for those in the PG&E's electricity service area (Sacramento is a public utility), it's likely a few dimes tacked on to an auto-withdrawal that is hardly noticed. For manufacturers, farm processors, and the like, it can be a huge hit to the bottom line. Thus, it is a big political issue.
But the alternatives provide equally big challenges.
The two being talked about are bankruptcy and selling the gas side of the investor-owned utility, either as a stand-alone sale or as part of a bankruptcy restructuring. The parent company began 2018 with $19.2 billion in net assets so in no way is it a defunct company even while cash poor and facing billions in liability. Because it is an investor-owned utility that has rates set by the PUC on a cost of generation + cost of operation + reasonable rate of return structure, it's essentially always cash-flow positive. If the cost of purchasing natural gas increases or it's a dry winter in California and Oregon (hydrogeneration), it can seek a rate adjustment for to adjust for its cost. SB 901 added the fourth variable of cost recovery for debt service.
However, the assets of an investor-owned utility are unlike most other businesses. As Sears Holdings Corp. goes through its successive rounds of restructuring, it has been closing stores and selling off assets, which frequently are still valuable real estate that can be reused as another store temporarily (Halloween City), sold to another entity, and frequently with legacy Sears and Kmart location, torn down to be rebuilt for a new use, such as housing.
You can't do that easily with a gas main or portfolio of clients. You can do it creatively with creative lease-back arrangements, but that's difficult with the $17.7 billion in long-term debt PCG started the year with, let alone with the billions anticipated with wildfire liability. And "creative financing" and utilities are not particularly palatable in a state still burned by the market manipulation and fall of Enron. After all, a governor was largely recalled over that debacle, even though he wasn't the one who signed the 1992 bill that largely led to the crisis of rolling blackouts.
So, closing the 2018 donut hole isn't simple as even doing so may not stave off bankruptcy. Selling off the gas benefits in their entirety is possible, even with the possibility that PG&E continues to be the retail face. However, even that might require bankruptcy.
Why did the state electrical unions give $1 million to the California Democratic Party on August 23, 8 days before SB 901 was adopted? Bankruptcy is a function of renegotiating and/or imposing contracts to maximize value to creditors. There aren't faces to PG&E shareholders or bondholders, even though most of us likely are while we may not know it through investments in mutual and pension funds. We likely wouldn't know the impact of a bankruptcy-imposed settlement of a bond series at 80 cents on the dollar with the overall fund performance. Union electrical employees would, however, notice layoffs of their co-workers and reductions in salaries and benefits.
At the "top end" it's a wing-tipped fight between shareholders, bondholders, PCG/PG&E, and insurance companies. It shows up with the faces of victims who are frequently acting in the interest of insurance companies against faces local organizations who have been financially supported by the corporations like PG&E, most notably as I've written previously, such as minority chambers of commerce (see Senate Floor Analysis of SB 901).
Why do I spend so much time on a Saturday morning on this issue that seems like an obscure, down-the-hallway conversation? First, I don't like to write about the challenges of a publicly traded company and California politics when trading is open. But for our purposes, it will be one of the biggest issues of the forthcoming session.
The week ahead beginning with Sunday's festivities through Thursday's budget release and Friday's news coverage thereof will be all positive, and that's a great thing. Governor Brown is leaving behind constitutionally full state coffers and billions more both one-time and ongoing and actuarially sound state pensions (don't ask about locals) and other debt for Governor-elect Newsom. Yes, there are the issues of high-speed rail and water infrastructure, but nothing requires quick action.
The fate of PG&E and its impact on ratepayers from many of you readers to large manufacturers, industrial (including refineries) customers, and agri-business in Northern and Central California are the biggest issue facing the Legislature and Governor-elect when things start get rolling Monday and time may be of the essence.
Very sadly, only Mother Nature will prevail in however this tragic situation. Obviously, we can't bring back lost lives of firefighters and other victims. There's no way to make whole all injured parties of the climactic wrath. Injured parties of devastation range from individual victims who many of us know personally to shareholders of utilities to insurance companies that might be ourselves, even if unknowingly. Even the most strident of climate change doom-and-gloomers could not have predicted what California experienced over a fourteen-month period, and nobody knows what 2019 has in store.
In this fight, as Alexa is playing right now, "Everybody Hurts." That is, except lawyers, lobbyists, and bond-traders.
By the way, yesterday, PCG--the parent corporation's stock--dropped 19.26% after hours after climbing 1.92% during normal trading hours. The S&P 500 was up 3.43% on the day.
For the 16 new legislators, welcome aboard. For the two members returning after time away, welcome back. Governor-elect, congratulations.
To you all, Godspeed.
#CAKEDAY after the jump...
2020: In the Times, Dakota Smith and Howard Blume look at what the likely upcoming teachers strike means to Mayor Eric Garcetti's ambitions for the presidency. Although the mayor does not directly control any schools, it would certainly be hung around his neck and former allies could easily become enemies.
Ask Antonio Villaraigosa.
As I did the final edits (yes, I try to edit) on the above wildfire item, I had Alexa playing Bad Religion randomly. "[T]he hills of Los Angeles are burning...palm trees are candles burning in the wind" was playing. Seriously. I've always loved that song, but now it brings tears.
#CAKEDAY: Happy birthday to Assemblymember Jim Cooper, Lara Larramendi, and Derick Lennox!
Add your classified of up to 100 words by emailing firstname.lastname@example.org for $40/week.
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MATTHEW CHOI @
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MATTHEW CHOI @
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MATTHEW CHOI @
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Ocasio-Cortez jabs GOP over â
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