Read the PG&E: Fire in Paradise case study and answer the following questions:

1. The following areas of law are relevant to this case study: Corporations Law, Environmental Law, Administrative Law, Criminal Law, Competition and Consumer Law, Property Law, Tort Law, Energy Law, Employment Law and Contract Law. With reference to the facts in the case study, describe how three (3) of these areas would apply to bring justice to those who have been wronged by the conduct of PG&E? (500-600 words) (9 marks)

2. Should the regulators be held accountable for the wildfire incidents? Discuss the role of regulators in this incident and evaluate whether the actions taken by the California Public Utilities Commission (CPUC) are sufficient in preventing future wildfire incidents. (500-600 words) (9 marks)

3. What is the business structure utilised by PG&E and what are its main features? How does the principle of separate legal existence apply to prevent the directors, employees and shareholders of PG&E from being personally liable to the victims of the wildfires? (500-600 words) (9 marks)

4. Discuss how the corporate culture at PG&E could have contributed to the Camp Fire tragedy. To what extent do you think weaknesses in risk governance and risk management were contributing factors to the problems at PG&E? (500-600 words) (9 marks)

Case study

On the morning of 8 November 2018, California saw its deadliest and most destructive wildfire in history consume the entire town of Paradise. Originating from Camp Creek Road, the Camp Fire quickly spread across 153,336 acres over the course of 17 days, destroying more than 19,000 buildings and claiming 85 lives. The incident sparked an investigation by Californian regulators, which revealed that the ignition was caused by electrical transmission lines owned and operated by Pacific Gas and Electricity Company (PG&E).

PG&E faced heavy financial penalties and criminal charges of involuntary manslaughter relating to one of the most devastating wildfire incidents in California. Initially, its liability was estimated to exceed US$30 billion, more than three times the companys market value of just over US$9 billion. This led to the resignation of Chief Executive Officer Geisha Williams. Almost three months after the outbreak of Camp Fire, PG&E filed for Chapter 11 with the United States Bankruptcy Court in the Northern District of California.

The objective of this case is to facilitate a discussion of issues such as board composition; board responsibilities; corporate culture; remuneration; risk management; and external environmental, social and governance (ESG) ratings.

Keeping the lights on

Safety drives everything we do at PG&E... Our customers count on us to provide safe, reliable and affordable gas service every day.

Nick Stavropoulos, former President and Chief Operating Officer of PG&E 1

Founded in 1905 from a merger between San Francisco Gas and Electric Company and the California Gas and Electric Corporation,2 PG&E is an American public utility company regulated by the California Public Utilities Commission (CPUC).3 It is the major subsidiary of PG&E Corporation (PG&E Corp), headquartered in San Francisco, California and listed on the New York Stock Exchange.4 PG&E is responsible for providing natural gas and electric services to more than 16 million households and businesses in northern and central California.5 In 2018, it boasted total revenue of US$16.76 billion,6 positioning itself as the largest utility in the state of California.7

Despite being a utilities company, PG&E has been recognised as a leader in environmental, social or governance (ESG) by Sustainalytics, Newsweek and Dow Jones Sustainability

This case was prepared by Aaron Teo Yang Han, Khoo Wei Jie, Tan Wee Ning, Woo Yu Xuen Qiqi and Zhang Jinlin, and edited by Isabella Ow under the supervision of Professor Mak Yuen Teen. It has been substantially re-written, with information added, by Professor Mak Yuen Teen. The case was developed from published sources solely for class discussion and is not intended to serve as illustrations of effective or ineffective management or governance. The interpretations and perspectives in this case are not necessarily those of the organizations named in the case, or any of their directors or employees.

A victim of its own fire

Between 2013 and 2019, historic droughts swept across California, killing millions of trees and leaving behind dry, forest floor debris. This made the state extremely prone to forest fires. Between 1972 and 2018, the total area burnt by summer wildfires per year has increased fivefold. Since 2003, the state has seen nine out of 10 biggest fires in California history.

The forest fires were not solely due to unfavourable meteorological conditions. For many years, PG&E was aware of its worn-out power lines and transmission towers. The average life expectancy of the steel transmission towers was around 65 years. However, the average age of PG&Es equipment was 68 years, with the oldest being in operation for more than a century. The company took no action to undertake the necessary maintenance and replacement, despite knowing the huge fire risk. Many critics have accused PG&E of neglecting safety and cutting back on maintenance expenditures to improve its bottom line in order to increase dividends to investors.

Cracks within the company began to surface as early as 1996 when PG&E settled a US$333 million class action lawsuit for dumping gallons of chromium-tainted wastewater around Hinkley, California. This was followed by rolling blackouts for households and businesses during the California electricity crisis in 2001, which eventually drove PG&E into bankruptcy. Three years later, the battered company emerged from bankruptcy after repaying more than US$10 billion to its creditors.

