In late January 2019, California’s largest investor-owned utility (IOU) Pacific Gas and Electric (PG&E) declared bankruptcy for the second time causing anxiety for investors, ratepayers, employees, PPA holders, elected government officials and, lest we forget, fire and gas explosion victims. Judge Alsup, who is overseeing PG&E’s probation from its felony conviction, lambasted the company for violating its probation. “To my mind, there’s a very clear-cut pattern here: that PG&E is starting these fires,” Alsup said. “What do we do? Does the judge just turn a blind eye and say, ‘PG&E continue your business as usual. Kill more people by starting more fires.”

In the US, corporations enjoy personhood, that is, as an entity a corporation has the same rights of free speech and due process as individuals under the constitution. Corporate personhood rights date to the 1890s and the railroads, in particular, the 1897 Gulf, Colorado & Santa Fe Railway CO V Ellis case in which the Supreme Court held that: “A state has no more power to deny to corporations the equal protection of the law than it has to individual citizens.”

The rights of personhood conferred to corporations in 1897 also allow the corporation to be tried and convicted. In 2016 PG&E was found guilty in Federal Court of violating pipeline safety rules and misleading investigators over the 2010 pipeline explosion in San Bruno that killed eight people and destroyed 38 homes.

PG&E’s recent bankruptcy filing was a strategic defensive move designed to protect the utility from liability. The utility’s filing potentially enables it to renegotiate power purchase agreements, in particular for solar contracts, at rates the utility argues, reflect new, lower costs. In its filing, the utility asked the court to allow it to cancel $42-billion (387) in energy contracts that it entered into over the past 15-years. 298 of the contracts were for solar, wind, or other RE. Just the potential of contract cancellation and renegotiation has affected the credit ratings of utility-scale projects in the state and could affect the ratings of projects out-side of California if these projects are on the Western Grid and sell electricity to PG&E. The US Federal Energy Regulatory Commission has stated it has veto power over the bankruptcy court in this regard.

Meanwhile, PG&E obtain senior secured liability financing of $5.5-billion from JPMorgan Chase, Bank of America, Barclays, and Citigroup, putting the banks at the head of the line when it comes to recouping money.

PG&E’s latest bankruptcy is being overseen by the same Federal judge who oversaw its 2001 bankruptcy filing, Judge Dennis Montali. In PG&E’s first filing, Judge Montali upheld the PPAs. Despite the precedent set in the first bankruptcy, a different decision is possible given the different circumstances existing today for the US solar industry than did in 2001.

In the US, solar deployment has grown significantly from 2001 through 2018, while module prices have decreased drastically over the same period. PG&E could argue that the significant price decrease for components argues for a reassessment of current PPA rates and might lead to a decrease that would benefit ratepayers as well as PG&E as it restructures.

Allowing the utility to renegotiate its contracts inserts uncertainty and therefore risk into the development process, potentially shaking investor confidence. One example of a market shaken by government and utility actions is Spain, which saw its market for solar deployment crash after retroactive changes to its FiT.

Another example is the Republic of South Africa’s government-owned utility Eskom. Mid-2016 Eskom began refusing to sign PPAs won under the country’s REIPPP (Renewable Energy Power Producer Program) with Independent Power Producers (IPPS) claiming inadequate transmission an action that effectively stalled solar project development. In August 2017 Eskom continued refusing to sign PPAs with RE IPPs, preferring nuclear power. In 2018 South Africa courts ruled that Eskom must resume signing the abandoned PPAs. In late 2018 Eskom resumed honoring PPAs.

In 2019 the government looks to be moving to renegotiate PPAs signed under its 2011 and 2012 REIPPP in an attempt to aid its technically-bankrupt utility.

PG&E Bankruptcy #1 – Blame it on deregulation and Enron

PG&E’s first bankruptcy had its roots in California’s poorly designed, ill-thought-out energy deregulation of the late 1990s.

In 1996, then-Governor Pete Wilson signed the bill that deregulated California’s utilities, keeping intact regulation of distribution lines, but freeing the states three IOUs to sell generating assets and buy natural gas on the open market, theoretically at competitive rates. In their eagerness to sell burdensome generating assets such as nuclear facilities, and under the naïve assumption that the free market would drive rates down, the utilities sold too many generating assets and, during an unusually cold winter and extremely hot summer, found themselves the victims of poor regulatory design and vulnerable to market manipulation.

Under California’s deregulation, ratepayers choosing to stay with the IOUs continued with a regulated default rate for electricity that was capped for four years. Utilities, assuming competition would lure ratepayers to different sources were surprised to find that only 3% of ratepayers switched, leaving utilities with 97% of their customer base to continue serving.

Moreover, utilities were not allowed to buy forward contracts and instead bought natural gas on the new wholesale spot market – not a problem if a utopia of competitive pricing pushes prices down, but definitely a problem if wholesalers work to promote scarcity and force prices up.

California’s newly deregulated market also encouraged energy traders to enter the market where previously they could not operate. The newly minted middlemen saw opportunities and took advantage, basically enacting a wild-wild-west version of business-as-usual.

In May 2000, demand for electricity surged due to high industrial activity and unexpectedly hot weather. On May 22, 2000, California’s electricity crisis officially began.

Suppliers responded by overbooking capacity and creating scarcity. California’s utilities were stuck with capped retail rates and premium-priced natural gas, and by the end of the year were paying ~six times what they could charge ratepayers for electricity. Energy traders, such as Enron, used a variety of methods to drive up the prices or profit in other ways. Strategies used to drive up prices included again, overbooking and forcing Cal-ISO (the California Independent System Operator) to pay a premium for power, or, overscheduling and forcing the Cal-ISO to pay a congestion fee to the energy trader, or, buying power at California’s capped rate of $250/MWh and reselling at a higher price elsewhere.

In January 2001, PG&E became insolvent, and then Governor Gray Davis stepped in to buy power on the spot from the unregulated suppliers on behalf of the beleaguered (and bankrupt) utility). Eight billion dollars later, Governor Davis negotiated 20-year power contracts worth $50-billion, passing the additional cost on to ratepayers who were not amused and launched a successful recall effort.

What PG&E’s latest bankruptcy may mean for the US Solar Industry

Pay attention to this case because should the judge allow PG&E to renegotiate its contracts, a precedent will be set. Blame it on the solar industry’s low margin environment. This precedent could encourage other utilities across the US and in other countries, to take the same action, thus insinuating uncertainty, and risk, into the market. Granted higher risk generally means higher reward, but, as the solar industry has no control over the price of its components, or the value of its product (electricity), higher risk may mean, lower reward.

 

In its late February filing, PG&E stated that it was ‘probable’ that its equipment was at fault in the November 2018 Camp Fire, which claimed 85 lives. The utility also stated that: “Management has concluded that these circumstances raise substantial doubt about PG&E corporation’s and the utility’s ability to continue as going concerns.” California Governor has formed a team to study and suggest potential solutions. One thing is certain, a complete failure of Pacific Gas and Electric without a plan in place to serve ratepayers could be catastrophic. At the very least, rates for electricity and gas would rise, at the very worst, reliability of service could be disrupted. As transmission and gas line maintenance has been lacking for many years, any entity taking over the utility’s responsibilities will find itself mired in maintenance needs.

And in fact, in August 2019, PG&E advised the bankruptcy court that it had reached an agreement to cut PPA prices by at least 10% on five power contracts.

Could net metering be next?

Market after market the outcome has been the same, when governments offer incentives markets balloon, and when governments remove, pause, or reverse incentives, market balloons deflate.