Dive Brief:

• Regulators in California have teed up two proposals which, if approved over the next couple of months, would allow Pacific Gas & Electric (PG&E) to securitize $7.5 billion of costs stemming from the claims it faces for a series of wildfires in 2017.

• PG&E last year asked the California Public Utilities Commission (CPUC) for permission to recover the $7.5 billion by issuing ratepayer-backed recovery bonds under the "stress test" process. That process was adopted by lawmakers in September 2018, before the company filed for bankruptcy.

• PG&E sees multiple benefits to securitizing that $7.5 billion — it could retire around $6 billion in debt that was used to pay wildfire claims, and speed up payments to wildfire victims as per its bankruptcy reorganization plan, it said in its application.

Dive Insight:

The "stress test" allows the CPUC to consider a utility's financial situation in determining the magnitude of wildfire costs it should be on the hook for — any amount above that maximum limit a utility can pay can be allocated to ratepayers via bonds. 

The CPUC's proposed decision, slated for a vote on April 22 at the earliest, would allow PG&E to use that mechanism to finance $7.5 billion of its 2017 wildfire costs. A second proposed financing order giving the utility the formal go-ahead to issue the recovery bonds will be considered by commissioners on May 6. 

"In sum, we determine that without the securitization proposed in this application, ratepayer costs will be higher as it will take PG&E longer to achieve investment grade credit ratings," the commission noted. 

The commission would also authorize PG&E to create a "customer credit trust," that will pay out monthly customer credits to counter the impact of the bonds on ratepayers. The utility's shareholders would be required to put $1 billion into the trust this year, and an additional $1 billion before February 2024. In addition, the proposal would require shareholders to contribute nearly $7.6 billion, drawn from certain shareholder-owned tax deductions or net operating losses.

But some stakeholders have concerns over this strategy. Consumer advocacy group The Utility Reform Network (TURN) pointed out in a March filing that PG&E's most recent 10-K with the Securities and Exchange Commission states that its ability to tap into its net operating loss (NOL) carryforwards could be limited. This would happen if it were to be determined that the company's bankruptcy reorganization effectively caused an ownership change — an eventuality that PG&E says is unlikely, according to its 10-K. 

"[T]he Commission should take note of statements made by PG&E to federal regulators indicating the potential for some or all of the NOLs to be unavailable for future use," TURN's filing states. 

PG&E pushed back on this assertion in its own filing, stating that disclosing the potential risk in its SEC filing, "does not alter PG&E's conclusion that a change of ownership did not occur as a result of consummating the [bankruptcy reorganization plan]."

If that money is not freed up, or if things don't go as planned for PG&E, ratepayers won't be reimbursed for the rate increases they'll see due to the bonds, April Rose Maurath Sommer, executive and legal director of the Wild Tree Foundation, said. 

On the other hand, if the trust has surplus money, the commission's proposal would have PG&E distribute at least 25% of that to customers, with the rest going to shareholders, Maurath Sommer said, "which is morally reprehensible." 

Most securitizations in the country apply to costs that ratepayers would have been on the hook for anyway, according to Maurath Sommer.

But "if this bond is denied, as it should be, ratepayers will pay nothing, because they should not have to pay for the costs of damages they themselves have suffered," she added, noting that people who lost their homes and families in the wildfires are also PG&E ratepayers.

PG&E spokesperson James Noonan said in an email that the proposed decisions confirm PG&E's plan won't increase customer bills and will strengthen the utility's business. The shareholder contributions to the customer credit trust, a contingent supplemental shareholder contribution of up to $775 million in 2040, and the possibility of crediting customers with a quarter of surplus balances in the trust after the bonds are repaid, are all steps to ensure customers don't see bill increases, Noonan said. 

"PG&E's application is intended to save customers money by improving PG&E's creditworthiness, which will allow us to continue making critical safety and reliability improvements in its electric system at the lowest possible cost to our customers," Noonan added.

California's electricity rates are already some of the highest in the country. Earlier this year, the CPUC estimated that rates in PG&E, Southern California Edison and San Diego Gas & Electric service territories have increased respectively by 37%, 6% and 48% since 2013 even before accounting for wildfire prevention investments. Between now and the end of the decade, the commission expects that wildfire costs will increase PG&E's revenue requirement by $20.2 billion.