In 2010, investigations into the San Bruno pipeline explosion revealed that in the decade before the deadly explosion, PG&Es revenues exceeded authorised revenue requirements by US$224 million. Yet, the company reduced its spending on maintenance. Internal audits found that teams were severely falling behind their maintenance and repair work schedules. Under immense pressure to comply with regulation and achieve unrealistic performance targets of zero late tickets, it was common knowledge at PG&E that employees were falsifying records. The company responded by dismissing mid-level managers but rewarding the programme directors who were behind the unrealistic targets with promotions and higher remuneration.

In 2018, state investigations into the October 2017 wildfire which killed 44 people attributed the fire to faulty electric power distribution lines, conductors and the failure of power poles. These equipment all belonged to PG&E. An internal memo revealed the need to replace transmission towers and better manage its equipment to prevent it from spreading fires. However, resources meant for maintenance were instead directed towards other high priority projects, including the upgrading of substations.

Paradise in flames

The Caribou-Palermo transmission line was known to be one of PG&Es worst-performing circuits, running through areas with elevated and extreme fire risks. Since 2013, PG&E has pledged US$30 million towards replacing equipment along the line. However, the project had been repeatedly delayed, citing reasons such as the work not [being] maintenance-related.

As dawn broke on 8 November 2018, strong winds resulted in a c-hook getting dislodged from one of the oldest transmission towers of the Caribou-Palermo transmission line near the town of Pulga, causing electric lines to strike and fall to the ground. Numerous employees spotted the fire near the tower and reported it promptly, but the wildfire spread quickly. The critical first few hours brought to light multiple failures within the emergency response system, which impeded the rescue and evacuation efforts by the city officials. Within 12 hours, the wildfire engulfed the whole of Paradise. Firefighters, engines and helicopters were deployed from all over western United States.

The adjacent towns were not spared either, with Concow and Magalia also badly affected, losing a significant amount of their infrastructures. The fire took a total of 17 days to reach 100 percent containment, but its impact on the community continued to linger.

The destruction caused by the Camp Fire threatened PG&Es ability to carry on as a going concern. It received thousands of claims relating to deaths, injuries, property damages, amongst others, estimated to add up to more than US$30 billion.

In the week following the start of the Camp Fire, PG&Es market capitalisation slid to US$10 billion from US$16.9 billion. It subsequently lost its investment-grade rating and looked towards California lawmakers and regulators for its survival. The huge financial liabilities eventually led PG&E to file for Chapter 11 bankruptcy protection.

As PG&E plunged into financial distress, Geisha Williams, the Chief Executive Officer (CEO) of PG&E Corp since March 2017, announced her resignation on 13 January 2019. John Simon, PG&E Corps executive vice president and general counsel, was named interim CEO.

The public attributed the wildfire to mismanagement of the company, and its activist shareholders lobbied for changes to the PG&E Corps board of directors. In February 2019, PG&E Corp announced plans for a major shakeup to its board, in an attempt to restore shareholders confidence.

Men vs nature

Following the San Bruno incident in 2010, the company introduced new corporate governance practices. This included enhancing board committees responsible for safety, improving commitment to shareholder involvement through regular dialogue, encouraging a speak-up culture, and increasing safety training for employees and board members.

A fireproof board?

At the time of the latest disaster, PG&E Corp had seven board committees, with some of these committees also existing at the subsidiary, PG&E, with the same members and charters. The board committees included a Compliance and Public Policy Committee and a Safety and Nuclear Oversight Committee. The Compliance and Public Policy Committee assisted

the board primarily in oversight of corporate sustainability issues, such as environmental compliance and leadership and climate change, including an annual review of PG&Es sustainability practices and performance. The Safety and Nuclear Oversight Committee helped in maintaining oversight relating to enterprise-wide safety matters and promoting a strong safety culture.

PG&E Corp appeared to fare well in board independence. The entire board of directors was independent, with the exception of Williams, the then president and CEO of PG&E Corp.

The entire board of the subsidiary, PG&E, except for Nick Stavropoulos, who was its President and Chief Operating Officer (COO), was a director on the board of PG&E Corp. The Chairman of the board of PG&E Corp has been an independent director since the positions of CEO and Chairman were separated in 2017. Furthermore, only independent directors are permitted to serve on PG&E Corps board committees.

PG&E Corp also tried to ensure that board members have diverse backgrounds, skills and experiences. Prior to the Camp Fire, half of the 12 directors were minorities or women. This was similar for the directors at the subsidiary level.

