On January 14, 2019, California’s largest utility, PG&E, filed a bankruptcy notice stating that it plans to file for Chapter 11 bankruptcy by the month end on January 29th. Given its business situation, PG&E must proceed with the bankruptcy process unless lawmakers step in because PG&E’s current liabilities from California’s 2017 and 2018 fires are about 10 times PG&E’s current market cap of $3.5 billion, which is down 90% since last Fall. Obviously, this is a big issue for the cleantech industry since PG&E covers a territory that runs from Eureka to Bakersfield, including 106,000 miles of electric grid.
What happens in a Chapter 11 bankruptcy?
In California, there are two types of bankruptcy that companies can file: Chapter 7 and Chapter 11. In Chapter 7 bankruptcy, a company stops doing business, a trustee sells all of the company’s assets and the proceeds are distributed to the company’s creditors with any residual amounts going to the owners. In a Chapter 11 bankruptcy, like the one PG&E filed, a company remains in business, the owners remain in control as “debtors in possession” – absent a showing of cause, such as for fraud, gross mismanagement or incompetence – and the company must prepare a Business Re-Organization Plan that is approved by the bankruptcy court through a court process. During the Chapter 11 bankruptcy proceeding, an automatic stay is placed on almost all litigation against the company and its creditors ability to collect. Additionally, the court has control of all the company’s major business decisions, such as its ability to sell assets, enter or modify contracts and pay the company’s fees and expenses. While PG&E is in the Chapter 11 proceeding, a judge or creditor’s committee will be going through PG&E’s financials with a fine tooth comb and deciding which creditors get paid. Additionally, the court will be monitoring PG&E to make sure it keep its expenses in check, which could result in layoffs and other cuts.
Within about four months after the bankruptcy filing, PG&E will have the exclusive right to file its Business Reorganization Plan. This Business Re-organization Plan basically allows a company to “reorganize” or restructure its financial affairs – it creates a contract as to how the company will operate and pay its obligations in the future. Most such plans usually provide for some downsizing to reduce operations and free up assets. Once filed, creditor committees and other parties can file competing plans, motions to oppose or support the plan, or move to dismiss and convert the case to a Chapter 7 bankruptcy. Ultimately, the Business Re-organization Plan is subject to a review and vote by the company’s creditors and the ultimate approval by the bankruptcy court. The typical order of who gets paid in a Chapter 11 bankruptcy is that the secured bondholders are paid first, general creditors and accident victims (wildfire survivors further in line) and any left over money goes to shareholders. The dark side of the bankruptcy process is that if an interested party doesn’t file an objection and stay up to date on what is happening to preserve its bargaining position, it will be out of luck.
Studies show that only about 10 to 15% of Chapter 11 cases result in successful reorganizations. Most cases are dismissed or converted to Chapter 7 liquidations. Thus, everyone who has a stake in California’s clean energy transition should prepare to participate in the bankruptcy proceeding. Much is at risk and no outcomes are pre-ordained.
When PG&E filed for bankruptcy in 2001, it was a long process of about three years before PG&E emerged. In that bankruptcy case, the California Public Utilities Commission (“CPUC”) filed a competing Re-organization Plan that resulted in a trial over the plan. Ultimately, a settlement was reached between the CPUC, PG&E and an Official Committee of Unsecured Creditors. The result of the settlement was that PG&E remained intact under CPUC regulation and PG&E was allowed to pass about $7 billion of costs on to customers through increased rates. The PG&E 2001 bankruptcy was different that than the current situation. Then, the bankruptcy was solvable through policy changes, which included scrapping energy de-regulation and reaching negotiated settlements between the state and various parties to return the utility to solvent. In PG&E’s current situation, even if it resolves its past financial issues the possibility of more fires and unknown other impacts from Climate Change are potentially unsolvable risks through a business reorganization.
Can the State of California step in to help?
In late 2018, Governor Brown signed a law called Wildfire Bill SB 901 that allowed the CPUC to let PG&E issue bonds to pay off its fire liabilities with those bonds being repayed by rate payers. However, that bill applied to fires in 2017 and earlier. It did not cover the State’s 2018 fires or any later fires. Since the 2018 Camp Fire far surpassed the damages of the 2017 fires and there will likely be more fires, the State would need to do something different to assist PG&E now. One way the State could step in that is being discussed by lawmakers is to potentially divide up PG&E or to have the State take it over. The issue the State will need to navigate is that allowing PG&E to recoup is costs from Climate Change related impacts from their ratepayers will cause a major backlash over skyrocketing electricity bills. Allowing PG&E to recoup too little will potentially scare off investors and make it harder for it to raise money to fund their operations. Ultimately, if the State doesn’t step in, and PG&E doesn’t have money to pay the fire victims, the court will need decide who gets how much.
So, what are the impacts on California’s stakeholders?
