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The Big Questions Raised by PG&E’s Coming Bankruptcy

January 27, 2019


How will costs be spread? Are legacy solar and wind PPAs at risk? And how can California policymakers and its largest utility reorganize to cope with a future severely impacted by climate change?

Pacific Gas & Electric, overwhelmed by an estimated $30 billion in potential liability damages from California’s deadliest wildfires of 2017 and 2018, announced plans Monday to file for bankruptcy by month’s end.

The move sets the stage for what could be a years-long struggle to restructure the state’s largest utility to improve its safety, keep up with California’s clean-energy and carbon-reduction goals, and prepare it for a future in which climate change makes wildfires an increasing threat. 

PG&E’s impending bankruptcy presents a massive set of challenges to state policymakers and other parties involved in its restructuring to come. Tasks include how to manage longstanding wind and solar contracts that may be very attractive targets for cost reduction, but whose renegotiation could undermine the state’s broader clean energy goals. There are also questions around how to manage PG&E’s ongoing clean energy projects — from electric-vehicle charging to distributed energy integration — and whether or not it should radically increase its efforts to inspect its power grid and de-energize power lines to prevent fires from starting. 

We’ve collected some of the key questions raised by PG&E’s bankruptcy notice, along with our best efforts to provide answers.

Can PG&E still avoid bankruptcy? 

PG&E filed a bankruptcy “notice” on Monday, as required by California law. So could the utility change course before officially filing for Chapter 11 on January 29?

The short answer is: no, unless California lawmakers step in with an extraordinary effort — and that’s looking increasingly unlikely. PG&E’s potential liabilities from the fires of 2017 and 2018 dwarf its roughly $1.5 billion in liability insurance coverage, and are nearly 10 times its current market capitalization of $3.5 billion, which is down 90 percent since last fall. 

Given these fundamentals, it’s hard to imagine a path avoiding bankruptcy that doesn’t involve some massive intervention by the California government, said Michael Wara, director of the Climate and Energy Policy Program at Stanford University’s Woods Institute for the Environment. 

 

Last year’s wildfire bill, SB 901, did provide PG&E some relief, by allowing it to pass the costs of wildfires in 2017 and earlier on to ratepayers through bonds. But the law didn’t extend that opportunity for fires after 2017, meaning that it wouldn’t apply to the Camp Fire, which killed 86 people and caused damages in the range of $10 billion to $16 billion, surpassing the 2017 Tubbs Fire as the state’s most destructive and costly. 

But according to Wara, “the state would have to do something a little bit more radical than that” to help PG&E avoid bankruptcy now. “They would have to take action to guarantee some of PG&E’s bonds, or any new debt PG&E issues, so that bondholders could lend PG&E money again,” he said. “The state might be willing to do that for a limited period of time, in order to buy them time. The question then becomes, what guarantees does the state get for that? This is an extremely valuable concession.” 

California leaders’ response to PG&E’s bankruptcy announcement has deflated observers’ hopes that they will step in to prevent it from happening. Rob Rains, energy analyst at Washington Analysis, noted that state Senate President pro Tempore Toni Atkins issued a statement Monday saying that the protection of ratepayers, fire victims and reliability would be some of the legislature’s top priorities in the “coming months,” suggesting no push for an immediate response. 

Newly elected Gov. Gavin Newsom used similar “throughout the months ahead” language in his Monday response to PG&E’s announcement laying out his administration’s plans. During a Monday afternoon press conference, Newsom said that “the consequences of distrust and mistrust” between PG&E and the public would make it difficult to balance the needs of fire victims, ratepayers and shareholders, called for changes at PG&E’s board of directors, and noted that options including breaking up the utility were still on the table. 

Other lawmakers were far more critical of PG&E. State Sen. Bill Dodd, the author of SB 901, said PG&E’s “hubris and mismanagement have led to this unfortunate point.” Republican Assemblyman James Gallagher, who represents the area ravaged by the Camp Fire, said in a statement he wants PG&E to be held responsible for what it owes fire victims, and believes the company should be broken up, the Sacramento Bee reported.