The average tenure of the directors was seven years. Out of the 12 directors in PG&E Corp, five directors had tenures exceeding nine years. Barbara L. Rambo was the longest serving director, with a 13-year tenure, and chaired the Finance Committee. Richard A. Meserve had served for 12 years, followed by Roger H. Kimmel, Rosendo G. Parra and Lewis Chew at nine years.

Out of the seven board committees, four were chaired by long-serving directors with more than nine years of tenure. Four of the five members of the Nominating and Governance Committee Rambo, Meserve, Kimmel and Parra were long-serving directors.40

Fit for the job?

According to the 2018 joint proxy statement, the Audit Committees (AC) responsibilities include reviewing the guidelines and policies that govern the processes for assessing and managing major risks, as well as the allocation of responsibilities to the other committees (such as to the Safety and Nuclear Oversight Committees). The AC Chairman was Lewis Chew, who joined the board in 2009 and was Chief Financial Officer (CFO) at Dolby Laboratories. According to his LinkedIn profile, Chew previously held positions as CFO of National Semiconductor Corporation and as a Partner at KPMG LLP, where he mainly served clients within technology and financial institutions.41,42

In the lethal 2010 San Bruno natural gas pipeline explosion, PG&E was found to be criminally liable. Furthermore, subsequent investigations revealed gross mismanagement in inspection, maintenance and pipeline replacement, and exposed the company as one which was more concerned with profits than safety.43 However, six of PG&Es 2018 board members had retained their positions following the San Bruno explosion. CPUCs president, Michael Picker, criticised that this was not a strong message of accountability to the rest of the organisation.44

Following the 2017 fires, State Senator Bill Dodd said PG&E and PG&E Corp needed systematic change, including on their boards and in the executive suite in light of the findings that the utility had falsified gas pipeline records.45

After the 2018 Camp Fire, State Senator Jerry Hill called for a shareholder revolt that forces a change in leadership on the board.46 Blue Mountain Capital Management LLC, an asset management firm, also wrote to the shareholders of PG&E Corp on 24 January 2019, alleging that the company had failed its shareholders and stakeholders. In the letter, it said: The company has lost the publics trust, and it has severely damaged its relationship with regulators and elected officials.47

Playing with fire A risky affair

As a utility company, PG&E faces significant risks in its daily operations. The key risks can be classified into three broad categories enterprise and operational risks, which include risks associated with public and employee safety, reliability and the operating environment; compliance risks, which involve compliance with applicable legal and regulatory requirements; and market and credit risks, which are associated with PG&Es energy portfolio, including trading in commodities and derivatives.48

The firefighters

According to PG&E Corps 2018 joint proxy statement, the company adopts an Enterprise and Operational Risk Management (EORM) programme which combines a top-down and

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bottom-up approach in its risk management framework.49 This allows PG&E to assess and manage risks at both an enterprise and operational level.

The programme includes board-directed review processes and allows operational experts to identify emerging issues for the company. While the board oversees risk management policies and conducts annual reviews of enterprise risk, the day-to-day responsibilities for managing exposure to risks and implementing measures primarily fall on the management. The Vice President, Internal Audit and Chief Risk Officer (CRO) of PG&E Corp and the Utility are responsible for helping oversee the risk management process and reports to the AC of the respective boards.

In 2017, a new Vice President-level Risk Management Committee was established to provide strategic guidance and make recommendations to senior management on key aspects of risk management.50 This is in addition to each line of business having its own risk and compliance committee to review their specific risks.

Despite the risk management policies in place, the investigations by CPUC revealed failure to comply with internal procedures. As noted in CPUCs 2019 investigation report on the Camp Fire, there was a failure to conduct detailed climbing inspections on the incident tower as set out in the companys policies.51 Moreover, an outdated inspection form was used during its detailed climbing inspections conducted between 19 September 2018 and 5 November 2018.52 The failure to comply at the operational level resulted in a complete unravelling of PG&Es overall risk management framework, culminating in the dislodgement of the c-hook that ultimately led to the deadly Camp Fire.

