What happened

Shares of PG&E (NYSE:PCG) have had a strong run of late on growing investor optimism that the stock would retain some of its value as part of the bankrupt utility company's restructuring plan. That optimism was dealt a blow over the weekend, however, after California Governor Gavin Newsom voiced his objection to a company plan to compensate wildfire victims that is key to its exit. Shares of PG&E traded down more than 12% on Monday morning as a result.

So what

PG&E entered bankruptcy nearly a year ago to manage an estimated $30 billion in liabilities stemming from 2017 and 2018 wildfires. From the start, the company has hoped to reorganize in such a way that its equity retains some value. That plan was thrown into question after the court, in October, allowed creditors to file competing plans, but a deal reached earlier this month on compensation for victims gave PG&E a powerful backer of its plan against rivals and raised investor hopes for recovery.

A utility transmission line.

Image source: Getty Images.

In a letter dated Dec. 13, Gov. Newsom served notice that the drama surrounding PG&E is far from over, saying the company's proposal "falls woefully short" of the requirements the state has set for PG&E to receive state assistance. Newsom said PG&E needs to completely overhaul its board of directors, with candidates subject to state approval, and put provisions in place that would allow PG&E's operating license to be transferred to the state "or a third-party when circumstances warrant."

"For too long, PG&E has been mismanaged, failed to make adequate investments in fire safety and prevention, and neglected critical infrastructure," Newsom wrote. "PG&E has simply violated the public trust."

Now what

Newsom's letter provides PG&E no easy option, which is why the stock is under pressure today. The company must attempt to negotiate a compromise that satisfies enough of the governor's concerns to win state backing while also not surrendering too much and making a deal unpalatable to creditors and equity holders.

The state needs electricity just as badly as PG&E needs the state's backing, so odds are high a compromise will eventually be reached and PG&E will be allowed to complete its reorganization. What is far less clear is how the company's equity will be impacted by whatever compromise is reached and what a deal will mean for current shareholders.

Since the company entered bankruptcy, PG&E shares have been best bought and sold by speculators and avoided by long-term investors. These latest developments, coming just as it seemed some of the risk to owning PG&E shares was fading, is a fresh reminder of why it is best to stay away.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.