Indeed, PG&E’s bankruptcy notice seems to have put a halt on legislative action to help the company. In November, Assemblyman Chris Holden launched a legislative effort to amend the bill to extend SB 901’s bond coverage to 2018, a move that PG&E had sought to help it mitigate its exposure to the Camp Fire’s massive potential liabilities. But on Tuesday, Holden said he was withdrawing that bill, telling reporters that ” PG&E has made a decision that the legislative arena is not where they feel they’re going to get the kind of results that will go far enough.”

How will the financial pain of a PG&E bankruptcy be spread?

Who stands to be hurt most by PG&E’s financial crisis? The short answer to this question is, beyond the shareholders who are wiped out, mostly PG&E ratepayers — unless the state steps in to socialize the costs. PG&E’s 2001 bankruptcy ended in 2003 with a settlement that allowed the utility to pass on about $7 billion in costs on to its customers through increased rates. 

 

PG&E’s current liabilities from the 2017 and 2018 fires are much larger, and could increase customers’ bills by an average of 14 percent if they’re fully passed on to customers through securitization, Credit Suisse analysts Michael Weinstein, Khanh Nguyen and Maheep Mandloi wrote in a Monday note. “The bill inflation could be contained by spreading the liability to [the] wider California customer base (or perhaps the entire California tax base), but obviously this could face opposition from non-PG&E customers,” the analysts noted. 

Unless Holden’s bill to extend SB 901’s securitization rules to 2018 is taken back up in the legislature, PG&E won’t be able to pass on all of that $30 billion through bonds. “That is meant to relieve PG&E of some of the burden — so the bankruptcy court could only hope that those [legislative relief] deals stick around,” Weinstein said in a Tuesday interview. 

After all, these liabilities represent claims from fire victims, property owners, insurance companies and all the other parties seeking restitution from the fires in question. Absent some mechanism to fund them in full, such as the securitization process laid out in SB 901 or some other means, these claims will join the long list of PG&E creditors seeking whatever a bankruptcy court and parties to PG&E’s bankruptcy reorganization determine they can be paid. 

And as experience from previous utility bankruptcies indicate, no parties are likely to receive close to what they feel they’re owed at the end of the process. This calculus puts tremendous pressure on Newsom to deliver on his promise Monday of a “solution that ensures consumers have access to safe, affordable and reliable service, fire victims are treated fairly, and California can continue to make progress toward our climate goals.” 

How much could PG&E’s bankruptcy disrupt existing renewable energy contracts and future clean energy goals?

How much does PG&E’s coming bankruptcy cloud the utility’s clean energy future? The answer to that is: a lot. 

Newsom said Monday that PG&E should be held to “honor promises made to energy suppliers,” including the solar and wind farms selling the utility energy under long-term power-purchase agreements. But according to Credit Suisse’s Weinstein, many of these PPAs signed in the early 2010s are selling power at prices three to five times higher than today’s renewable energy projects, making them a huge target for bankruptcy lawyerslooking for money to fund all of the company’s other obligations.

PG&E’s weighted average solar PV PPA price is about $140 per megawatt-hour, compared to the $32.5 per megawatt-hour for PPAs being signed by the utility today, according to Credit Suisse. That’s because solar and wind power was much more expensive in the early days of California’s renewable portfolio standard mandates, and of course, “those contracts were signed fair and square.”

 

But they also represent a huge pot of money for parties to the bankruptcy, he said. PG&E has about  5.9 gigawatts of solar PV, as well as 1.3 gigawatts of solar thermal projects, built before 2012 that are on average even more expensive, at roughly $150 per megawatt-hour, Credit Suisse’s report noted. If PG&E were allowed to renegotiate those contracts down to today’s prices of about $35 per megawatt-hour, it would save the utility about $2.2 billion per year. 