The smoke detectors

PG&E Corps code of conduct sought to cultivate a speak-up culture, where employees are confident in voicing any opinions or concerns.53 It pledges a strict non-retaliation policy against anyone who raises concerns in good faith.54 Employees are provided with various avenues to make reports, including their direct supervisor, human resource representatives, or other appropriate departments, and are encouraged to utilise these platforms should they encounter any misconduct or questionable activities at work. A multilingual, 24/7 compliance and ethics helpline was established to help employees raise any issues relating to compliance and ethics.55

However, the strong stance towards protecting its employees and handling reports of misconduct and unsafe work practices apparently did not materialise in reality. PG&E was faulted for failing to handle complaints appropriately on multiple occasions.56 Former PG&E employees who spoke out against the safety issues had also filed lawsuits against the company for wrongful termination, employment discrimination and retaliation.57 Some claimed that they were placed on leave and eventually, had their employment terminated without any justification.58

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One example was in 2011, when Matthew Niswonger had a near-death experience in the Santa Cruz County. He was tasked by his supervisor to repair a broken electrical pole with his colleagues without cutting off power. Although no one was hurt in the process, the incident could have brought about disastrous consequences. Subsequently, Niswonger filed a safety complaint against his supervisor, only to have his employment terminated through a voicemail message one month later. Furious with how the company handled the case, Niswonger then initiated a lawsuit against PG&E and successfully obtained US$1 million compensation for wrongful termination.59,60

Safety first, they said

Since the tragic San Bruno explosion, weve benchmarked against some of the safest companies in the world. Weve learned from them and taken significant actions to improve our safety culture and performance.

PG&E, in an email statement61

In 2017, a report by NorthStar Consulting Group (NorthStar) found that PG&Es efforts in promoting a culture of safety do not yet add up to a consistent, robust, and accountable corporate-wide safety program. The report also mentioned that reconsolidating the company under a single president might help PG&E develop a more consistent and inclusive approach to safety.62

Notwithstanding the numerous management-level committees working to engrain safety, an update from NorthStar on 29 March 2019 revealed differences in the safety culture and practices within the various lines of business.63 The report highlighted how PG&E continued to take a reactive approach to potential issues and lacked a single, comprehensive safety strategy addressing all aspects of safety. PG&E was also said to prioritise its productivity and performance targets, with minimal progress made on additional supervisory time in the field.64

This lack of a safety culture could be traced back to as early as 2009, when regulators found that PG&E employees repeatedly filed false records about the companys response to excavators, who were trying to avoid striking underground pipelines (the 811 programme). Due to pressure from their bosses to meet a goal of zero late tickets,65 PG&E was alleged to have falsified more than 50,000 811 tickets in order to conceal the companys inability to meet the 48-hour deadline.66 PG&E enacted the zero late ticket policy to avoid legal and civil penalties should an excavator strike one of their lines.67

Moreover, instead of ensuring its locate-and-mark department - which responds to 811 situations - was adequately staffed, PG&E exploited a loophole in the law. US Code Section 4216.2(b) authorises a utility company and excavator to mutually agree to a different notice and start date. PG&E instructed workers to contact the excavator to negotiate a start time after the 48-hour period. By doing so, PG&E was prima facie compliant with Section 4216.2(b)s mutually agreeable start date requirement. However, the CPUCs safety and enforcement division report claimed that many excavators were never notified, and PG&E basically falsified its records.68

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A whistle-blower, who was dismissed by PG&E after suggesting that the 811 programme was unsafe, testified that there was a culture of intimidation in the company and that everyone knew it.69 Another PG&E lineman, Todd Hearn, who raised wildfire safety concerns was also dismissed after he blew the whistle on the vulnerability of power lines to dangerous fires.70

PG&E = Paying gratuitously (to) executives?

Were not at the point where they should be rewarded for not killing people. Theres no point to rewarding a company for fulfilling its basic function.

Mark Toney, executive director of The Utility Reform Network (A Non-Profit Consumer Protection Rights Organisation)71

PG&E had faced heavy criticism for paying top executives hefty bonuses for meeting safety

benchmarks, even as the embattled utility company was facing numerous lawsuits for safety

oversight that led to deadly explosions and fires. SEC filings revealed that from 2012 to 2017,

the top five executives of PG&E were paid a total of US$17 million in bonuses, including special

payments for exceeding public and employee safety benchmarks.72 The filings added that

the safety component was structured to provide a strong focus on the safety of employees,

customers and communities, while the board claimed to have historically reviewed the

companys safety performance every year, overseeing goals and policies with respect to

promoting a strong safety culture.73 A PG&E spokesman added that PG&Es compensation

programmes factor in the companys safety performance across its operations including

power generation, gas and electric, as well as workforce safety throughout the company.74

Figure 2 shows the short-term incentive plan results disclosed in the companys 2018 joint

proxy statement.

