Northern California utility Pacific Gas & Electric has won approval for the priciest and longest-running ratepayer-backed bond in U.S. history. Securitizations like this could play an increasing role in managing the costs of adapting to climate change, whether to react to disasters exacerbated by global warming or to close down the carbon-emitting power plants causing it.
But PG&E’s 30-year, $7.5 billion bond securitization is being challenged by consumer advocates. Critics say it shifts too much risk onto ratepayers to cover liabilities from past wildfires sparked by the utility’s power lines. Similar critiques could also apply to future securitizations that seek to spread out the potentially devastating costs to utilities to repair their past mistakes.
The May 6 decision from the California Public Utilities Commission gives PG&E the final go-ahead to issue the bond securitization, which will add about $394 million in ratepayer costs per year over the next three decades.
The purpose is to refinance $6 billion of the investor-owned utility’s short-term bankruptcy debt stemming from fire-victim claims from 2017, one slice of the more than $30 billion in wildfire claim liabilities that drove it into bankruptcy in 2019.
PG&E emerged from Chapter 11 bankruptcy protection last summer with nearly $39 billion in debt. The plan is designed to speed payments to wildfire victims, including those of the 2018 Camp fire, the deadliest in California history, and others who lost loved ones and property to fires caused by the utility's equipment.
A $7.5 billion bond to be fully paid by ratepayers “will be almost twice the size of all utility securitization bonds in investor accounts today,” said Joseph Fichera, CEO of Saber Partners, a Wall Street advisory firm.
No. 2 on the list of most costly ratepayer-backed bonds was a $4 billion issuance by Pennsylvania utility Peco in 1999. The longest maturity duration of utility securitizations to date is Southern California Edison’s 23-year, $337 million ratepayer bond, approved by the California Public Utilities Commission last November.
Wall Street is keeping tabs on PG&E’s bond guaranteed by ratepayers.
“There absolutely will be a lot of interest from the investment banking community in the issuance,” said Harriet Moyer Aptekar, a principal with Colorado-based Crest Policy Consulting.
PG&E’s credit ratings are at the bottom of the investment-grade barrel. After PG&E exited its second bankruptcy last June, the parent corporation received a rating of Ba2, and the utility itself was labeled Baa3.
The $7.5 billion securitization won’t materially change the company’s ratings, according to Jeffrey Cassella, a Moody’s senior analyst. The most essential hurdle to PG&E achieving improved ratings is reducing its exposure to fire risk. Given the vast size of its territory, improvements from the billions of dollars of investments in system hardening — from adequate tree and vegetation clearance to covering power lines to avoid them sparking — are expected to take at least three years. Moody's also singled out improved relations with regulators and customers as something PG&E must achieve to boost its rating, according to a March 17 report.
PG&E’s bond securitization, like those issued by many other regulated utilities around the country, is governed by state statute. But it is the only utility in the U.S. to seek securitization after bankruptcy, Fichera said.
And while PG&E promises to fully repay customers through a reimbursement account funded by projected shareholder tax savings, with up to $1 billion deposited at the time of the issuance, full reimbursement is neither guaranteed nor required by the CPUC.
PG&E securitization faces headwinds
PG&E’s compliance with California’s securitization law is being disputed by ratepayer advocates and others.
CPUC President Marybel Batjer said on May 6 that PG&E is eligible for the bond securitization because it satisfies the legal “stress test pursuant to Senate Bill 901,” as noted in the commission’s April 22 decision.
SB 901 is one of the two state securitization laws passed in the midst of PG&E’s slide into bankruptcy that set the terms of ratepayer bond issuances covering utility wildfire costs. The test case was SCE’s $337 million securitization last year.
Ratepayer advocates and the City and County of San Francisco are challenging the CPUC’s April 22 decision on the grounds that PG&E’s proposal does not satisfy the securitization statutes. The Utility Reform Network (Turn) ratepayer advocacy group and the Wild Tree Foundation, an environmental advocacy group, will also appeal the approval of PG&E’s financing order setting the bond parameters.
Turn and Wild Tree claim PG&E is disqualified from securitization because its bankruptcy reorganization plan approved last June forbids forcing ratepayers to pick up the costs. They argue that the bond issuance will drive up utility bills and fail to help PG&E attain investment-grade status in order to lower its borrowing costs, which is required under the securitization statute.
