Credit to Author: Darrell Proctor| Date: Fri, 02 Aug 2019 20:55:44 +0000
California utility Pacific Gas & Electric (PG&E) has asked the judge overseeing its bankruptcy case to support restructured deals with some of the utility’s power suppliers in an effort to reduce the price PG&E pays for those companies’ electricity.
The fate of $42 billion worth of long-term power purchase agreements (PPAs) is a key component of PG&E’s bankruptcy and is being closely watched by the power industry, which relies on long-term power contracts to attract financing.
PG&E’s court filing comes just weeks after California Gov. Gavin Newsom signed into law a measure to create a $21 billion state wildfire fund, designed to help the state’s three investor-owned utilities pay for damages resulting from wildfires in the state.
Allan Marks, a partner in the Los Angeles office of global law firm Milbank LLP, working in Milbank’s Project, Energy and Infrastructure Finance practice, told POWER, “In general, [the wildfire fund] is designed to provide liquidity if utilities aren’t able to handle wildfire claims without becoming insolvent.”
Deals Intended to Reduce Uncertainty
PG&E filed for Chapter 11 protection in January of this year, citing billions of dollars in liabilities for its role in a series of wildfires in California over the past few years. The company brought William “Bill” Johnson, a retired Tennessee Valley Authority executive, on board as its new CEO earlier this year to lead the utility through its reorganization.
The San Francisco-based utility in its court filing this week asked judge Dennis Montali to back the utility’s deals with Recurrent Energy, a subsidiary of Canadian Solar, and Micronoc Inc. and EsVolta LP, two energy storage providers. The filing said the deals would cut the contract prices by at least 10% and save PG&E about $20 million. The utility also is seeking support from state regulators for changes to the PPAs.
Judge Montali in June ruled that his court has standing to determine the fate of PG&E’s contracts, after other power generators had asked the Federal Energy Regulatory Commission (FERC) to intervene.
PG&E said Recurrent, Micronoc, and EsVolta LP asked the utility to renegotiate contracts “to reduce uncertainty and eliminate financing risks.”
Ratepayers, Utilities Will Pay into Wildfire Fund
The PG&E case is rewriting some of California’s laws regarding investor-owned utilities. Newsom on July 12 signed Assembly Bill 1054 (AB 1054), legislation that creates a fund that the state’s three public utilities—PG&E, Southern California Edison (SCE), and San Diego Gas and Electric (SDG&E)—can use to pay damages should any of the utilities be held liable for wildfire damage linked to their equipment. The wildfire fund earmarks $21 billion to pay for damage; it includes a 15-year extension of an existing charge on ratepayers’ monthly bills that will provide $10.5 billion to the fund. That charge was set to expire in 2021.
All three of the utilities have pledged their support to the fund, though it will take years for the measure to be fully funded. The utilities will provide the other $10.5 billion over time. AB 1054 specifies that PG&E will pay 64.2% of the $10.5 billion total funded by the utilities. SCE will pay 31.5%, and SDG&E will pay the remaining 4.3%.
The measure does require the three investor-owned utilities to contribute $7.5 billion initially to the fund. SDG&E and SCE have 60 days, or until late September, to pay their share. PG&E officials last week said they will make an initial contribution of $4.8 billion after the company emerges from bankruptcy, though the law requires that payment be made no later than June 30, 2020.
Marks told POWER the wildfire fund can protect utilities from future wildfire liabilities, and could increase the safety of electricity infrastructure.
“With respect to the three large, investor-owned utilities, this provides a pool of pretty significant capital for claims, losses, and infrastructure upgrades,” Marks said, noting the measure should “encourage or incentivize” the utilities to “plan prudently for wildfire risk and prevention,” because “they could tap this fund and not have to pay it back.”
Marks said the three utilities have “publicly expressed their support, and all three are putting in money. This is designed to allay those concerns about utility liquidity by the rating agencies. You’re not just trying to protect utilities [financially], you’re trying to protect [the ability to pay] future wildfire claims.”
Added Marks: “This fund is only to recover uninsured claims. Utilities must still have insurance. This is [just] additional funding.”
Marks said it is likely other states, particularly those prone to wildfires, will look at the legislation. “States will look at it to fit their own unique situation,” he said. “With the impact of climate change, certainly states across the West, those areas where we see wildfires much more frequently, and they’re much more costly,” should consider similar legislation.
—Darrell Proctor is a POWER associate editor (@DarrellProctor1, @POWERmagazine).
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