A review of PG&Es FY2017 short-term incentive plan (STIP) - the annual cash incentive plan for executives - revealed that safety performance had exceeded targets.76 The safety component of the STIP includes targets for Nuclear Operations Safety, Electric Operations Safety, Gas Operations Safety, and Employee Safety. Part of its Electric Operations Safety measure is an Electric Overhead Conductor Index, which gauges inspections, upgrades, and vegetation management.77 The company had exceeded targets for this index, despite the wildfires which occurred during the year. However, while eligible for the incentives, the CEO and CFO did not accept the bonuses in the end.78

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Additionally, PG&E also had the practice of excluding certain costs that do not reflect the normal course of operations from its earnings calculations, including the US$1 billion fine for the San Bruno explosion, and US$578 million in fines paid in 2015.79 As such, since the executives bonuses were partially derived from the companys financial performance, on top of not docking the executives pay to cover the cost of the fines, exempting the costs meant higher earnings calculations which translated to higher bonuses.80

Safety first...for pay

Aside from bonuses paid to top executives, PG&E also came under fire for its controversial employee bonus packages. In April 2019, two months after scrapping US$130 million in employee bonuses in the wake of the 2018 California fires, PG&E gained approval from a federal judge for a US$235 million employee bonus programme.81 PG&E said the payments, meant for 10,000 rank-and-file employees, and would not be allocated to senior management. The incentive formula, originally based 50% on safety and 40% on financial performance, was modified after criticism, to 65% based on safety and 25% on financial performance, with the remaining 10% based on customer service performance.82

The bonus programme included a performance metric based on PG&E clearing all trees and branches within four feet of its power lines in high-risk areas. However, the metric fell short of the original commitment made under PG&Es enhanced vegetation management programme, under which the utility company pledged to remove all trees and branches within 12 feet of power lines, as per the recommendation of CPUC.83 PG&E cited Californias competitive labour market as a reason to offer appropriate employee compensation and incentives.84

In March 2020, days after informing a federal judge it would be financially unsustainable to keep a workforce of 5,500 tree trimmers for the year, PG&E filed a motion with the bankruptcy court seeking approval for over US$450 million in bonuses for employees and senior executives. It insisted that the rewards were not to be viewed as bonuses, but short-term and long-term incentive programs.85

PG&E argued that it was rapidly evolving and intends to emerge from Chapter 11 as a different organisation with an enhanced focus on safety, customer welfare and operational excellence.86 It justified its actions by stating that incentive-based compensation plans are designed to incentivise eligible PG&E employees to perform in line with key goals of the enterprise, and to enable those employees to realise a level of compensation competitive in the debtors industry.87

Paying for failure

On 13 January 2019, Williams resigned from PG&E Corp, less than two years after she took on the role of CEO. She received a severance package of US$2.5 million even as PG&E geared up to file for Chapter 11 bankruptcy protection. Her payout came at a time where PG&E customers were facing the prospect of higher monthly bills and uncertainty relating to the companys bankruptcy filing.88

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In 2018, Williams earned a base salary of US$1.085 million, in addition to up to US$8 million in long-term incentives over three years.89 The severance package was in line with SEC filings, which states that Williams was eligible to receive a payout of US$7.4 million if she resigned, or US$3.1 million if she was terminated with cause.90 The end of Williams tenure was labelled as a departure by PG&E.91

PG&E has a history of executives who left with generous payouts. Nick Stavropoulos, former president and COO, who retired in September 2018, was eligible for a US$6.9 million cash payout for his retirement.92 This came even after Stavropoulos was the executive-in-charge of gas operations from 2012 to 2017, during which PG&E allegedly falsified records in respect of its gas pipeline system.93 Anthony Earley, Williams predecessor, received a US$10.4 million severance when he retired as CEO in early 2017. Prior to Earley, former CEO Peter Darbee received a US$34.8 million severance package even though he helmed the company at the time of the deadly San Bruno pipeline explosion.94

Williams successor, William D. Bill Johnson, has a three-year contract with an annual base salary of US$2.5 million more than twice of his predecessors.95 Johnson also received a one-time transition payment of US$3 million on his first day on the job, as well as an annual equity award of about US$3.5 million. He would also receive a payout if his employment was terminated.96

PG&E said they believed pay should be strongly tied to performance particularly safety performance and [its] compensation programmes are designed to reflect this.97 It stated that over half of Johnsons incentive compensation was directly tied to safety performance and metrics, which PG&E believed significantly exceeded industry standards. It added that the company sets executive compensation to be comparable with similar companies in the industry.98

Shareholders vs stakeholders

PG&E, being Californias largest utility, has to engage with a great diversity of stakeholders and ensure that their interests are protected. However, the calamities and blackouts brought to the fore the different interests of shareholders, including the public who relies on PG&E for electricity, as well as the regulators which seek to hold PG&E accountable for their actions.

Within a short span of six years, PG&E power lines had caused more than 1,500 California wildfires, including the Camp Fire the deadliest and most destructive fire in Californias history.99 The severity of these wildfires may vary, but one thing was clear PG&E failed in its duty to have in place an effective inspection and maintenance programme such that the transmission lines were always in the best condition.

