Governor Newsom is following through on one of his first priorities—the passage of a bill to deal with risk and costs associated with massive, expensive, and deadly wildfires, aka the “new abnormal,” and help stabilize the state’s large utilities. One of these large utilities is already in bankruptcy, threatening to increase already highest in the nation energy rates and jeopardizing energy reliability. Last year the Legislature passed, and Governor Jerry Brown signed, SB 901 (Dodd), which appropriated millions of additional dollars for forest management and wildfire safety response, updated forest management practices, required utilities to update wildfire safety plans, and authorized the California Public Utility Commission (CPUC) to issue bonds for wildfire-related costs in an attempt to reduce the long term costs to ratepayers.
Unanswered Questions
Left open after last year was how the state should handle the many millions of wildfire-related costs going forward. Should costs be borne by the rate base, the utility’s shareholders, taxpayers, or some combination? Should the utilities be responsible for fire damage regardless of fault? How does California’s climate policy interact with wildfire costs? What do we do when a utility goes bankrupt? How do we prevent further credit downgrades that could result in more bankruptcy filings? How do we timely compensate residents and fire victims who lost homes and lives?
Speculation abounded over how the Governor, who convened a “strike force” to evaluate the issues, would weigh in on a potential legislative fix. Governor Newsom’s Strike Force issued its first report outlining several legislative options on April 12. The Legislature and Governor’s team worked hard on the issues, and the Strike Team issued a status update on June 21 with specific recommendations. In addition to ongoing fixes, the Governor wanted a bill that would:
- Establish a more rigorous wildfire mitigation plan process for power companies.
- Incentivize power companies to prioritize safety without profit.
- Update state climate modeling.
- Implement cost-effective financing for wildfire mitigation safety incentives.
- Create a new framework for allocating costs of utility-caused wildfires.
- Expand safety expertise, adopt industry best practices, and overhaul decision-making processes at the CPUC.
- Require investors of power companies in bankruptcy to contribute to a solution, meet accountability and safety conditions to participate in changes to the wildfire liability structure for power companies.
- Evaluate impacts of utility bankruptcy on state clean energy goals and ensure bankruptcy plans are compliant with state law and are feasible.
The Legislative Fix
Assembly Members Chris Holden, Autumn Burke, and Chad Mayes, chair and members, respectively, of the Assembly Committee on Utilities and Energy introduced AB 1054 on June 27, which was co-authored by Senators Bill Dodd and Bob Hertzberg. The bill contains many of the Governor’s requests. It is a complex, comprehensive bill changing the structure of how costs related to wildfire damages associated with utility infrastructure will be handled, conditioning access and cost recovery on billions in contributions from utility shareholders, creating new ratepayer charges, and hopefully preventing further bankruptcies that risk the reliability of our grid. Major provisions include:
- Creation of the California Catastrophic Council to oversee the California Earthquake Authority and newly created Wildfire Fund Administrator.
- Changing the cost recovery standard at the CPUC, depending on utility contributions.
- Creation of a Wildfire Fund to pay victims of utility-related wildfires.
- Conditioning utility access to the Wildfire Fund on safety certifications.
- Conditioning safety certifications on wildfire mitigation plan compliance, including persons with safety experience in utility board committees, establishing an executive incentive compensation plan linked to safety performance measures, and establishment of board-level reporting to the CPUC on safety issues.
- Allows the Department of Water Resources to issue bonds, and requires the CPUC to initiate a proceeding within 14 days to consider imposing a charge from ratepayers to fund the Wildfire Fund, and reach a decision on that rate increase within 90 days.
- Requires that the first $5 billion in aggregated safety investments be made by utility shareholders, not ratepayers.
- Allows securitization of appropriate costs found reasonable in rate recovery at the CPUC.
How is the Wildfire Fund Accessed?
The new Wildfire Fund will cover third party damages resulting from wildfires ignited after the bill is signed, and which was determined by the appropriate agency to be caused by the utility. The claims must be more than on $1 billion in aggregate or greater than the amount of insurance that the utility is required to carry. The utility must also have paid, or entered into binding commitments to pay, all or substantially all of victim claims, exhausted all of its rights against third parties that have financial responsibility for the fires, including accessing applicable insurance policies. The idea is that funds will be available more quickly to reimburse victims of fire damage going forward, rather than waiting for the time consuming CPUC process.
Utilities’ participation in the fund is conditioned upon a valid safety certification from the newly created safety division at the CPUC, that the utility not be subject to bankruptcy (unless certain ratepayer and climate policy protections are in place), and, for regional utilities, that a 5 cent per kilowatt hour customer fee is established to contribute to the fund. If reimbursement is granted, the utilities must petition the CPUC for rate recovery, and, depending upon the funding mechanism chosen below, replenish the fund fairly quickly.
How is the Wildfire Fund Funded?
AB 1054 creates two options for a fund. These funds differ based on funding source, and the choice can trigger different liability standards at the CPUC. Section 3291 of the bill contains the default Wildfire Fund to be created no later than June 30, 2020. This default would be funded by an initial transfer of $2 billion from the general fund and supplemented by the rate increases imposed by the CPUC and regional utilities. If this default fund is used, the current standard used at the CPUC for cost recovery, the “prudent manager” standard, will remain. This standard has meant that sometimes utilities will be held to a strict liability standard regardless of “fault,” but that they will not be able to pass those costs along to ratepayers.
Section 3292 contains the optional Wildfire Fund. This section requires initial funding from the large utilities of $7.5 billion and annual contributions of $300 million, along with the CPUC and regional utility rate increases. Regional electrical corporations may also participate upon an initial contribution of $625 multiplied by the number of customer accounts, annual contributions of $25 multiplied by the number of customer accounts, and the voluntary imposition of a $0.005 charge per kilowatt hour. So long as the initial contribution is made, the standard used at the CPUC for cost recovery is altered, changing to state so long as the utility maintains a valid safety certification, the utility’s conduct with respect to future wildfires is deemed to have been reasonable unless a party “creates a serious doubt as to the reasonableness of the electrical corporation’s conduct. Once serious doubt has been raised, the electrical corporation has the burden of dispelling that doubt and proving the conduct to have been reasonable.”
Both funds are intended to provide financial stability to the state’s utilities, which are facing credit rating issues, a downgrade in which could ultimately mean higher rates for California ratepayers. AB 1054 is also intended to provide more legislative and administrative oversight over wildfire safety issues at each of the utilities, hopefully reducing, in combination with wildfire prevention activities enacted pursuant to SB 901, the threat of catastrophic wildfires in the future. Although there are conflicting evaluations of impacts on rates, the Governor’s office has projected that the plan will either save, or only result in slight increases in rates when considered as a whole.
What’s Next?
The bill was signed by Governor Newsom on Friday, July 12. Once enacted, expect to see a new charge on utility bills and additional action from the Legislature on forestry management and emergency response issues. A looming question remains: with some of the highest commercial and industrial rates in the country, will the Legislature continue to pass additional procurement mandates or other bills that increase rates even further, or will ratepayers finally get a breather? Stay tuned.