Marking a significant commitment by the state to shore up the financial position of California’s major investor- owned utilities, California Governor Gavin Newsom signed Assembly Bill 1054 into law on July 12, 2019. Because the law passed as an “urgency bill” with a more than two-thirds majority in each chamber, AB 1054 took immediate effect. Enacted on a bipartisan basis, the law creates a pool of liquidity to cover future wildfire claims, creates incentives to increase the safety of electric utility infrastructure, and indirectly backstops utility credit.
NEW $21 BILLION WILDFIRE FUND
The new law establishes a Wildfire Fund of at least $21 billion to provide liquidity for utilities to cover eligible, uninsured third-party damage claims resulting from future catastrophic wildfires. The law also establishes a new framework to encourage and certify utility safety practices, intended to reduce the risk of wildfires ignited by power infrastructure.
The Wildfire Fund is necessitated in part by California’s “inverse condemnation” doctrine. That rule, in effect, makes public utilities strictly liable for damages from fires sparked by utility-owned facilities or equipment, regardless of fault. As catastrophic wildfire risks rise with climate change and increased residential development in fire-prone areas, the utilities’ potential liability to pay wildfire claims can exceed their capacity to pay. The new fund provides a reserve to bridge that gap.
Without this reserve, placing on utilities the cost of widespread wildfire liabilities raises the challenge of how utilities can recover those costs. Recovering the costs from ratepayers by raising retail power rates creates challenges of affordability and fairness. Trying to pass the costs entirely on to utility shareholders has economic limits and, since fault is not required, is also unfair. Having tax- payers bear the costs spreads them more widely than having ratepayers bear the burden but also raises issues of fairness and is deeply unpopular.
The new law solves this puzzle by allowing utilities to access a pool of capital that they will fund over time at affordable levels, in part by amounts collected from ratepayers and in part by amounts borne (indirectly) by utility shareholders, while penalizing any utility that fails to make invest- ments and operational improvements to prevent future fires or that is shown to act unsafely. So that the fund is immediately available, the state will provide upfront funding to be repaid by the utility contributions. Thus, future wildfire victims can recover on their claims, ratepayers are protected from exorbitant rate increases, utility investors bear the risk of how the utility manages fire safety, and the risk of future fires is reduced. Further, utility credit is protected, keeping wholesale power costs stable while preserving both grid stability and the state’s renewable energy procurement goals.
CAPITALIZING THE WILDFIRE FUND
The Wildfire Fund created by AB 1054 essentially acts as a supplemental line of credit for private utilities beyond what is covered by their insurance to pay for adjudicated, covered third party-claims arising from catastrophic wildfires ignited by utility-owned equipment. The Wildfire Fund will create a state-backed pool of capital of at least $21 billion.
Ratepayers (through the extension of an existing, small monthly charge on electricity bills) will ultimately fund $10.5 billion of the Wildfire Fund, by repaying the start-up bridge funding to be provided by the state from other surplus funds on hand and future bond proceeds. For legal certainty, the state’s funding obligations are supported by a continuing appropriation. Specifically, the Wildfire Fund will be capitalized initially by a loan from
California’s Surplus Money Investment Fund. This loan will be repaid from the proceeds of AB 1054’s extension past 2020 of a $2.50/month surcharge on retail electric utility bills collected by the Department of Water Resources that was otherwise due to expire. The Wildfire Fund is a revolving fund, to be replenished from utility reimbursements and future contributions as the fund is used.
The three large investor-owned utilities — Southern California Edison (SCE), San Diego Gas & Electric (SDG&E) and Pacific Gas & Electric Company (PG&E) — have each committed to make supplemental contributions, increasing the fund from $10.5 billion to $21 billion. The initial contributions of the utilities to the Wildfire Fund will total $7.5 billion, with aggregate annual contributions of $300 million required thereafter. Each participating utility will be responsible for a percentage of the total initial contributions equal to $7.5 billion multiplied by the utility’s “Wildfire Fund allocation metric.” Thereafter, each utility will be required to make annual contributions in an amount equal to $300 million multiplied by its assigned percentage under the Wildfire Fund allocation metric.
The Executive Director of the California Public Utilities Commission (CPUC) determined the Wildfire Fund allocation metric to be 64.2% for PG&E, 31.5% for SCE and 4.3% for SDG&E. The Wildfire fund allocation metric was calculated as the average of (i) the proportion of land area that sits in high fire-threat districts that is served by such utility as compared to the total land area in high fire-threat districts served by all utilities and (ii) the pro- portion of the line miles of transmission and distribution lines owned by such utility as compared to the total line miles owned by all utilities collectively. This figure is subject to adjustment based on the utility’s historic risk mitigation efforts. PG&E’s participation in the fund is contingent on it emerging from bankruptcy by June 30, 2020.