The root cause of the failure to ensure proper maintenance and equipment upgrade is arguably PG&Es placing its bottom-line as its main priority.100 PG&Es employees have consistently spoken out against how management has consistently disregarded their concerns about the use of faulty analysis and outdated equipment.101 The CPUC also supported the publics opinion that PG&E prioritised profits over safety. In 2012, CPUCs investigations of the 2010 San Bruno pipeline explosion revealed that PG&E was cutting back on operations and maintenance, instead of ensuring safety and providing assurance to the public.

In May 2017, PG&E approved a second dividend increase within just over a year to win investors support, instead of channelling these funds to tackle the root cause of the wildfires. Such a move came off the back of over US$4.5 billion in dividends in the years prior to the wildfires of 2017 and 2018. This was before PG&E finally suspended its quarterly cash dividends in October 2017, citing uncertainties about liabilities from the wildfires.104

In response to the recent fires, PG&E decided to implement public safety power shutoffs.105 While this move aimed to help reduce the probability of future wildfires, it severely punished its 16 million customers living across California.106 Not surprisingly, PG&Es plan for pre-emptive outages was heavily criticised by various stakeholders, including businesses, regulators and emergency services providers, who viewed such shutoffs as a huge threat and unsustainable. The shutdowns shifted the responsibility away from PG&E onto the public, as the company was more concerned about the hefty fines that it would potentially incur should another wildfire be caused by the company, rather than the interests of its stakeholders.

PG&Es regulators

PG&E has a long record of run-ins with California state regulators, with more than US$2.6 billion paid in penalties and lawsuit settlements for the past 23 years.108 CPUC had tried rectifying PG&Es behaviour through conventional tools of regulations, including imposing higher fines and removing responsible parties. However, the continued poor track record of PG&E in preventing wildfires points towards the fact that these traditional punishments were ineffective.109

According to PG&Es federal court filing in 2019, a total of US$5.3 million was contributed to political candidates and parties in 2017 and 2018.110 This may have helped create a close relationship between PG&E and the politicians capable of influencing regulations.111 U.S. District Judge, William Alsup, who oversaw PG&Es criminal probation, also questioned PG&Es decision to prioritise the campaign contributions over the replacement or repair of the aging transmission lines and trimming of hazardous trees located near power lines.112 Alsup later expressed strong dissatisfaction with PG&Es response and efforts in meeting the tree- trimming requirements, stating that PG&E is not even close to perfect.113

Furthermore, CPUC was criticised for being excessively cosy with PG&E and the other companies it is supposed to regulate.114 PG&Es friendly relationship with CPUC and U.S. politicians allegedly allowed it to influence the state laws designed to regulate it. The Camp Fire exposed CPUCs inability to hold PG&E accountable for the safety of the Californian citizens.115

CPUCs failure in ensuring PG&Es compliance with safety regulations has also been heavily attributed to ineffective political mandates from the states leadership, the lack of resources for maintaining safety in the utilities it regulated, and its tendency to allow utilities to conduct their own safety oversight.116 Furthermore, most of the utility commissioners appointed by Californias governors placed greater focus on reducing the states carbon footprint, rather than prioritising the operational safety of these utilities. As such, they were slow to react to the wildfire risk brought about by Californias arid weather.117

PG&E took advantage of the inefficiencies with the regulators and further hindered their ability to carry out their duties. For over 25 years, it repeatedly misled regulatory authorities, withheld required information, did not follow through on promised improvements, engaged in improper back-channel communications with regulators or obstructed an investigation.118 Mark Ferron, a former commissioner of CPUC, acknowledged that while CPUC was lacking in the uncovering of PG&Es wrongdoings, PG&E was also guilty of testing the limits of the commissions safety regulations.119

Catas-trophies

PG&E received many ESG-related accolades prior to the 2018 Camp Fire.120 These include being named on the Dow Jones Sustainability North America Index (DJSNAI), being awarded the Emergency Recovery Award by Edison Electric Institute (EEI), and being ranked within the top 10% of its peers by Sustainalytics.121

Before the devastating Camp Fire, PG&E was named to the DJSNAI for the eighth time in 2017.122 It was amongst one of the eight gas and electric companies to make the index during its 2017 annual review. The DJSNAI is based on the total sustainability scores of North American companies resulting from the annual SAM Corporate Sustainability Assessment (CSA). Only the top 40 companies based on their sustainability scores are included.123 The sustainability scores of companies within the utilities industry are evaluated based on a variety of ESG factors, including corporate governance, electricity generation and operational efficiency, amongst others.124 PG&E was ranked ahead of its competitors in both the electric and gas industries.125

According to its 2018 corporate responsibility and sustainability report, PG&E invested US$5.6 billion in enhancing its infrastructure to improve safety and reliability, as well as allowed customers to enjoy savings of about US$300 million on their energy bills through its energy efficiency programs.126 Furthermore, in 2018, PG&E achieved its climate goal of greenhouse gas reduction, with more than 80% of its electricity provided to customers being derived from greenhouse gas-free resources.127 These initiatives allowed PG&E to achieve high scores in the CSA, especially in the environment component, which contributed heavily to its place in the DJSNAI.