“If they’re hunting for money, that’s one place they could get it,” Weinstein said. “Our understanding from bankruptcy experts is that those kinds of contracts that are above market, they get looked at.” 

This risk has already led to significant headwinds for legacy PG&E-serving projects such as Berkshire Hathaway Energy’s 550-megawatt Topaz solar farm, which saw its credit rating cut to junk status by S&P Global last week, and NextEra Energy’s250-megawatt Genesis Solar project, which was downgraded by Fitch last month. Others at risk include Con Ed, which counts PG&E as the offtaker for about 29 percent of its renewable energy portfolio at an average price of about $197 per megawatt-hour. The 14 could also be in a tough spot.

If renewable project developers are hit by renegotiated contracts for existing projects, they can be expected to increase the cost of building new renewable energy projects in California, Weinstein noted. Credit Suisse projects that credit rating downgrades could increase the cost of new PPAs by 10 to 20 percent, as project developers absorb the losses of renegotiated PPAs by raising prices on new projects. Of course, that 10 to 20 percent increase equates to $36 to $39 per megawatt-hour, still much cheaper than PG&E’s average price of $100 per megawatt-hour for its energy mix. 

Of course, California lawmakers could push back against these kinds of renegotiations, on the grounds that they will derail progress on the state’s ambitious renewable and zero-carbon energy goals. To do that, California officials would most likely ask the Federal Energy Regulatory Commission to assert that keeping the PPAs in place meets FERC’s “public interest” standard, “given the state’s deep commitment to low-carbon electricity choices and its robust clean technology economy,” Washington Analysis’ Rains noted. 

The problem with this approach is that other federal court decisions in recent years have given bankruptcy judges some significant leeway over federal or state energy regulators in determining whether these kinds of contract renegotiations take place, he said. In particular, a federal court in Ohio ruled last year that bankrupt utility FirstEnergy Solutions could breach several money-losing PPAs, overruling a counterargument from the power plant owners in question that FERC had the authority to force FirstEnergy to maintain them. 

This lower court decision is now under appeal at the 6th Circuit U.S. Court of Appeals, and “will likely be closely watched for additional clues as PG&E moves forward with its own bankruptcy,” Rains said. In the meantime, FirstEnergy Solutions is also seeking to renegotiate a PPA signed in 2011 for 20 megawatts of solar PV at $230 per megawatt-hour, and replace it with a current-market-competitive solar PPA of $37.5 per megawatt-hour, the Credit Suisse report states. That’s a preview of the kind of argument that could be made by PG&E and supporters of renegotiating its legacy PPAs to fund other creditors. 

How could PG&E’s bankruptcy affect other programs, from energy efficiency and smart grid to energy storage and microgrids? 

 

California has asked its investor-owned utilities, including PG&E, to take on a lot of expensive projects to help it meet its clean energy and carbon reduction goals. These programs aren’t as obvious a target for cost reduction in bankruptcy as are higher-than-market PPAs, but they could still serve as a source of funds if they’re cut or curtailed. 

But there are also good reasons to keep those programs in place, as well as precedent from PG&E’s 2001 bankruptcy to bolster the case, according to Ralph Cavanagh, co-director of the Natural Resources Defense Council’s Climate and Clean Energy program. In 2001, NRDC joined PG&E in a successful motion to exempt its “Public Purpose Program” funds — which were spent on energy efficiency, low-income assistance, renewable energy and R&D — from bankruptcy creditors. 

But PG&E’s financial commitments to state-mandated energy programs are much bigger today than they were in 2001, Cavanagh noted. PG&E is now the state’s largest investor in energy efficiency and electric-vehicle infrastructure, with annual commitments well in excess of $1 billion, he wrote in a Monday blog post. “Other threatened initiatives involve grid upgrades, programs to support small-scale ‘distributed’ (local) resources, and technology innovation.” 

“Right now we are alerting everyone with a stake in California’s clean energy transition that they need to prepare to participate in the bankruptcy proceedings,” Cavanagh said in an email. “Much is at risk, but no outcomes are preordained.” 

