California utility giant PG&E’s move to raise capital by selling 49.5% of its non-nuclear generation to investment behemoth KKR for somewhere around $3 billion is scheduled to come before the California Public Utilities Commission next week (May 9). Its fate is uncertain.
The KKR deal, announced Wednesday (May 1), would see the utility, which has the highest electric rates in the continental United States, spin off its large hydroelectric system along with smaller natural gas, solar, and battery storage elements to KKR. The Oakland-based company would continue to operate the system.
The CPUC will not be voting on the KKR deal directly, but on an earlier PG&E plan to move those generating assets into a separate business entity, with 49.99% outside ownership. In September 2022, PGE unveiled the proposal “to transfer its non-nuclear generation assets into the subsidiary company and then sell a minority stake in Pacific Generation which would provide an efficient source of equity financing to help PG&E fund wildfire risk mitigation and clean energy investments.” This week’s deal puts financial flesh on the bones of the original plan.
A commission administrative law judge has already recommended rejecting PG&E’s 2022 plan, citing oversight and control issues among others. The KKR deal would also require Federal Energy Regulatory Commission final approval. According to a December 2022 filing with FERC describing the nascent plan, the assets in the new subsidiary, Pacific Generation, would consist of “3,848 MW of hydroelectric, 1,400 MW of natural gas, 152 MW of solar, and 182 MW of battery energy storage.” FERC gave the plan a conditional approval a year ago, subject to further filings once state regulators acted.
The Wall Street Journal in 2022 explained the background of the move to spin off its non-nuclear generation: PG&E “is limited in its ability to raise debt and equity following a complex bankruptcy restructuring that required it to issue record amounts of each. Now, it is seeking alternative ways to fund its capital-spending plan, which proposes roughly $50 billion in investments between 2022 and 2026.”
The 2019 bankruptcy, the second in 20 years for the troubled northern California utility, is a result of successive years of major wildfires in its service territory pinned to the company’s elderly, above-ground transmission lines. The company pleading guilty to 84 criminal counts of involuntary manslaughter in the aftermath of the fires.
Now the company is seeking to bury much of its transmission system, perhaps 10,000 miles, an extremely expensive proposition that has some of the state’s vociferous and well-organized consumer groups balking at the impact. Electric rates have already risen 18% just this year, on top of multiple rate increases totaling some 30% in 2023.
At the 2022 announcement of its proposed generating spinoff, PG&E said, “The proposed transaction would have no impact on PG&E customer bills.” In its news release this week announcing the KKR deal, PG&E said it “is anticipated to reduce customer rates by more than $100 million over the next 20 years as Pacific Generation is expected to have higher credit ratings and a lower cost of debt than PG&E. The potential investment would also enhance PG&E’s credit profile, which would benefit PG&E’s customers.” Saving customers $5 million a year over 20 years seems a modest impact on the company’s highly burdened rate payers.
PG&E faces tidal waves of customer outrage over its rates. The shareholders (PCG:NYSE) are doing fine. For the 2024 first quarter, the company reported $732 million in profits ($0.34/share) on $5.9 billion in revenue, compared to a first quarter 2023 profit of $569 million, or $0.27 per share, on revenue of $6.2 billion. The company’s stock has traded from $18.08/share this January to $17.53 yesterday.
Mark Toney, the executive director of the feisty and tenacious consumer group TURN (The Utility Reform Network), told The Quad Report yesterday, “PG&E acts as though there are no limits to how much they can spend.” He noted that the CPUC-approved 2020 “general rate case” allocated $4.7 billion for wildfire mitigation. The company spent $9 billion, Toney said, and has been recovering that in rates.
Toney cited a classic case of overspending that gets recovered in rates: undergrounding high-voltage transmission lines to prevent overhead lines from causing fires. That’s costing the utility — its customer — some $4 million per mile. Los Angeles-based SCE, which also has wildfire exposures, is replacing conventional overhead lines with special insulated wires, at a cost of $800,000 per mile.
TURN “is doing everything we can to stop PG&E’s creative financing that enables them to continue to spend with abandon and not exercise fiscal restraint,” Toney said. The KKR deal could be another creative financial deal that allows the company to raise more capital, he suggested.
“PG&E’s rates are so high,” said Toney, “it’s not only bad for customers, but bad for reaching our climate coals. The cost of operating a heat pump or an electric water heater is higher than with natural gas. People don’t like to be punished for doing the right thing. We are shooting ourselves in the foot.”
–Kennedy Maize