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Renewables contract rejections 'likely' in PG&E bankruptcy, Credit Suisse says

With billions of dollars in compensation for California wildfire victims hanging in the balance, Pacific Gas and Electric Co.'s, or PG&E's, rejection of renewable energy contracts through its joint bankruptcy proceeding with parent company PG&E Corp. "seems likely to us," investment research analysts at Credit Suisse said in an April 26 note to clients.

Though Gov. Gavin Newsom has vowed that the state will "never waver on achieving the nation's most ambitious clean energy goals," which include reaching 60% renewable energy by 2030 and total decarbonization of the power sector by 2045, those targets could remain on track even if the utility sheds some deals, according to Credit Suisse. The utility has possible "room to spare," the analysts said, noting a potential cushion from past over-procurement and the possibility that community choice aggregators could pick up rejected agreements. California also could create a state procurement authority to meet state renewable energy targets, they added.

Given an estimated roughly $2.2 billion per year in revenue collections for above-market contract payments, "we think regulators and state officials will ultimately end up leaning on this source of customer [money] to help pay for some of the proposed financial solutions, such as a 'liquidity fund' and 'wildfire fund,'" Credit Suisse said.

The analysts based their assessment partly on an April 22 interview with attorney Kimberly Winick, a bankruptcy specialist at Los Angeles-based law firm Clark & Trevithick. Winick questioned, however, whether PG&E's rejecting contracts would make financial sense if the company actually is solvent, despite reporting potential wildfire liabilities in excess of $30 billion that prompted its bankruptcy filing. If solvent, PG&E would have to pay 100% of all unsecured claims, including the value of rejected contracts, she noted.

"So the argument would then be, why would [PG&E] want to reject a PPA?" Winick said to Credit Suisse analyst Micheal Weinstein, according to an interview transcript. "If PG&E is not solvent, rejection starts to make sense," she added.

'We don't think FERC should have a veto'

As PG&E weighs which contracts it may propose to reject, the role of the Federal Energy Regulatory Commission in the process remains uncertain. FERC, for instance, could appeal a recent federal district court decision allowing Judge Dennis Montali, who is presiding over the joint Chapter 11 proceeding in the U.S. Bankruptcy Court of Northern California, to maintain jurisdiction over any potential contract rejection.

In advance of the bankruptcy filing, FERC asserted that it has concurrent jurisdiction over the contracts, which moved PG&E and its parent company to ask Montali, through a so-called adversary proceeding against FERC, to confirm his sole jurisdiction over their rights to reject power purchase agreements, or PPAs, and other federally regulated contracts.

"We don't think FERC should have a veto," an attorney for PG&E said at an April 10 hearing in the San Francisco courtroom.

At the hearing, Montali gave attorneys for the parties until early May to find common ground on the process for contract rejections before issuing a decision.

PG&E has listed $42 billion in commitments through 387 PPAs with 350 counterparties, involving 13,668 MW of capacity. Renewable energy projects account for more than half of that capacity.

In contrast, two energy storage companies with agreements for projects in development have requested, and received, the right to cancel their deals with PG&E. They cited looming development costs and uncertainties over whether the utility may seek to cancel the agreements, leaving them with stranded costs.

After authorizing Enel Green Power North America Inc. to terminate three capacity contracts in March, Montali on April 15 granted a request from esVolta for similar relief. EsVolta has a resource-adequacy contract with PG&E for a 75-MW battery storage project, which California regulators approved in November 2018.