Preliminary Issue: Creditworthiness³

Before we proceed to address the four specific issues on which we are to adopt rules, we must consider two preliminary issues that overlay the other issues. The first of those is the statutory prerequisite that a utility be deemed creditworthy. PG&E has raised this issue.

The statutory language is fairly plain on the topic of utility creditworthiness:

The commission shall not require an electrical corporation to conduct procurement to fulfill the renewables portfolio standard until it is deemed creditworthy by the commission upon it having attained an investment grade rating as determined by at least two major rating agencies. Within 90 days of being deemed creditworthy, an electrical corporation shall conduct solicitations to implement a renewable energy procurement plan. The creditworthiness determination required by this paragraph shall apply only to the requirements established pursuant to this article. The requirements established for an electrical corporation pursuant to Section 454.5 shall be governed by that section. (§ 399.14(a)(1).)

The statute also defines "procure":

For purposes of this article, "procure" means that a utility may acquire the renewable output of electric generation facilities that it owns or for which it has contracted. Nothing in this article is intended to imply that the purchase of electricity from third parties in a wholesale transaction is the preferred method of fulfilling a retail seller's obligation to comply with this article. (§ 399.14(g).)

PG&E argues that it is not subject to any part of SB 1078 for any purpose until it becomes creditworthy. (See, e.g., PG&E Reply Brief, pp. 10 -11.) The scope of PG&E's argument is far-reaching:

PG&E is not currently subject to the RPS program and shall have no obligation under the decision in this proceeding until it has attained an investment grade rating as determined by at least two major rating agencies. (id. at 11.)

The only authority cited by PG&E in support of its position is part of § 399.14(a)(1):

The commission shall not require an electrical corporation to conduct procurement to fulfill the renewables portfolio standard until it is deemed creditworthy by the commission upon it having attained an investment grade rating as determined by at least two major rating agencies. (PG&E Reply Brief, p. 10.)

There is, however, a mismatch between this statutory language and PG&E's claim. The statute bars the Commission from requiring a non-creditworthy electrical corporation to conduct procurement. That is all the statute prohibits. PG&E, with no explanation, somehow reads the statute to mean: "The Commission is obligated to defer application of SB 1078 for all purposes until PG&E attains an investment grade credit rating." (PG&E Opening Brief, p. 10, emphasis added.) PG&E's position is simply inconsistent with and unsupported by the statute. We will not order PG&E to conduct procurement prior to its becoming creditworthy, but PG&E is subject to the requirements of SB 1078, and does have obligations arising from this decision.⁴

The question of the precise scope of those obligations remains open, however, as the statute does not provide additional guidance on this point. There are several options. TURN proffers a variety of ways in which the Commission could compel or encourage PG&E to procure renewable power, based in part on other statutory authorities. (See TURN Opening Brief, pp. 11-15.) While this would be the most consistent with the statute's overall policy goal of increasing procurement of renewable resources, it appears to conflict with the language of the statute. Since the Commission "shall not require an electrical corporation to conduct procurement to fulfill the renewables portfolio standard" until it is creditworthy, we will not require an electrical corporation to conduct that same procurement under a different guise.

Alternatively, the Commission could find that, in the absence of an investment-grade credit rating, no annual procurement target (APT) should be set for a given year.⁵ This is a more-plausible subset of PG&E's broader argument (PG&E Reply Brief, p. 12). This alternative can best be examined in relation to our other main choice: an APT that is set each year, regardless of a utility's credit status, but without associated procurement being required. CalWEA advocates this position, arguing that APT obligations are not extinguished by lack of creditworthiness, but are only deferred. (CalWEA Reply Brief, pp. 12-13.) With deferral of APT obligations, the compliance mechanism would need to be adjusted to compensate for the fact that no procurement would be made until the utility was deemed creditworthy.

The "no APT" option is easiest on the utility. Once it became creditworthy, it would then begin to procure renewable generation at a 1 percent per year clip, just like other creditworthy utilities. If the utility had an APT set (and deferred) prior to becoming creditworthy, once it became creditworthy it would be behind, and would have to play catch-up to make up the APT that accrued when it was not creditworthy. This could make procurement more difficult, and could give bargaining leverage to renewable generators at the utility's expense.

However, setting an APT for each utility in each year, regardless of the utility's credit rating, is more consistent with the statute's goal of reaching 20 percent renewable procurement. In addition, both PG&E and SCE have stated that they expect to be creditworthy very soon. Accordingly, very little catch-up would be necessary, so the burden on the utilities is minimal. In addition, we are only requiring the statutory minimum 1 percent per year annual procurement.⁶ The plain language of the statute, which requires an increase in procurement of renewable energy by at least an additional 1 percent each year, allows us to require even greater quantities. (§ 399.15(b)(1).) The fact that the utilities might have to procure more than 1 percent for a limited period of time is fully consistent with the statute.

However, just because a utility may have an APT before it becomes creditworthy does not mean that a utility should be penalized (or even considered out of compliance) for not procuring renewable energy prior to becoming creditworthy. The potential bargaining leverage gained by renewable generators is reduced if the utility does not risk penalties or a finding of non-compliance if it does not procure renewable energy. Accordingly, a utility's credit rating shall be taken into consideration under the topic of flexible rules for compliance, which is discussed in more detail below.

⁴ SCE, the other non-creditworthy utility, takes a less aggressive position than PG&E, and refers to "PG&E's unique position with respect to its creditworthiness in light of its bankruptcy." (SCE Reply Brief, p. 8.)