How can PG&E stop causing deadly wildfires?

PG&E’s looming bankruptcy stems from wildfires sparked within the past few years. So what about future ones? How can California’s largest utility prevent and respond to fires going forward?

This is the question that lays bare how different PG&E’s current bankruptcy is from its 2001 bankruptcy, or in fact, most any other utility bankruptcy in recent memory. According to Credit Suisse’s Michael Weinstein: “The 2001 bankruptcy was solvable through policy changes,” (i.e., scrapping California’s ill-conceived energy deregulation regime and reaching a negotiated settlement between the state and various parties to return the utility to solvent ongoing operations). 

But wildfires caused by utilities that are held liable for damages aren’t a problem that can be changed by economic or policy changes, or by short-term financial fixes, he said. “You have a number of $30 billion for 2017, 2018. But even if you get the bankruptcy resolved, you still have the possibility of more fires in 2019, and 2020, and 2021, and 2022. California has a wildfire problem — and it has not solved it yet. And there’s a real risk of owning any asset that can be blamed for wildfires.” 

Governor Newsom has already proposed spending an additional $105 million on preventing, fighting and responding to wildfires in the state. And there are technologies and processes that can help prevent utility-caused wildfires, Stanford’s Wara noted. One that he’s been pushing as a major new policy is a far more aggressive use of de-energizing power lines at times of high fire risk — typically days of high wind, hot temperatures and dry conditions, traditionally through the summer and early autumn months, but increasingly occurring year-round.  

The CPUC first allowed utility San Diego Gas & Electric to preventatively de-energize its power lines as a response to its deadly 2007 wildfire season; it allowed PG&E and Southern California Edison to start doing it last year after the 2017 wildfire season. PG&E did conduct a safety shutoff in October, cutting electricity to about 60,000 customers in seven counties over two days of high winds. But in the days leading up to the Camp Fire, it considered but ultimately decided against de-energizing lines, including the transmission line that’s been linked to the start of the blaze. 

“We need to be as aggressive as possible” with de-energizing power lines to prevent fires, despite the downsides of leaving tens or hundreds of thousands of people without electricity for hours or perhaps days at a time, Wara said.  “We’ve been experimenting with fires, rather than with power shutoffs. That needs to change.”

“That could turn this crisis into an opportunity for the system, because we’re going to have to go in and mitigate all those impacts when we turn off power once a month,” he said. Opportunities could include installing backup batteries with solar panels at key sites like hospitals and fire stations, or more elaborate microgrids like those being piloted by PG&E and other utilities across California.

Jigar Shah, co-funder and president of Generate Capital, noted in an op-ed Monday that the costs attributed to the 2017 and 2018 wildfires could have funded a panoply of grid investments to better combat wildfires, from microgrids to high-frequency sensors that could shut off power to lines as they’re downed by falling trees or high winds. 

Of course, it’s a challenge to launch an aggressive new grid investment campaign in the midst of a bankruptcy proceeding. But last month, the federal judge overseeing PG&E’s criminal court case for the 2010 San Bruno gas pipeline explosion said he plans to order PG&E to re-inspect the entirety of its 106,000 miles of transmission and distribution grid by the start of summer this year, to trim trees, repair equipment, and otherwise “fix any other condition anywhere in its grid similar to any condition that contributed to any previous wildfires.” 

U.S. District Judge William Alsup, who has set a Jan. 30 hearing to decide whether to make the order a condition of PG&E’s probation, noted in his order that his goal is to “reduce to zero the number of wildfires caused by PG&E in the 2019 wildfire season” — a standard that might well require a significant increase in PG&E’s spending on wildfire prevention amid its bankruptcy proceeding.

The judge also wrote that this zero-fires policy “will likely mean having to interrupt service during high-wind events (and possibly at other times) but that inconvenience, irritating as it will be, will pale by comparison to the death and destruction that otherwise might result from PG&E-inflicted wildfires.” 

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