Pacific Gas and Electric Co.'s bid to spin off 5.6 GW of generation assets into a separate company is running into resistance at the Federal Energy Regulatory Commission, with multiple parties raising concerns about whether the proposed transaction is in the public interest.
The PG&E Corp. subsidiary filed an application with the California Public Utilities Commission in September 2022 to separate its non-nuclear generation portfolio into a stand-alone entity called Pacific Generation LLC. The portfolio would include 3,848 MW of hydroelectric, 1,400 MW of natural gas-fired capacity, 152 MW of solar and 182 MW of battery energy storage.
Pacific Gas and Electric, also dubbed PG&E, filed a related application (EC22-38) with FERC on Dec. 13, 2022, under Section 203 of the Federal Power Act.
PG&E seeks access to capital for system improvements
In its FERC filing, PG&E explained that the transaction would facilitate the sale of up to 49.9% of the equity interests in Pacific Generation to "one or more" third-party investors. The transaction is necessary to strengthen PG&E's financial condition and allow the company to "more efficiently access equity capital to fund significant capital requirements to improve the safety and reliability of its system," PG&E said.
PG&E has been on precarious financial footing since it emerged from a $58 billion bankruptcy reorganization in July 2020. Moody's, Fitch and S&P Global Ratings all assigned their lowest investment-grade ratings on approximately $33 billion in PG&E senior secured debt underpinning its restructuring plan, a day before the company pleaded guilty to 84 counts of involuntary manslaughter for its role in the 2018 Camp Fire that engulfed the town of Paradise, Calif.
"PG&E faces substantial capital needs over the next several years to modernize and to improve the safety and reliability of its system," PG&E said in the FERC filing. "These capital expenditures will require a significant amount of new equity funding."
The company said its approach is similar to other recent transactions. In August 2021, FERC approved Duke Energy Corp.'s sale of a 19.9% minority interest in its Duke Energy Indiana LLC subsidiary to an affiliate of Singapore sovereign wealth fund GIC Pte. Ltd. for $2.05 billion.
More recently, FERC approved FirstEnergy Corp.'s $2.38 billion sale of a 19.9% stake in FirstEnergy Transmission LLC to Brookfield Super-Core Infrastructure Partners LP.
PG&E's Section 203 application with FERC was met with protests Jan. 10 filed by the City of Santa Clara, the California Community Choice Association, and Public Citizen, a consumer advocacy group active in FERC proceedings. The California Hydropower Reform Coalition, an advocacy group focused on protecting California's rivers, also weighed in.
Protesters raise regulatory, consumer protection concerns
Santa Clara outlined a range of concerns with the proposed transaction, saying PG&E's Section 203 filing lacks key details that FERC would need to conclude that the transaction will not create "a regulatory gap."
Specifically, Santa Clara said PG&E failed to include schedules and exhibits detailing the company's owned generation, property leases, generation rights of way, and a list of assets to be excluded from the sale.
"Without the ability to review these schedules, which contain the detail of what is actually being proposed to be transferred under the proposed transaction, it is impossible for the commission and interested parties to determine whether the proposed transaction will diminish the commission's regulatory authority or create a regulatory gap" and whether it is in the public interest, the city said.
Moreover, Santa Clara said it could not determine whether PG&E intends to transfer jointly held contracts tied to PG&E's 65-MW Bucks Creek hydropower project, as well as the operation of the 17-MW Grizzly hydropower project, to Pacific Generation.
"Assuming PG&E does intend to transfer these two contracts as part of the proposed transaction, it will need Santa Clara's consent to such transfer, which it does not have," the city said.
Santa Clara therefore urged FERC to issue a deficiency letter requiring PG&E to respond to the city's concerns.
The California Hydropower Reform Coalition demanded that FERC require PG&E to provide more information about the identity and specific rights of third-party investors in Pacific Generation.
"Information about the identity of potential third-party investor(s) in Pacific Generation and complete descriptions of the special rights PG&E proposes to grant those investors is relevant to the commission's public interest test under Section 203, including its evaluation of the transaction's potential effects on competition and cross-subsidization," the coalition said.
The California Community Choice Association, which represents 24 community choice electricity providers in California, echoed those concerns.
"The commission should defer consideration of this application until PG&E can provide all the requisite information about the second step of this interrelated, two-step transaction: the minority interest sale," the organization said a protest.
Public Citizen said PG&E's status as a publicly traded company gives it "a number of less disruptive means to raise capital," including issuing more shares.
"Private equity will likely be the purchasers of PG&E's proposed equity sale of its rate-based generation assets," Public Citizen said. "Transferring control of consumer-funded assets to opaque private equity will impede effective state regulatory oversight, further eroding consumer protections."
In its FERC filing, PG&E said it anticipates that initial bids for one or more minority stakes in Pacific Generation will be submitted sometime in the spring.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.
S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.
