As crisis-riddled California utility Pacific Gas and Electric Co. and its holding company, PG&E Corp., enter the second year of their joint Chapter 11 bankruptcy reorganization sparked by a series of catastrophic wildfires linked to aging power lines and climate change, the chess pieces appear set for a dramatic endgame.

Pressure has been building for months while Pacific Gas and Electric, or PG&E, races toward a state-imposed June 30, 2020, deadline to emerge from bankruptcy protection as a recapitalized, reformed and rehabilitated provider of power and natural gas. Missing that deadline would mean losing out on a $21 billion state wildfire fund to cover future utility-ignited fires, a critical component to stabilizing the reorganized company and keeping it from reentering Chapter 11.

In Sacramento, Gov. Gavin Newsom, backed by several state lawmakers, is threatening a state takeover. More than 160 local politicians throughout PG&E's Northern and Central California service territory are calling for local communities to seize control. Meanwhile, the debtors' Wall Street shareholders and bondholders are embroiled in a dispute over the only two competing restructuring proposals now before the U.S. Bankruptcy Court for the Northern District of California in San Francisco, PG&E's home town.

Caught in the middle are tens of thousands of individual wildfire victims awaiting the release of $13.5 billion of a total $25.5 billion pot the companies have agreed to pay creditors. Attorneys for fire victims are also fighting the Federal Emergency Management Agency and Newsom's own Office of Emergency Services over the agencies' more than $6 billion in claims that could eat into fire survivors' hard-won settlement.

At some point, the final pieces will fall into place and PG&E will be reborn, even if the utility more closely resembles its former self than the "radically restructured" entity Newsom has demanded. Either way, PG&E's new start can only commence after bankruptcy Judge Dennis Montali approves the winning reorganization plan and the California Public Utilities Commission gives its own stamp of approval.

The governor, who appointed the PUC's new president in July, has vowed that stamp will not be a "rubber" one.

Prediction: competing plans unite

One bankruptcy scholar closely following PG&E's case has a prediction for how it will conclude.

"I would predict that, if you reach the point where you're going to have two plans in front of Judge Montali, there can be a global agreement where bondholders agree to support the shareholder plan if they are allowed to provide financing for the shareholder plan," Jared Ellias, a law professor at the University of California's Hastings College of the Law, said during a Jan. 8 presentation in San Francisco. "I suspect that's a highly likely outcome of what may happen."

"The bondholders are going to have to fight like hell, and they are," Ellias added on the sidelines of the event hosted by the Power Association of Northern California.

Indeed, utility bondholders upped their offer after Montali gave PG&E Corp. shareholders an edge Dec. 17 by approving major settlements with committees of wildfire victims and insurance companies, which commit them to supporting the company's restructuring plan.

Led by hedge funds Elliott Management Corp. and Pacific Investment Management Co. LLC, the group of bondholders responded with a $13.5 billion all-cash deal for wildfire victims. Shareholders, by contrast, have proposed the same dollar value, but split evenly between cash and common stock.

"Wildfire victims will be forced to take stock in the very company that caused their devastating losses," the bondholders group said in a Dec. 31 court filing asking Montali to reconsider his approval of the two settlements, or at least the "anti-competitive provisions" that obligate wildfire victims and insurance groups to back shareholders' plan of reorganization. Previously, wildfire victims supported the bondholders' proposal.

A hearing on the bondholders' request is set for Jan. 21.

Public takeover 'very late to the party'

If events unfold as Ellias believes they will, a shareholder-bondholder collaboration could also help cut the high debt levels that would accrue from the shareholders' plan, which Newsom and bondholders have criticized. Capital structure is one of the key metrics the PUC will consider in deciding whether to approve the restructuring plan, in addition to compliance with state safety rules, climate policies and other factors.

But as the battle over leverage continues in court, another one appears to be gathering momentum on the legislative front.

"I plan to introduce legislation to turn PG&E into a publicly-owned utility because now is the time to reform California's broken energy system," state Sen. Scott Wiener of San Francisco said in a Jan. 8 email. "PG&E needs to be accountable to California residents, not Wall Street. Turning PG&E into a public utility will mean safer, cleaner, and more reliable power for Californians."

In the state Assembly, Marc Levine of Marin County opened the 2020 session by introducing legislation Jan. 6 to create a public administrator for the "failed PG&E." Citing preventative power outages in October that left millions of Californians in the dark, some for days, Levine said in a news release that the administrator would be "embedded" with utility management and would have oversight authority over activities that impact public safety.

Ellias, however, believes that the window of opportunity for a sweeping public takeover has closed, whether sponsored by local or state officials.

"My take on all of these groups is that they are very late to the party," said the bankruptcy expert, who has testified before lawmakers on the PG&E case. "With that said, if the timeline starts to slip, perhaps one of these ideas is something that might become more likely."

But that also risks turning the proceeding into "a circus that spirals out of control," Ellias said, while subjecting PG&E to another wildfire season under bankruptcy protection. In a worst-case scenario, PG&E then could become liable for a major new wildfire ignited by its equipment without the shelter of the state's wildfire fund to help cover the cost, adding fresh victims to existing ones in a prolonged Chapter 11 proceeding.

PG&E may have narrowly avoided that scenario in October 2019 when the Kincade fire near Geyserville, Calif., tore through Sonoma County, although without the fatalities that marked 2015, 2017 and 2018 wildfires linked to the utility.

"We haven't seen a company in bankruptcy prior to this that was running such a risky operation while they were in bankruptcy that you worry there would be a giant tort claim that arose during the bankruptcy case itself," Ellias said. "This is extraordinary and it's not something the bankruptcy system was built to handle."