Electricity is unlikely to go out for PG&E’s consumers. PG&E is a regulated utility so there are processes and procedures in place to make sure electricity flows regardless of what happens during the bankruptcy proceeding. However, the end result will likely be rate increases estimated at about 14% by industry research, unless the State steps in to socialize costs. We predict that PG&E’s clean energy programs such as energy efficiency, smart grid, energy storage and microgrids will become a target for cost reduction in the bankruptcy proceeding, but that the programs will survive any attempts to reduce them. For example, in PG&Es 2001 bankruptcy proceeding, NRDC and PG&E successfully moved to exempt its Public Purpose Program Funds from bankruptcy creditors. However, this is a big issue as PG&E is currently the State’s largest investor in energy efficiency and electric vehicle infrastructure with annual commitments over $1 billion. Also, PG&E had plans to build a network of electric car charging stations. Under a judge’s supervision, these investments in clean technologies could be curtailed. PG&E’s employees could also be affected. In bankruptcy, companies can alter labor agreements, which raises the prospect that workers’ pensions could be affected. This has happened in other industries. For example, airlines have fallen under intense scrutiny for what many see as them using Chapter 11 bankruptcy as a simple tool for escaping labor contracts, usually 30-35% of an airline's operating cost. Every major US airline has filed for Chapter 11 since 2002. Lastly, in regard to services provided by PG&E, there will likely be fewer people to process paperwork, including interconnections and possibly rebate processing.
What about PG&E’s power purchase agreements (“PPA”) and other contractual obligations?
Contracts to provide services, such as PG&E’s contracts with Community Choice Aggregators (“CCAs”) to collect and remit money from customers for the power CCA’s supply to customers are one area to watch during the bankruptcy proceeding. The CCAs are concerned about ensuring that all money PG&E collects on their behalf from customers is regularly remitted to them. In general, however, this is mostly seen as a pass through that will likely not be affected by the proceeding. It is thought there will likely be no substantial affect, but collections could slow if staffing is reduced leaving fewer people available to process paperwork.
In regard to solar and wind energy suppliers, the bankruptcy court could allow PG&E to renegotiate any contracts where developers are selling energy for prices higher than today’s renewable energy project prices. PG&E’s current weighted average solar PV PPA price is approximately $140/MW-HR. The current solar PV PPA signed today is priced at $32.5/MW-HR. Renegotiating past contracts at today’s prices would save PG&E approximately $2.2 billion per year. If this occurs, the impacts would likely include significant losses to investors in renewable energy projects, increased costs of building new renewable energy projects, credit rating downgrades of existing solar and wind projects, and project developers and investors absorbing losses of renegotiated PPAs by raising prices on new projects. However, whether legacy PPAs can be renegotiated in bankruptcy to fund creditors is uncertain. For example, it is an open question still being decided on a state-by-state and federal level as to whether a bankrupt utility can breach a money losing PPA or re-negotiate a solar PPA signed at a historically high price and replace it with a current market competitive solar PPA.
What at the State’s Solar Related Programs?
In regard to Net Energy Metering (“NEM”) and the State’s Self-Generation Incentive Program (“SGIP”), no potential impacts are expected. PG&E has an obligation under state law and CPUC decisions to continue calculating customers’ credits under the approved NEM formulas. The funds used for the incentives and the administration of SGIP are collected by a separate adder on utility bills and the funds are reserved under state law for the purposes of SGIP. Similarly, PG&E is required to continue offering the NEM successor tariff to solar customers. PG&E’s bankruptcy status will not affect PG&E’s NEM or SGIP commitments under state law. Suspension of the programs would not help PG&E cover any of its general debt obligations because PG&E cannot redirect NEM or SGIP funds. The main affect that could occur is potential staffing of the programs being affected, which may delay processing of NEM and SGIP documentation and incentive payments.
In regard to interconnection applications, we also predict no significant long-term impacts, but a slowing of interconnection processing timelines and an increased difficulty in attempting to resolve disputes about specific interconnection projects or other issues due to staffing and operational cuts.
Lastly, in regard to existing contracts for demand response, renewable energy, and other grid services there is a risk that some invoices will not get paid in addition to the potential contract re-negotiation issue of legacy PPAs discussed above. For example, during the bankruptcy proceeding, PG&E will continue to pay all invoices submitted after PG&E files the bankruptcy petition, but any unpaid debts incurred prior to the filing cannot be paid until the court approves a Reorganization Plan. This will likely affect some invoices on contracts for energy, capacity, and other grid services with monthly payments.
Going forward, what will happen with PG&E’s distribution services?
Simultaneous to this bankruptcy proceeding, a federal court case is occurring related to the probation term imposed on PG&E in 2017 after it was convicted of six felony counts for violating federal pipeline laws in the 2010 San Bruno pipeline explosion. In that case, the judge just ordered a hearing on a proposed plan to force PG&E to inspect all 106K miles of its electric grid and repair and trim where necessary by June 21, 2019. A hearing is scheduled for January 30, 2019 in US District Court in San Francisco on the judge’s plan. If the plan is adopted, it would create a parallel oversight with the CPUC by the Federal Courts on PG&E’s business operations. Also, the CPUC has an open investigation into whether PG&E falsified gas pipeline safety records.
What is the long term solution?
We think the first solution that should be implemented is to require PG&E to bury its power lines. This has been done successfully in Europe for centuries. Additionally, we think PG&E has proven unworthy of operating under its current business structure and management. PG&E should be broken up and its assets given to smaller, localized public entities who will be responsible for the welfare of their citizens. An obvious choice in the regard, would be for each CCA to take control of PG&E’s distribution lines located within the jurisdictions where they operate. Hopefully, this interruption will lead to a faster transition to a clean energy economy more quickly by increasing our focus on local, renewable energy microgrids and speeding the transition to batteries.
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