Facing potential takeover, PG&E pins hopes on reorganization

The latest blow to the gas and electric utility company came July 16, when the California Department of Forestry and Fire Protection (CAL FIRE) concluded PG&E caused the October 2019 Kincade Fire in California’s Sonoma County. “After a very meticulous and thorough investigation, CAL FIRE has determined that the Kincade Fire was caused by electrical transmission lines owned and operated by [PG&E],” CAL FIRE said. The Kincade Fire burned roughly 78,000 acres and destroyed 374 structures in the region.

Responding to CAL FIRE’s findings, PG&E did not admit any responsibility, only stating it didn’t have access to CAL FIRE’s investigative report or the evidence it has collected. “We look forward to reviewing both at the appropriate time,” PG&E said.

The Sonoma County District Attorney’s office is now reviewing CAL FIRE’s finding, potentially adding to PG&E’s long history of criminal charges. In June, PG&E pled guilty to involuntary manslaughter for the 84 lives lost in the infamous 2018 “Camp Fire,” the most destructive wildfire in California’s history, determined to be caused by aging power lines and faulty maintenance by PG&E.

“I have no doubt that PG&E doesn’t want to start anymore fires. The problem is that their long-term negligence in maintaining their equipment is making it almost impossible for them to stop doing so.”

Jack Weaver, Partner, Welty Weaver & Currie

California District Attorney Michael Ramsey during a live press conference called the guilty plea “unprecedented in nature,” adding that “this was a historic moment and hopefully a historic moment for corporate America to know that prosecutors, wherever, will not allow [companies] to get away with recklessly endangering the lives of citizens that they serve.”

PG&E, which exited Chapter 11 bankruptcy on July 1, previously reached settlements for wildfires it caused in 2015, 2017, and 2018 to the tune of a $24.5 billion payout. But that amount did not account for the legal liabilities it now faces for the 2019 Kincade Fire. In a March 31 quarterly filing, PG&E estimated it could incur losses for the Kincade Fire in excess of $600 million, not including potential fines, penalties, punitive damages, or other unanticipated costs.

A lawsuit filed July 8 in California Superior Court on behalf of roughly 100 businesses and individuals who suffered damages from the Kincade Fire alleges PG&E started the fire, in part, due to its failure to manage, maintain, repair, or replace its aging infrastructure and equipment. “PG&E knew or should have known that a breach of those standards and duties constituted negligence and would expose members of the general public to risk of death, injury, and damage to their property,” the complaint states. It goes on to describe 19 other fires and gas explosions PG&E has caused prior to the Kincade Fire dating back to 1981.

“I have no doubt that PG&E doesn’t want to start anymore fires,” says Jack Weaver, a partner at Welty Weaver & Currie and lead attorney in the case. “The problem is that their long-term negligence in maintaining their equipment is making it almost impossible for them to stop doing so.”

The lawsuit further alleges PG&E’s corporate culture was the “root cause” of the Kincade Fire, due to its long history of putting profits and compensation over safety. In one instance, PG&E spent nearly $5 million on bonuses for six of its top executives in 2009, the same year it planned to replace a segment of its San Bruno pipeline. Repairs were never made, and the result was the 2010 San Bruno pipeline gas explosion that killed eight people and destroyed dozens of homes.

“You can’t be giving dividends and huge bonuses to your executives year after year while simultaneously ignoring your equipment,” Weaver says. “That’s going to have an impact and, frankly, that went on too long with PG&E.”

Because the lawsuit is not a class action, Weaver says it’s impossible to calculate individual damages at this time, given that some businesses and individuals only suffered smoke damage to their properties while others lost everything. “We have claims ranging from thousands all the way into the millions,” he says.

Reorganization plan

On June 20, the U.S. Bankruptcy Court for the Northern District of California approved PG&E’s Plan of Reorganization, following approval by the California Public Utilities Commission (CPUC) on May 28 in a decision that placed enforceable requirements on PG&E to meet the mandates of wildfire safety and accounting legislation, AB 1054.

Under its reorganization plan, PG&E has committed to a series of enhancements to its governance, risk mitigation, operational safety, and financial structure, including the following:

A newly constituted board of directors. As part of its bankruptcy overhaul plan, PG&E in June appointed 11 new board members, “with substantial expertise in diverse areas critical to the company’s work,” PG&E said, including those with experience in utilities and emergency management.

Appointment of a new executive-level chief risk officer role. PG&E announced it will be splitting the chief audit officer role from the newly created senior vice president and chief risk officer role, to be held by Sumeet Singh. Effective Aug. 1, Singh will oversee all risk management related to PG&E’s operations and public safety, including risks associated with wildfires, nuclear, dams, natural gas and natural disasters, as well as other strategic risks confronting utilities, including those relating to cyber-attacks. Singh will also be responsible for evaluating risks associated with the Public Safety Power Shutoff program.

Elevated chief safety officer role. The chief safety officer, a role held by Francisco Benavides since March, will be elevated to a senior vice president role. Benavides is responsible for PG&E employee, contractor, and public safety.

Formation of an independent safety oversight committee. The responsibility of this committee, made up of non-PG&E personnel, will be to provide independent review of operations, including compliance, safety leadership, and operational performance.

Reformed executive compensation structure tied to safety performance. Under the reorganization plan, PG&E must tie its executive compensation structure to safety performance in a way that is “measurable and enforceable” for all executive officers. How to go about doing this and the challenges of doing so effectively, however, was a topic of great debate.

PG&E’s compensation plan also faced significant criticism. For example, The Utility Reform Network, a consumer advocacy group, recommended that “achievement milestones should be calibrated to incent improvement, not provide guaranteed compensation,” and that “incentive compensation should be based on outcome-based (performance) metrics, not program targets.”

The approved reorganization plan indicates PG&E’s executive compensation plan will be discussed in future proceedings. “For purposes of this decision, we find that PG&E’s executive compensation plan minimally and conditionally satisfies the requirements,” it states.

Appointment of an independent safety monitor. The independent safety monitor, who will be appointed when the term of the court-appointed federal monitor expires, will report to the CPUC “and be functionally equivalent to the federal court monitor. Other details for implementing the independent safety monitor are reserved for future consideration, such as the monitor’s selection and appointment, its exact scope of duties, reporting requirements and budget and cost recovery.”

Increased use of state-of-the-art technology to mitigate wildfire risk. PG&E has also developed a multi-pronged Community Wildfire Safety Program that uses state-of-the-art technology, including new fire-spread modeling and more granular weather forecasting tools to provide more precise data; the addition of hundreds of weather stations and high-definition cameras in high fire-threat areas to boost situational awareness; and the use of drones as part of its transmission system inspections.

On June 30, California Governor Gavin Newsom approved legislation, “The Golden State Energy Act” (SB 350), that would create a non-profit entity, called “Golden State Energy,” that could take over PG&E if the utility fails to meet the safety obligations outlined by the CPUC.

Curiously, nowhere in the 135-page decision approving PG&E’s reorganization plan is the term “ethics” or “integrity” mentioned as it applies to the expectations of the company, and nowhere does it spell out what the responsibilities of the chief ethics and compliance officer should be in all of this. This is shameful.

According to PG&E, Julie Kane was appointed to this role in May 2015 as part of the company’s “commitment to achieving a best-in-class ethics and compliance program” and to lead its “ethics and compliance training and culture-building efforts.” But what does that mean in practice? Based on PG&E’s abysmal record and its apparent disregard for the health and safety of its employees, customers, and the broader community, what leadership role can and should a chief ethics and compliance officer play? For chief ethics and compliance officers everywhere, maybe that’s the most important question here.