An administrative law judge has recommended the California Public Utilities Commission reject Pacific Gas and Electric Co.'s application to spin off its 5.6-GW non-nuclear generation portfolio into a stand-alone entity.
The transaction's negative impacts "outweigh" any potential financial benefits that Pacific Gas and Electric (PG&E) would reap, and the restructuring does not meet "even the minimal public interest standard," Administrative Law Judge Sophia Park wrote in a March 15 proposed decision.
Park cited issues including customer rate increases, "unknown risks" concerning minority investors, uncertainty related to the commission's continuing jurisdiction over the portfolio and unclear implications for PG&E's balance sheet should the creation of Pacific Generation LLC be approved.
"There is no precedent for the commission to regulate two [investor-owned utilities] providing simultaneous electric service to the same retail customers in the same service territory. There is also no precedent for a load serving entity that is a generation-only electrical corporation," Park wrote.
Given that PG&E's parent company, PG&E Corp., intends to maintain a 50.1% ownership interest in the new operating company and sell the remaining interest, the proposed decision emphasized that PG&E did not present enough evidence that it will retain sufficient operational and budgetary control over Pacific Generation.
"We do not find applicants' proposal to defer consideration of issues regarding the identity of the minority investor(s), code of conduct, governance rights, and other matters to a subsequent advice letter process to be adequate," Park wrote. "We also do not find the fact that [the Federal Energy Regulatory Commission] would undertake review of any sale or transfer of interests exceeding 10[%] or more in Pacific Generation to be sufficient for this commission to make a finding that there are adequate safeguards against anticompetitive or other adverse public interest impacts."
In a March 18 statement, the company said, "While we are disappointed with the proposed denial of our application — which we continue to believe would be a highly beneficial transaction for customers with clear potential to lower bills — we will continue to be an active participant in the proceeding by submitting comments, and we hope for a different outcome."
Shares of PG&E were down about 1% in afternoon trading March 18 compared with the S&P 500 Utilities Index, which was up about 0.3%.
FERC authorized the spinoff in 2023, but PG&E faced resistance from consumer and environmental advocacy groups concerned about whether a proposed 49.9% minority stake sale of the new entity was in the public interest. The portfolio would include 3,848 MW of hydroelectric resources, 1,400 MW of natural gas-fired capacity, 152 MW of solar and 182 MW of battery energy storage. Among the largest assets, according to S&P Global Market Intelligence data, are the 1,212-MW Helms Pumped Storage facility in Fresno County, Calif.; the 668-MW gas-fired Maxwell Generating Station in Colusa County, Calif.; and the 586-MW gas-fired Gateway Generating Station in Contra Costa County, Calif.
PG&E said in its 2022 application to the PUC that Pacific Generation's creation and subsequent minority stake sale would be the best way for the utility and its parent to raise equity capital for liability improvements, but Park refuted that statement.
"The record does not reflect that the proposed transaction will generate equity proceeds at a better valuation than an issuance of stock by PG&E Corporation," the proposed decision said.
PG&E Corp. Executive Vice President and CFO Carolyn Burke said Feb. 22 on the company's fourth-quarter 2023 earnings call that equity issuances are currently "not the most efficient financing," in response to a question about how deliberations in the Pacific Generation proceeding might impact financing plans.
How the potential transaction would impact PG&E Corp. and PG&E's credit rating also remains unclear, according to Park. Both entities' issuer-level ratings are still below investment grade as they continue to rehabilitate their balance sheets after emerging from Chapter 11 bankruptcy in 2020.
Whether the PUC would ultimately retain regulatory authority over Pacific Generation is another key issue.
Pacific Generation is "voluntarily submitting ... and subjecting itself to the commission's plenary jurisdiction," but the entity "is arguably exempt from being considered a public utility" because its entire output will be sold to the California ISO wholesale market instead of to retail customers or PG&E, the proposed decision noted.
Analysts at Guggenheim told clients March 18 that "there does not seem to be a direct fix to improve the application," while analysts at Mizuho agreed that it is "less likely that some minor tweaking could make it amenable."
"The company does not want to get into a prolonged dispute of the application or create an overhang on the stock," Guggenheim analysts continued. "[Management] is disappointed in the outcome but noted it would continue advocating for the ability to pursue such transactions and in the interim would have to find other offsets to source of funds."
The PUC could hear the proposed decision as early as April 18, according to the filing.