Similarly, the EEI Emergency Recovery Award in 2017 highlighted PG&Es readiness in restoring services to the public post-natural disasters, and its preparedness in the face of crisis.128 The utility was able to lead its crew to successfully restore power to more than two million Californian customers in less than 24 hours, amidst the harsh storms and weather conditions brought about by one of the worst winters in California in early 2017.129 That was the fifth recovery or assistance award PG&E had received from EEI in the past 10 years.130 In January 2018, PG&E also received the EEI Emergency Assistance Award for its Hurricane Irma response, when the company aided Florida in restoring its power in the aftermath of the disaster in September 2017.131

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Sustainalytics, a leading independent ESG-rating firm, also rated PG&E as among the top 10% of its peers in the environmental category in November 2018, shortly before the Camp Fire disaster. PG&E was also named by Sustainalytics as one of the top 10 companies in the world best positioned to leverage on the emerging ESG trends.132

An extinguished sustainability leader

Following the 2018 Camp Fire, PG&E was immediately left out of most of the ESG accolades, especially those with an emphasis on environmental and social factors. Sustainalytics also quickly issued a statement to revise its rating on PG&E, claiming that its previous assessment was performed under an old methodology and hence, no longer valid.133 Soon after Sustainalytics adopted its new risk rating framework, PG&E was ranked last out of 2,952 companies in respect of product governance a category that encompasses quality and safety events.134

Powering forward

Regardless of the root causes, causing 1,500 fires over six years is a sign that something within PG&E had to change.135 The leadership was a clear place to start. The devastating 2018 Camp Fire and the resulting fallout in terms of legal liabilities and public scrutiny finally provided PG&E the impetus it needed to make these changes, starting with sweeping changes to its boards.

In PG&Es 2019 joint proxy statement for both PG&E Corp and PG&E, it was disclosed that eight of the original 10 directors stepped down during a reshuffle of the board in April 2019, including most of the long-standing independent directors. All directors who held positions during the San Bruno gas pipeline explosion in 2010 Kimmel, Meserve, Miller, Parra, and Barbara Mambo left.136 The departure of the directors was seen by some as a sign that PG&E was finally prioritising safety and beginning to enforce accountability for safety violations, starting with the leadership.137

Replacing the departed directors were 11 newly elected independent directors.138 Shareholders of PG&E Corp subsequently voted to amend the Corporation Charter at the 2019 Annual General Meeting to increase the maximum number of directors from 13 to 15. This was to add more diverse perspectives and to enhance the collective effectiveness of the PG&E Corporation Board.139 Subsequently, Johnson who replaced Williams as the president and CEO of PG&E Corp in May 2019 was appointed as executive director of the PG&E Corp board.

Following the board refreshment, the boards of PG&E Corp and PG&E are identical. In terms of independence, 13 of the 14 directors of PG&E Corp are independent, with Johnson being the only executive director. Furthermore, 13 of the directors have held their position on the board for less than five years, with the remaining director, Fred J. Fowler, holding his position for seven years. The board remains diverse with regards to gender, race and age.140

Nora Brownell replaced Richard Kelly as the non-executive Chairman of the board of PG&E Corp. Prior to her appointment, she was the Commissioner of the Federal Energy Regulatory Commission, a member of the Pennsylvania Public Utility Commission and a President of

the National Association of Regulatory Utility Commissioners, bringing with her a wealth of experience with regards to the energy sector, its challenges and its regulatory environment.141

PG&E Corp stated that the appointment of Brownell and Jeffrey Bleich, replacing Miller as the non-executive Chairman of the board of PG&E, underscores their commitment to engage with their stakeholders to address the states evolving energy challenges and is part of additional actions to bring about real and dynamic change that reinforces their commitment to safety and continuous improvement.142

Following her appointment, Brownell publicly stated that PG&Es primary focus is taking action to create an operational environment where safety and integrity always comes first.143 PG&Es 2017 corporate responsibility and sustainability report stated its culture as to put safety first, to be accountable, and to act with integrity, transparency and humility, amongst others.144 Yet, less than a year later in November 2018, PG&E caused the deadliest and most destructive wildfire in California history. It remains to be seen if Brownell can align PG&Es actions with its words, and whether the sweeping changes at the highest level of leadership within PG&E can inspire a fundamental change in culture and processes to reflect a sufficient focus on safety.

