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Pacific Gas & Electric is seeking regulatory permission to shift $7.5 billion of its 2017 wildfire costs from shareholders to ratepayers.

Ratepayer advocate groups, both large and small, strenuously object on grounds it places an inordinate financial risk on utility customers while providing them little or no benefit. “It is morally reprehensible,” April Rose Maurath Sommer, The Wild Tree Foundation executive director, said.

By law, the 30-year bonds PG&E proposes must be rate-neutral, meaning they should not increase costs for consumers. They also are supposed to provide a path for the company to return to investment-grade status, which would lower borrowing costs. But advocates say the bond proposal fails both tests. In addition, it is impermissible to shift a debt that is part of its bankruptcy reorganization, they argue in filed testimony.

PG&E’s plan before the California Public Utilities Commission is the second recent utility request to recover wildfire costs and claims using bonds repaid by ratepayers under relatively new laws. It faces more opposition than a recent application by Southern California Edison.

SCE will issue $337 million in securitized bonds early next year to recover its first round of wildfire capital expenses following the Commission’s Nov. 5 approval. Intervenors ’ objections resulted in the inclusion of some ratepayer protections in that bond financing order.

Biggest bond securitization in the country

PG&E’s $7.5 billion bond securitization proposal is the largest one in U.S. history, surpassing the record of a $5 billion issuance in 2006. The largest utility bond securitization was for $4 billion in 1999.

Farm groups are among those concerned. “The unprecedented size and duration of the proposed securitization emphasizes the need to address the risk to ratepayers posed by a shortfall in PG&E forecasts and expectations,” the Agriculture Energy Consumers Association’s testimony states.

The ratepayer recovery bond, intended to replace $6 billion of PG&E’s short-term shareholder debt, is largely governed by SB 901 by Sen. Bill Dodd (D-Napa). Passed prior to its companion measure, AB 1054, the bond financing is supposed to lead to investment grade ratings. But this latest approval request for a bond issuance also must satisfy AB 1054 by Assembly Utilities & Energy Chair Chris Holden. It requires that the ratepayer recovery bonds be rate-neutral on average. Only then may PG&E tap into the law’s $21 billion wildfire insurance fund, paid for by shareholders and ratepayers.

PG&E claims its ratepayer-backed bond proposal is rate-neutral. In exchange, customers would receive $1.8 billion in distributions of cash and tax savings collected over three decades by the company. These funds would be put into a customer reimbursement account.

PG&E’s adds that not only is its ratepayer recovery bond neutral as far as its cost to customers but it could provide benefits. That’s because the proposed reimbursement account could generate a surplus, and customers would receive a quarter of any excess funds. In addition, savings from refinancing short-term debt using ratepayer bonds will lower borrowing costs down the line because it would return the company to investment grade status by 2023 and 2024. That is estimated to produce $423 million in savings over the life of the bond, according to the utility.

The Coalition of California Utility Employees agreed that “ratepayers will benefit from a lower cost of debt if PG&E attains investment-grade status sooner.”

But most ratepayer advocates want the proposal rejected because the benefits of a bond issuance all accrue to shareholders, while the risks fall on PG&E customers.

A last resort

The City and County of San Francisco argues that the Commission said previously that it would allow “such extraordinary proposals…only in limited circumstances and as a last resort where needed to prevent harm to utility customers.” San Francisco’s Margaret Meal warns that utility customers may have to pay about $400 million per year, for 30 years to cover the bond.

Ratepayer bonds are not the only financing option available to PG&E, San Francisco adds. Four public power agencies have offered $3.2 billion to buy some of its assets. Others point out the utility could issue stock to replace the shareholder debt, avoiding ratepayer risks.

A key concern is the possible inadequacy of the proposed customer reimbursement fund.

PG&E estimates an 84% chance of a surplus in the account.

Running the utility’s model without a thumb on the scale, The Utility Reform Network finds about a 50-50 likelihood of extra cash, Matt Freedman, senior attorney said. TURN also shows the potential for a shortfall of $4.1 billion.

Source: FERC Form 1 via S&P Global; PG&E; TURN analysis

Among ratepayer advocate groups, Cal Advocates is the outlier. It argues the CPUC should approve a smaller issuance of $6 billion in ratepayer-funded 30-year bonds. It calls this proposal “an equitable balance between the objective to improve PG&E’s credit rating through securitization, while mitigating adverse ratepayer impacts.”

Then there is this disparity: The account to reimburse ratepayers could fall far short, but on the other hand, if it generates a surplus customers reap only 25% of that gain. Shareholders, who bore none of the risk, would reap the other 75%. All upside, no downside.

“Ratepayers should not be forced to accept such an unsound financial deal,” TURN’s Jennifer Dowdell states.

Path to investment grade ratings?

Intervenors also throw cold water on PG&E’s claim that the $7.5 billion bond would return it to investment grade status as required by SB 901. They point out that the rating agencies have raised serious concerns about additional wildfire liability for the utility and even mention a possible third bankruptcy. PG&E revealed it may have sparked last month’s Zogg Fire in Shasta County that killed four people.

Another concern is the recent large turnovers of PG&E executives and managers. “Who is making decisions?” John Geesman, representing Alliance for Nuclear Responsibility, asked.

If PG&E is allowed to swap out its shareholder debt for long-term ratepayer-backed bonds, the CPUC and a finance team must be involved in the pre-issuance process to ensure utility customers receive the least costly deal possible, Wild Tree insists. A financing team should determine the structure, marketing, and pricing of the bond, and ensure it meets the legal mandates. The CPUC required one be used in 2004 to securitize costs from PG&E’s first bankruptcy. It also requires that the SCE upcoming bond issuance be guided such a team.