PG&E Touts Biggest Ratepayer Bond in U.S. History
24 Nov 2020
Pacific Gas & Electric argues that its proposal before utility regulators to issue $7.5 billion in 30-year bonds to be repaid by ratepayers is a good deal for its customers. This low-cost refinancing of shareholder debt to cover utility wildfire costs “will enable PG&E to promptly move $6 billion in debt off its balance sheet,” which will reduce the company’s liabilities. The assertions are made in a recent filing with the California Public Utilities Commission.
The size of this utility securitization is unprecedented.
“$7.5 billion is the largest single utility securitization program and will be almost twice the size of all utility securitization bonds in investor accounts when it comes to market,” Joseph Fichera, Saber Partners CEO, said. This Wall Street advisory firm is not a party to this proceeding. It has represented utility regulators in five states where there were similar bond offerings, with the official role of protecting ratepayer interests.
Several consumer advocates warn that PG&E ratepayers, who already face steep utility bill increases, may not be fully reimbursed for this massive recovery bond issuance. A new law requires that bonds that cover utility wildfire costs fully repaid by ratepayers must not raise their utility bills; i.e be rate neutral on average.
The utility’s rebuttal filing rejects the claim of inadequate customer reimbursement. It also insists the financing scheme will get it back on an investment grade rating track and is rate neutral, as required. Both points were contested by opponents.
Ratepayers are not only likely to be fully paid back with a combination of $1.8 billion cash on hand and tax savings over three decades, but could come out ahead, PG&E argues. “While there is some uncertainty about the outcome, the uncertainty goes in both directions,” according to PG&E’s testimony. “The results could be better than the forecast presented.”
If Biden raises corporate taxes, ratepayer repayment speeds up
PG&E notes that corporate taxes have been at a historical low and that President-Elect Joe Biden is expected to increase corporate tax rates. “If tax rates increase, all else equal, the Customer Credit Trust will be funded with the $7.59 billion faster, increasing the likelihood of surplus.”
Plan opponents say the deal, which is a promise not a guarantee of full repayment, only benefits PG&E shareholders because they bear no risk and would reap 75% of any surplus in tax savings. In the larger scheme of things, ratepayers should not be saddled with debt that rightfully lies with shareholders and is part of its bankruptcy reorganization plan, they insist.
There is an 84% likelihood, PG&E claims, that its financing plan would generate a surplus.
The Utility Reform Network, using PG&E’s modelling but applying different assumptions, reached a different conclusion. It says there is just as good a chance of a shortfall as a surplus, and the shortfall could be as large as $4.1 billion. TURN forecasts far lower load growth in the future. The utility says that is not reasonable.
PG&E also contends that the bonds will help return it to investment grade status two years ahead of expectations, which would lower borrowing costs. Having its investment ratings upped in 2023 or 2024 is estimated to produce $441 million in nominal savings, without factoring in inflation.
Gov. Gavin Newsom back in March supported a proposed bond securitization only if the legal requirements of rate neutrality and the chances of investment grade ratings are achieved sooner rather than later. But his filing to the U.S. Bankruptcy Court also stated that the CPUC must have increased oversight and enforcement over a reorganized utility so it can require corrections as needed.
In related news, CPUC President Marybel Batjer warned PG&E Nov. 24 that CPUC staff are investigating whether to recommend subjecting it to an enhanced oversight and enforcement process. Her letter sent Tuesday points to an apparent “pattern of vegetation and asset management deficiencies that implicate PG&E’s ability to provide safe, reliable service to customers.”
Elsewhere, The Wild Tree Foundation called for an independent financing team to oversee the bond terms of the $7.5 billion issuance, including interest rates. But whether one is required remains to be seen.
PG&E insists it has a “significant economic incentive” to keep bond costs low because it’s supposed to fully reimburse ratepayers. It rejects claims that underwriters are solely motivated by a quick sale of bonds.