Utility customers will pay $10.5 billion for California wildfire costs under bill sent to Newsom

Reporting from Sacramento —  Gov. Gavin Newsom is expected to sign legislation Friday to overhaul how the state pays for utility wildfire damage — a complex bill the governor championed and moved swiftly through the California Legislature this week at Wall Street’s urging.

The bill’s passage was a political victory for the governor, but some questioned whether California leaders were just making a down payment for wildfire costs that will skyrocket if more isn’t done to prevent ever-larger blazes.

The administration says the bill will provide investor-owned utilities with at least $21 billion to pay for damage from blazes linked to their equipment beginning this summer. Utility customers will be required to pay $10.5 billion to the so-called wildfire fund through a 15-year extension of an existing charge on monthly bills, one that was originally expected to expire by 2021.

The Assembly sent AB 1054 to the governor’s desk Thursday with a 63-8 vote, three days after the Senate approved the proposal. Newsom commended lawmakers for moving the bill forward.

“I want to thank the Legislature for taking thoughtful and decisive action to move our state toward a safer, affordable and reliable energy future; provide certainty for wildfire victims; and continue California’s progress toward meeting our clean energy goals,” Newsom said.

The governor propelled the bill through the Legislature in response to threats from credit rating agencies to downgrade the state’s power companies if lawmakers failed to act by the end of this week. Newsom and his legislative allies have argued that his bill will ultimately cost customers less than inaction would.

Weaker credit ratings often lead to higher borrowing costs for utilities, and state regulators have allowed power companies to pass off those capital expenditures to ratepayers through higher monthly bills.

State leaders also feared a worst-case scenario in which Southern California Edison might follow Pacific Gas & Electric Co. into bankruptcy if the liability law remained unchanged, the power company was downgraded and a major wildfire broke out in its territory this year.

The Newsom administration has argued that the law protects ratepayers from potential price spikes by ensuring Edison doesn’t go belly up. As a condition of participation in the fund, the bill requires PG&E to exit its bankruptcy case by next year without raising rates on customers. PG&E would also have to pay off its claims from 2017 and 2018 wildfires to join the fund, a measure wildfire survivor groups praised during legislative hearings this week.

“AB 1054 will pave the way for very important changes in how we address wildfires in California,” said Assemblyman Chris Holden (D-Pasadena). “The package provides certainty for customers whose contributions are fixed by the bill. It provides certainty for the markets to protect the utilities and provides certainty to fire victims.”

An analysis shows that PG&E residential customers could expect their bills to double within eight years if recent wildfire trends continue and state laws go unchanged, said Steven Weissman, a lecturer at the Goldman School of Public Policy at UC Berkeley. Weissman said that similar increases could fall on Edison customers and that San Diego Gas & Electric Co., if faced with similar liability, could see rates rise even faster.

Weissman’s analysis did not provide a cost comparison to the effects on rates under Newsom’s proposal. He said shuffling money around can only go so far.

“Dollars have to come from somewhere,” Weissman said. “It’s either ratepayers, taxpayers, shareholders or victims. As these wildfires might pile up, you’re going to reach a point of saturation very quickly, where either ratepayers can’t pay their bills, shareholders won’t buy the stock and on down the line. There’s no substitute for doing what we can to prevent wildfires. What a bill like this does is buys a little time.”

Some lawmakers similarly asked their colleagues and the governor to focus more on wildfire prevention as the ultimate solution to the problem.

Assemblyman Marc Levine (D-San Rafael) said lawmakers were going too far to help utilities including PG&E, which has admitted that its equipment probably caused the Camp fire that killed 85 people in Butte County last year. Levine cited a Wall Street Journal investigation published this week that said PG&E knew the line that probably sparked the Camp fire could cause a wildfire and failed to perform upgrades on dangerous equipment.

“It is hard to see this bill as something other than a reward for monstrous behavior,” said Levine, who voted against the bill. “Our efforts should make public safety paramount.”

The ultimate effect of the proposal hinges on how Wall Street perceives the new law, whether the utilities decide to match the ratepayer monies and how state regulators enforce utility safety.

Newsom’s bill offers two different models of wildfire funds to help utilities pay for claims.

One option offers the utilities the $10.5 billion from ratepayers as a line of credit to pay for costs that exceed insurance coverage for wildfire damage. A utility that borrowed from the fund would later be required to repay the loan if regulators decide the company failed to properly manage its system to prevent the fire.

The second model gives utilities the option of contributing $10.5 billion to match the ratepayer money. That would create a fund of at least $21 billion in exchange for a cap on their wildfire liability. Under this plan, SDG&E, Edison and PG&E would have 15 days from the time the law is enacted to signal whether they intend to contribute.

Ana Matosantos, Newsom’s Cabinet secretary, told lawmakers this week that she expects the utilities to choose to participate in the larger wildfire fund.

In order to access the fund, utilities would have to earn a first-of-its-kind annual safety certification before the onset of wildfire season. To receive the certification, companies would be required to tie executive compensation to safety performance, create safety committees on their boards of directors and be implementing their wildfire mitigation plans.

A power company that obtained safety certification before wildfire season would be allowed to dip into the wildfire fund, which would act as a second insurance policy for the utilities. The companies would only have to pay it back, up to a cap, if they behaved unreasonably to cause a fire.

The safety certification would also shift the burden of proof away from a utility, requiring outside groups to intervene in regulatory proceedings and raise serious doubt that the electrical corporation operated its system reasonably before a wildfire.

Under the model, PG&E would be responsible for paying more than 60% of the total $10.5 billion from the utilities. Edison would pay nearly one-third, and SDG&E would cover about 4%.

An initial contribution of $7.5 billion is due from the utilities in the first year. SDG&E and Edison would have to provide their share of the money within 60 days of opting into the plan.

PG&E in particular won’t be required to pay an initial contribution until the San Francisco company emerges from bankruptcy no later than June 30, 2020, according to the governor’s office. Given the current bankruptcy proceedings, PG&E would be able to recover only 40% of its costs that exceed insurance coverage from the fund for wildfires that occur in the next year.

After the the first year, the utilities would be required to pay $300 million in aggregate annually.

The state would deposit an initial contribution of $2 billion after the utilities pay their portion, and an administrator of the fund would later determine when to add the additional money, the governor’s office said.

Several lawmakers expressed concern over the last week about efforts to move such complex legislation so quickly. Legislators who worked closely with Newsom to push the bill forward promised to continue to work on wildfire prevention when lawmakers return from summer break next month.

“We still have other work to do,” said Assemblywoman Autumn Burke (D-Marina del Rey). “This is not the end of the conversation, but this is a pivotal part in the conversation and this was something that cannot be pushed aside anymore because we have seen the cost of inaction and the devastation.”

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