JUICE: Doubts about PG&E Promise to Exit Bankruptcy Sans Rate Hike

26 May 2020

Pacific Gas & Electric’s $58 billion borrowing plan to exit bankruptcy is required to be rate neutral. Ratepayers are not supposed to pay an extra dime for the Chapter 11 proceedings under the law creating a $21 billion wildfire fund, AB 1054.

Protecting ratepayers from paying for this second bankruptcy, which roughly doubles PG&E’s debt, will not be easy. It will require the vigilant oversight of the California Public Utilities Commission over the next several years. In particular, the CPUC must protect ratepayers from getting saddled with all or part of the company’s upcoming $7.5 billion 30-year bond, which will be backed by rates. This securitized transaction will replace the short-term debt PG&E is to use to pay out its wildfire claims from 2015-2018.

Rate neutrality under AB 1054 specifically means utility ratepayers must not see rate increases “at any point in time to pay for wildfire liabilities or the fees PG&E has paid to lawyers and financial firms in its bankruptcy case,” said Tom Long, The Utility Reform Network legal director.  

Ratepayers are on the hook elsewhere, however. They are paying for half of PG&E’s contribution to the AB 1054-created $21 billion wildfire liability fund. The utility plans to dip into this money as soon as the reorganization plan gets signed, expected by next month. 

That ratepayer contribution under AB 1054 will show up as monthly charges in PG&E utility bills for another 15 years. The charges, which breaks down to an average $2.50 per month, originally arose from the state’s costs of the 2000-01 state energy crisis. It was supposed to end next year.

In exchange for extending this monthly fee—and giving PG&E the green light to tap into the $21 billion wildfire fund—the company agreed to make its reorganization plan rate neutral. That is, ratepayers are not supposed to pay anything further in bankruptcy charges beyond the extended monthly charge.

Ratepayers also will be paying billions of dollars for PG&E’s wildfire mitigation plan, estimated at $7.5 billion over the next three years.

One of the thorniest issues in the financing plan is the $7.5 billion securitization, which allows off the balance sheet financing. Off balance sheet financing allows a company to exclude a big liability(s) on its balance sheet, making it look more attractive to investors. This practice was made infamous by Enron.

“Securitization is a financial opiate,” John Geesman, attorney for Alliance for Nuclear Responsibility, warned.

PG&E’s first bankruptcy also resulted in securitized bonds but the upcoming one is far more problematic. The company says it “will not seek to recover in rates any portion of the amount paid” for fire claims and that the bond will be repaid from money saved from refinancing part of the utility’s debt at a lower rate, and from tax benefits. PG&E estimates the former as saving $1.4 billion, a figure which is being challenged. How far it will go in covering the three decades-long $7.5 billion bond is in question.

Also, this securitized bond is with a company saddled with far more debt than previously, and one that could spark more catastrophic wildfires.

If a heavily-leveraged PG&E ends up in bankruptcy court a third time because of more wildfire liability, “ratepayers could be left still paying the debt,” Michael Wara, Director of the Climate and Energy Policy Program at the Stanford Woods Institute for the Environment, said. There are no assurances PG&E would keep its promise to ensure the securitization is rate neutral. That includes because the $21 billion wildfire fund may not be enough to protect the company from the costs of a worst case scenario, he pointed out.

Most of the action on its planned $7.5 billion bond will be at the CPUC’s securitization proceeding. All interested eyes should focus on that hearing to ensure ratepayers are protected over the long term as promised by AB 1054.

Elizabeth McCarthy

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