The utilities will not be permitted to recover their contributions to the Wildfire Fund from ratepayers, in effect passing that cost indirectly on to utility shareholders in exchange for access to the additional reserves. The contributions will also be excluded from the measurement of the utilities’ authorized capital structure.
The state’s participating investor-owned utilities may seek payment from the Wildfire Fund to satisfy, settle or finally adjudicate eligible third-party wildfire claims that have been reviewed and approved by the Wildfire Fund Administrator. An affected utility may submit to the CPUC an application to recover wildfire costs and expenses from its ratepayers, subject to having acted reasonably. The utilities still must maintain insurance apart from the fund. A utility may have to repay to the Wildfire Fund at least some of the amounts advanced to pay claims, depending on whether the utility has been permitted by the CPUC to recover costs from ratepayers or has failed to be certified and taken reason- able steps for fire safety.
The Wildfire Fund will be available to cover eligible future wildfire costs but will not cover liabilities arising from the 2017 Wine Country fires, which burned at least 240,000 acres and resulted in 44 deaths, the 2018 Camp Fire, which burned at least 150,000 acres and resulted in 85 deaths, nor any other past fires. The law is intended to stabilize the utilities’ finances by giving more certainty regarding liquidity to cover the cost of future fires. Although the law lacks coverage for prior or existing wildfire liabilities, AB 1054 is intended to remove uncertainty about the impact of future fires on utility solvency so that the utilities can today raise new financing as needed to settle pending or probable claims from past fires.
Related laws (AB 111, along with other measures) were also passed to implement this complex legislation, creating a new Office of Energy Infrastructure Safety and, to oversee the administrator of the Wildfire Fund, a new California Catastrophe Response Council.
Subsequently, PG&E failed to secure the passage of Assembly Bill 235, which would have allowed California to borrow up to $20 billion on PG&E’s behalf through tax-exempt bonds, to be repaid from PG&E profits. The proceeds of the new bonds would have been used to pay fire claims related to the 2017 and 2018 wildfires, wholly apart from the Wildfire Fund. Concerted opposition to AB 235, especially from wildfire claimants and hedge fund investors seeking control of PG&E, resulted in the bill being tabled. Although AB 235 failed to pass in the current term, AB 235 may be reconsid- ered in January 2020. Politically, there appears to be little legislative support for any measure seen as a “bailout” of PG&E, in contrast to the Governor’s broadly supported bill creating the Wildfire Fund.
UTILITY SAFETY CERTIFICATIONS AND REIMBURSEMENTS
AB 1054 encourages the utilities to implement safety precautions by providing for a cap on a utility’s obligations to reimburse the Wildfire Fund and a presumption of reasonableness if a utility develops and maintains a valid safety certification from the Wildfire Safety Division. In connection with the valid safety certification, each utility must develop and implement an approved wildfire mitigation plan, implement the findings of its safety culture assessments, establish a safety committee of its board of directors, establish board-of-director level reporting to the CPUC on safety issues, tie executive compensation to safety performance, and spend the amounts necessary to implement its wildfire mitigation plan, as approved and supervised by the Wildfire Safety Division.
Once a utility has used the Wildfire Fund, the CPUC must review a utility’s use of the Wildfire Fund to determine if the utility acted reasonably and to what extent the utility must reimburse the Wildfire Fund for such use. The CPUC determination will be guided by a new reasonableness standard that requires a utility to prove that, based on the preponderance of the evidence, its conduct was consistent with actions that a reasonable utility would have undertaken in good faith under similar circumstances, at the relevant point in time and based on the information available to the utility at the time. If the utility had a valid safety certification for the period when the subject fire took place, the utility’s conduct will be deemed reasonable unless a party to the applicable proceeding creates a serious doubt as to the reasonableness of the utility’s conduct.
The law leaves unresolved larger issues as California grapples with increased wildfire risks from drought, climate change and suburban sprawl. AB 1054 does not include spending to protect homes in high risk areas, nor does it mandate statewide land use limits on developments in wildland-urban inter- face fire zones. The law also contains no mitigating measures to address the rising costs and decreasing avail- ability of fire insurance in fire-prone areas. Lastly, the law keeps in place California’s “inverse condemnation” doctrine under which public utilities may be held strictly liable for casualty losses resulting from fires sparked by transmission lines or other power facili- ties, regardless of fault.
Passage of AB 1054 bodes well for SCE, SDG&E and PG&E and has been favorably received by credit rating agencies. A number of remaining unresolved issues remain, including PG&E and SCE adjudicating and paying outstanding wildfire claims and PG&E finalizing its restructuring. Nonetheless, through AB 1054, the Governor and Legislature have crafted a solution that balances competing interests to reduce wildfire risks and to put funding of future wildfire claims on a firmer footing