“Already suffering some of the highest utility rates in the country, ratepayers should not be further burdened by costs incurred as a direct result of PG&E's neglect and mismanagement,” said April Rose Maurath Sommer, Wild Tree executive director.
Sen. Bill Dodd, D-Napa, SB 901’s author, essentially agrees. In an interview last week, Dodd said he is concerned that PG&E has not met the criteria for financing under SB 901 and PG&E’s own bankruptcy settlement, which requires a finding that the relief is just and reasonable and remains ratepayer-neutral — in other words, that it does not raise rates.
SB 901 does not specifically bar a utility from using the mechanism to address wildfire liability, but PG&E’s pursuit of it “defies the spirit of the law,” Dodd said.
PG&E spokesperson Ari Vanrenen countered this assertion, stating in an email that the bond securitization “will not increase energy bills and will strengthen PG&E’s going-forward business, while supporting our ability to provide safe, reliable, affordable and clean energy to our customers.”
Annual rate increases by PG&E and the other two investor-owned utilities in California continue to exceed the rate of inflation, CPUC staff concluded in a February 2021 paper. Since 2013, PG&E rates have increased by 37 percent. Over the next decade, rates will rise even further as the state’s three investor-owned utilities invest tens of billions of dollars in grid wildfire hardening and mitigation.
Why utility securitizations are becoming tools for climate-change mitigation
Securitizations have been used for decades to lower utility borrowing costs, and thus ratepayer bill increases, when utilities have been forced to cover unexpected costs. They started to be used during the era of deregulation in the 1990s to pay off remaining debt on traditional generation, fossil and nuclear plants.
After passage of California’s disastrous 1996 state deregulation law, the state's three investor-owned utilities securitized issuances, which were then known as ratepayer reduction bonds. PG&E issued a nearly $3 billion bond in 1997; Southern California Edison made a $2.5 billion issuance. Outside California, Commonwealth Edison issued $3.4 billion in ratepayer-backed bonds in 1998 to pay off stranded assets associated with its power plants.
The state-by-state laws that allow securitization provide guarantees to investors that the bond principal and interest will be fully covered by ratepayers on time. This certainty has consistently led to securitization bonds receiving top AAA ratings, which lowers their interest rate to around 3 percent, or about half the typical 7 percent rates of traditional utility financing, Moyer Aptekar said.
In the past two decades, bond securitizations have been expanded to cover other significant utility costs, from fires, hurricanes and extreme cold to the costs of pollution controls on coal-fired power plants. As climate change drives more severe and harmful disasters, ratepayer-backed bonds are likely to play an increasing role for states looking for ways to cover those costs, Moyer Aptekar said.
Colorado and Texas, for example, are exploring using securitization, the former to cover wildfire damage and the latter to cover the massive costs of last February’s ice storm, which knocked out power to huge swaths of the state for several days.
At the same time, a growing number of states are exploring the use of securitization to cover the costs of closing down uneconomic coal-fired power plants and replacing them with clean energy, Moyer Aptekar said. Much of the cost of building these coal plants remains on utility books, but closing them more quickly is vital to reducing carbon emissions. The same securitizations can provide financial support and retraining for workers displaced by the early closures of coal-, nuclear- and gas-fired power plants, she noted.
States including Wisconsin, Michigan, Colorado, New Mexico, Kansas and Indiana have passed legislation authorizing securitization pathways to assist in making this shift. North Carolina, Duke Energy’s home state, is looking at securitization under a state clean energy policy framework being debated in the state legislature this year.
Just how utilities are able to use this method of spreading today’s costs to future years will be determined by state law, however. California’s SB 901, passed in 2018, and AB 1054, passed in 2019, authorize investor-owned utilities to use bond securitizations to cover part of their enormous wildfire liabilities that are growing amid a hotter and drier climate.
But AB 1054 requires PG&E and other utility securitizations to come with the lowest cost possible on a net-present-value basis to ratepayers. Whether PG&E’s securitization plan meets this requirement is very much an open question.
(Article image courtesy of Michael Held)
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