PG&E's (PCG  ) stock opened more than 20% lower on Monday following California Governor Gavin Newsom's rejection of its bankruptcy restructuring plan. The company must immediately make major revisions to its bankruptcy plan. Otherwise, an alternative plan from bondholders may be accepted or the state could trigger a complete takeover of the utility.

Some of the conditions that Newsom insists upon including a new board of directors, an option for a state takeover if improvements are not made, and compliance with providing financial assistance to future victims of forest fires. In a letter to PG&E's CEO Bill Johnson, he expressed concern that the utility was not taking serious steps to "reform old practices and transform into a more responsible and accountable entity".

Newsom's Thinking

Newsom also asked Johnson for a better financial plan, well-defined safety metrics, and a more streamlined process for a state takeover if necessary. PG&E battled back against Newsom's allegations, however, its bankruptcy plan must be approved by the governor.

Of course, politics are involved as this is the most high-profile issue that Newsom has faced since becoming governor. He must show significant reform in PG&E's safety practices and prevent a recurrence of the forest fires and blackouts during dry periods.

If Newsom approves PG&E's plan, and it makes the same mistake, it would surely end Newsom's promising political career. A majority of Californians agree with Newsom that the utility needs to be reformed with a third wanting to see it be fully run as a state-owned company rather than owned by investors.

Rival Plan Gaining Steam

Newsom's stronger than expected opposition to management's plan increases hopes that a rival plan from Elliot Management, Pacific Investment Management, and other bondholders calls for the company to be recapitalized with $20 billion in exchange for nearly all of the company's equity. This plan calls for the equity to be wiped out, while bondholders are paid in full.

This is in contrast to management's plan which applies haircuts to bondholders and doesn't totally wipe out equity. Management's plan is also more risky, as it calls for PG&E to issue $10 billion in high-yield debt.

Stock Price Recovery

The immediate reaction to Newsom's aggressive pushback was a big drop in the stock and rally in bond prices as odds of the alternative plan being approved seemingly moved higher. However, these big moves have retraced by 50%, indicating that management's plan remains the favorite to be approved albeit with changes to satisfy Newsom.