Thursday, February 21, 2019

PG&E Wants to Undo Contracts, Revamp Biz in Bankruptcy

By Robert Mullin and Hudson Sangree

PG&E Corp. and its subsidiary Pacific Gas and Electric Co. confirmed in court papers Tuesday the companies hope to rescind costly power purchase agreements and reform their obsolescent business model during a bankruptcy process that kicked off with a midnight filing for Chapter 11 reorganization. (See PG&E Files for Bankruptcy.)

In doing so, the utility giant challenged two recent rulings by FERC in which the commission said it shares authority with a bankruptcy judge in San Francisco to decide if wholesale power purchase agreements can be repealed or modified in the course of bankruptcy. (See FERC Claims Authority Over PG&E Contracts in Bankruptcy.) The first hearing before that judge Tuesday gave some insight into how contentious the issue could become.

Philip Burton Federal Building, San Francisco | U.S. Bankruptcy Court – Northern District of California

PG&E said Tuesday it has 387 power purchase agreements with 350 companies worth about $42 billion. Those PPAs represent 13,668 MW of contracted capacity, the utility said.

PG&E said it invested billions of dollars to help the state of California meet its renewable power obligations. Those investments drove down the cost of wind and solar energy for its competition, PG&E said, but left the company still paying for the more expensive contracts.

“As a result, many of the utility’s agreements to procure renewable energy resources, which are typically long-term — 15- to 20-plus years in length — obligate the debtors at rates significantly higher than [those] currently available in the renewable resources market. On the contrary, other load serving entities, i.e., the debtors’ competitors, are able to procure required renewable energy resources at those lower rates.”

PG&E argued the only way for the companies to emerge from bankruptcy intact is for the court to allow the utility to abrogate overpriced contracts. It said any input from FERC over those contracts violates the court’s authority under the Bankruptcy Code.

In its filing, PG&E notes “recent changes in the energy landscape have significantly” altered its energy procurement needs for the future.

“In recent years, there has been a significant decrease in demand for [PG&E’s] electric supply service, which has resulted in [PG&E] providing less electricity to fewer customers,” the utility wrote. Chief among the causes are the growth of community choice aggregators, direct access and distributed generation, as well as the success of energy efficiency programs.

“Due to the incontrovertible economic significance of the debtors’ PPAs, as well as the continuously evolving competitive and regulatory factors affecting these agreements, the debtors’ PPA rejection and assumption decisions under section 365 of the Bankruptcy Code will play a vital role in the reorganized debtors’ post-emergence operations and financial profile,” PG&E’s lawyers wrote.

“As such, it is vital to a successful reorganization that the debtors’ determinations regarding whether to assume or reject their PPAs be assessed by this court pursuant to the business judgment standard to which any other debtor is subject.”

PG&E said it was primarily forced into bankruptcy by liability for massive wildfires in 2017 and 2018 that could top $30 billion. Wildfire victims and their advocates have argued PG&E was seeking bankruptcy protection to avoid their lawsuits, but PG&E insisted Tuesday that wasn’t the case.

Pacific Gas and Electric CFO Jason Wells | PG&E

“To be clear, the Chapter 11 cases are not a strategy or attempt to avoid PG&E’s responsibility for the heartbreaking and tragic loss of life, devastating damage and destruction to homes and businesses, and harm to the communities that has been incurred as a result of the 2017 and 2018 Northern California wildfires,” PG&E’s chief financial officer, Jason Wells, wrote in a court declaration.

The thousands of victims who are part of the 750 lawsuits filed against PG&E will now likely assume a status similar to unsecured creditors.

Shareholders, meanwhile, will have to take their chances. Investors often lose their stakes in bankruptcy, but PG&E shareholders emerged largely intact after the company’s 2001 bankruptcy in the wake of the state’s energy crisis. Whether that happens this time is highly uncertain and probably will remain so for much of the next two years, the time the bankruptcy is likely to play out.

One key difference: Unlike the previous bankruptcy that involved only the PG&E utility, this one covers its holding company as well.

14 Hours

The judge appointed to oversee the Chapter 11 proceeding in Northern California’s U.S. Bankruptcy Court pointed out that difference Tuesday during the first hearing in what promises to be a drawn-out process. Judge Dennis Montali would know. In 2001 he was picked to oversee PG&E’s prior reorganization.

Montali noted the sheer volume of the work already confronting his court.

“I want to repeat again something I made clear this morning … most of us have only had 14 hours to absorb what has been filed,” Montali said during the hearing, which began at 1:30 p.m. PG&E had filed for bankruptcy shortly after midnight. By the morning there were nearly 50 filings in the case.

The judge expressed regret that he wouldn’t be able to address the 17 motions already in the docket or hear statements from those with an interest in the outcome of PG&E’s bankruptcy.

“I’m trying to absorb everything quickly. I’m not going to listen to arguments [today],” he said.

Montali added he “feels very strongly” that the public should be able to weigh in on such a “high-visibility” case but that he couldn’t allow that during Tuesday’s hearings.

“I don’t mean to be [discourteous] or cut off people otherwise, but I can’t fit into the time frame anything,” he said.

Instead, Montali kept the hearing focused on the procedural issue of “what comes next” — namely the schedule going forward — and addressing the most immediate concerns of the parties before the next hearing, now slated for Thursday at 9:30 a.m.

Montali said some of the motions in the docket didn’t require immediate action, while pointing to a handful that did, including those related to maintaining current procedures around cash management, insurance policies, customer programs and employee wages. “The things that affect real people, like employees,” he said.

But Montali promised his court would review all the motions during Thursday’s hearing.

“The motions are fairly conventional, but the numbers are obviously much larger,” said Stephen Karotkin, an attorney with Weil, Gotsal and Manges, which is representing PG&E. “I think we were very careful to tailor for a smooth transition into Chapter 11.”

At Karotkin’s request, Montali issued orders temporarily granting the cash management request, as well as another motion intended to assure payments to natural gas and electricity exchange operators, such as CAISO. (CAISO issued a statement Tuesday saying the bankruptcy hadn’t caused any grid disruption.)

Another Weil attorney noted PG&E was seeking a preliminary injunction confirming the bankruptcy court’s exclusive jurisdiction over the debtors’ rights to reject PPAs and other FERC-regulated agreements. He said the company would need the court to act on that matter before FERC’s Feb. 25 deadline to respond to its Jan. 29 order on the issue.

“We don’t think we need to be there,” he said. “We need to be here.”

A Department of Justice attorney representing FERC piped up over the telephone: “The proceeding there is separate from the FERC one. FERC issued an order in its own jurisdiction. Nothing in this court could alter PG&E’s statutory obligation to respond to FERC.”

Montali urged PG&E’s attorneys to do what they needed to comply with FERC’s requirements until he ruled on the injunction.

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