To reduce wildfires and save utilities, Newsom wants $10.5 billion from ratepayers

Gov. Gavin Newsom is asking the California Legislature to extend an existing charge on utility customers’ bills in hopes of generating $10.5 billion for a new wildfire fund, one that power companies could use to pay for fire damage — but only if they meet the state’s safety standards.

Newsom’s plan would also give investor-owned utilities the option of matching the ratepayer money with another $10.5 billion. In exchange, the state would cap the companies’ financial liability if their negligence were to cause a wildfire.

Under pressure from Wall Street analysts to take action, the governor disclosed a broad outline Friday that seeks to shore up utility finances amid rising costs for wildfires — a plan that came under criticism for its lack of specificity.

The proposal stops short of meeting investor demands that the state change its doctrine of inverse condemnation, which holds utilities responsible for wildfire damage linked to their equipment.

But Newsom’s advisors said they were confident that a fund coupled with a new safety certification process would stabilize the industry’s finances, ensure that wildfire victims can recoup losses and reduce fire risks. They said the plan would create incentives for utilities to safely manage the thousands of miles of power lines and equipment that crisscross the state.

“Financially unstable electrical utilities will put wildfire victims in jeopardy and cause California families to see their electrical bills skyrocket,” Newsom said. “In the coming days, I will continue working with the Legislature to turn this framework into a package of bills that make the changes we need.”

Newsom has not yet introduced his plan in the form of a bill or released any detailed policy documents. The Utility Reform Network, or TURN, raised concerns about the governor’s attempt to rush the proposal through the Legislature. Many outside groups are impatient to read a clear proposal.

“What we’re waiting for and hoping for is to hear that PG&E will be held to the highest possible standards of safety, that PG&E will be held accountable for the death and destruction it has caused and that customers will be held harmless because they are not the ones responsible,” said Mindy Spatt, a spokeswoman for TURN. “That’s what we’d like to hear. We haven’t heard it yet.”

Pacific Gas & Electric Co.’s stock price closed at $22.96 on Friday, up more than 23% since Monday.

The issue of wildfire liability has vexed the Legislature since state regulators, in an unprecedented 2017 case, blocked San Diego Gas & Electric from passing off costs to ratepayers that exceeded the company’s insurance coverage.

The pressure to take action mounted after November’s Camp fire, which killed 85 people and reduced Butte County towns to ash. PG&E subsequently filed for bankruptcy, citing as much as $30 billion in potential liability costs. That triggered concerns that Southern California Edison could similarly fold if lawmakers failed to lessen the financial exposure of utilities.

The Legislature established a commission that issued several recommendations last month. Newsom and his team of advisors have also spent months studying the issue and paid top law firms and investment analysts $6 million to help them develop a solution by July 12, a deadline he imposed on lawmakers to pass a bill. Credit rating agencies have threatened to downgrade Edison and SDG&E if the Legislature fails to approve legislation to significantly reduce the financial risk for utilities.

“I feel confident that we’ll get something done this session,” said Assemblyman Chris Holden, a Pasadena Democrat who heads the utilities committee in the lower house. “There is a lot of education that we’ll have to go through with not only the members but with the community at large.”

Under the governor’s proposal, the state would establish a new wildfire division within the California Public Utilities Commission to enforce safety standards, according to administration officials.

Each electrical utility would have to undergo an annual review process and earn a safety certification before the start of next year’s wildfire season in order to tap the wildfire fund.

Certification would depend upon more than just the company’s efforts to prevent wildfires. Each company would also have to agree to tie executive compensation to safety performance and establish a safety committee on its board of directors, according to officials in the governor’s administration.

The utilities have already committed to spending $3 billion in ratepayer money on safety measures. Tapping into the fund would prevent the companies from earning a 16% return on that investment, according to the administration.

Sen. Jerry Hill (D-San Mateo) said it is unknown what criteria the state will use to determine whether utilities managed their systems to prevent wildfires, and that will be central to the plan.

“What are those standards that you would have to follow in order to avoid liability?” Hill asked. “The devil is in the detail, and that’s what I haven’t been able to look at yet.”

The governor’s office is suggesting two different options for the wildfire fund.

The first model, which Newsom’s team calls a liquidity fund, would raise up to $10.5 billion over 12 years to provide short-term loans to utilities to pay wildfire costs that exceed insurance coverage. The goal is to ensure that utilities have access to a line of credit to pay claims, according to the administration.

The state would finance this model with an indefinite extension of an existing Department of Water Resources bond, paid for by a charge on electricity bills. The bond program was established during the California energy crisis that began in the summer of 2000 and is otherwise set to expire next year.

The state would require utilities to pay back the liquidity fund after the Public Utilities Commission approves a cost recovery plan, officials said.

A second approach would augment the $10.5 billion from ratepayers with another $10.5 billion from the utilities. Instead of serving as a short-term line of credit, all of the wildfire fund monies would act as a second insurance policy, administration officials said.

Wildfire costs that exceed a company’s individual insurance coverage would be paid out through the fund. If the utility behaved prudently, the fund would pick up costs from the wildfire that typically fall on ratepayers. If the company acted negligently, the utility would be required to reimburse the fund, under a cap that has yet to be disclosed, the Newsom administration said.

PG&E would be barred from participating in the fund until it pays 2017 and 2018 wildfire claims and emerges from bankruptcy without raising rates for its customers, officials said.

The state’s utilities would be given 15 days from the enactment of the wildfire fund legislation to decide whether to provide the additional $10.5 billion. The proposal would apply to fires that begin in 2019 and subsequent years, according to the administration.

Newsom’s plan would also shift the burden of proof for liability away from the utilities for the first time in California for companies that earn the safety certification before a wildfire starts.

Similar to a model practiced by the Federal Energy Regulatory Commission, any party that intervenes in a regulatory cost recovery case and seeks to block a utility from recouping its wildfire losses from ratepayers would have to prove the company failed to reasonably manage its system or acted negligently. The existing regulatory structure in California generally requires utilities to prove that they prudently managed their systems in order to raise electricity bills after a wildfire.

Ratepayer advocates will probably bemoan the change because it assumes utilities behaved prudently. It could make it easier to shift costs onto ratepayers under the liquidity fund model. But some lawmakers say utility bills would increase anyway if the Legislature did nothing.

“I think the cost of inaction is much higher than acting, and we’ve got to act,” said Assemblyman Chad Mayes (R-Yucca Valley).

Senate President Pro Tem Toni Atkins (D-San Diego) said her house wants to ensure that the final solution is “in the best interest of ratepayers, fire victims and the reliability of electric and gas service to California’s residents.”

“In order for any solution to work, the Legislature and governor will have to work together,” Atkins said. “These goals will continue to be our highest priority.”