Amongst the newly appointed independent directors is Frederick W. Buckman, nominated by activist investor BlueMountain Capital Management LLC (BlueMountain) to serve in the Audit and Safety and Nuclear Oversight committees.145 Brownell stated that she believed Buckman shares PG&Es core belief of safety and operational excellence being vital to its success and will help to make sure that this will continue to be the boards utmost priority.146 However, Buckman soon stepped down in November 2019, with PG&E highlighting that his resignation does not involve any disagreement on any matter relating to the corporations or the utilitys operations, policies or practices.147

As part of the same agreement with BlueMountain, PG&E Corp also hired the former Chairman of the National Transportation Safety Board, Christopher Hart, to serve as its special independent safety advisor, who reports directly to CEO Johnson. This was in line with PG&Es claims of prioritising safety, and its hope that this appointment can have the effect of strengthening the companys safety culture.148

Rising from the ashes?

Moving forward, PG&E was tasked with devising a restructuring plan that allows the company to pay off its liabilities arising from the wildfires and emerge from Chapter 11 bankruptcy. To do so, it needed to satisfy creditors, wildfire victims and state officials, before the deadline of 30 June 2020, if PG&E wished to qualify for the US$20 billion state wildfire fund, which would cover future fire losses.149 The restructuring plan was to outline how PG&E intended to raise sufficient cash to pay off US$25.5 billion in claims as part of the settlements reached with wildfire victims, insurers and government agencies.150

However, PG&E faced a huge roadblock in the process the proposed plans by PG&E had been rejected multiple times since December 2019 by the California governor, Gavin Newsom. He felt that the initial restructuring plan, which proposed to finance the wildfire damages through the issuance of debt and equity, would leave PG&E too leveraged to make safety

investments in the electric grid and failed to ensure operational change within its leadership.151 This would make existing targets to spend at least US$37 billion on equipment upgrades and other improvements between 2020 and 2024 difficult to realise.152 PG&E would require Newsoms approval to be covered under the state wildfire fund, which is critical to their successful Chapter 11 exit.153

Newsom is also demanding that the entire board of directors of PG&E be replaced in order to overhaul a corporate culture that has repeated lapses in safety and played a role in a series of catastrophic wildfires.154 The governor threatened to launch a state takeover of PG&E if his demands were not fulfilled. However, he faced opposition from both the public due to the exposure of the state with a takeover as well as labour unions, due to the possible loss of employee benefits.155 Some questioned the states ability to run a more effective and efficient electricity system when it has struggled with its water services and transit system.156

In March 2020, PG&E managed to strike a deal with Newsom and the courts subsequently approved PG&Es US$23 billion bankruptcy financing package. While the governors approval of PG&Es restructuring plan represented a major step towards emerging from Chapter 11 bankruptcy, it came with several concessions on PG&Es part, including: PG&E agreeing to put itself up for sale if it is unable to exit Chapter 11 by 30 June 2020

Continuing the freeze on dividend payments to shareholders for another three years, saving about US$4 billion

The reduction of debt issuance from US$7 billion to US$4.75 billion and relying more on equity financing

Safety compliance to be monitored by a state-selected operational observer

Half of the board of directors to be filled with California residents

However, it was presented with yet another challenge regarding the claims by the wildfire victims. While the claims to the Californian government and insurance companies are to be paid in cash, the restructuring plan proposed to compensate half of the victims US$13.5 billion claims through PG&E shares. Unfortunately, the stock market has plummeted in recent months due to the COVID-19 pandemic. This has left the wildfire victims unhappy, with some saying that they were unlikely to vote in favour of PG&Es restructuring plan.159

PG&E needed to obtain the approval of the wildfire victims who, alongside other creditors, would have until 15 May 2020 to vote on its restructuring plan to exit Chapter 11 bankruptcy. The lawyers, who initially negotiated the settlement, had advised the wildfire victims to hold off on voting for the plan until 1 May 2020 as they attempt to revise the settlement terms with the utility.160

The settlement faced another hurdle after a lawyer who helped broker the settlement was accused of conflict of interest due to his relationship with some of PG&E investors.161 On 1 July 2020, PG&E announced its exit from Chapter 11 bankruptcy, and that it has paid US$5.4 billion in initial funds and more than 22% of its stock into a trust for victims of wildfires caused by its outdated equipment. This is an important milestone, but our work is far from over, said Bill Smith, its interim CEO.162