It also marks the first major political test for first-year Gov. Gavin Newsom, who is pushing legislators to bring a bill to his desk that he thinks will get money promptly into the hands of fire victims, ensure some long-term financial stability for the state’s three investor-owned-utilities, calm down Wall Street ratings agencies and reduce the risks of more fires ripping through the Golden State.
Newsom wants wildfire legislation before him by July 12, the last day lawmakers are in session before they take a one-month summer recess. The date also serves as an indicator whether the Legislature will likely put any changes into place before fire season goes into full swing, thus delivering a signal to ratings agencies mulling whether to issue another round of downgrades to California’s power companies.
Assembly Bill 1054 is the most far-reaching of the wildfire bills at the State Capitol. It has been marked as an “urgency statute” that can go into effect almost immediately but would require a two-thirds majority rather than a simple majority.
“Financially unstable electrical utilities will put wildfire victims in jeopardy and cause California families to see their electrical bills skyrocket,” Newsom said June 21. “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.”
AB 1054 runs largely in parallel to the plans outlined by the Newsom administration. It would create a $21 billion insurance fund that utilities could tap into, provided they meet the requirements of a newly instituted safety certification process.
To earn the certification, the utilities would have to undergo a review process each year, tie executive compensation to safety performance and establish a wildfire safety committee on their boards of directors.
The power companies could access the money if a fire caused by their equipment results in more than $1 billion in property damage — but only if the California Public Utilities Commission, or CPUC, determines they acted prudently. If the commission rules they acted recklessly, the utilities have to shoulder the costs.
Some of the bill’s critics have questioned whether the CPUC will go easy on the utilities, saying the commission has a history of being too accommodating to industry.
The fund would be run by a panel called the California Catastrophe Council composed of state government officials, including the governor or someone designated by the governor.
The fund would be financed half by the utilities (San Diego Gas & Electric, Southern California Edison and Pacific Gas & Electric) and half by ratepayers.
Under the bill, customers would keep paying $2.50 a month for a bond established in the wake of the California energy crisis though the Department of Water Resources. Instead of terminating the charge, the fee would be extended with the money going to the wildfire fund.
The utilities would be required to spend a combined $5 billion every three years to reduce the risks of wildfires in their respective service territories, on top of what they are already spending. The power companies would be allowed to pass those costs onto customers but they could not earn a profit on that spending. An advisory board under the CPUC’s new Wildfire Safety Division would have authority over the utilities’ mitigation plans.
State regulators have estimated about 10 percent of California wildfires can be traced to power line issues.
The bill does not specifically address the state’s legal doctrine of “inverse condemnation” that power companies have long sought to eliminate but it does make a subtle yet likely significant change.
Once a utility gets certification, proof of liability would shift. Parties looking to recover costs from power companies would have to prove a utility failed to manage its systems prudently or acted negligently. For years, the burden of proof has been placed on utilities to show they acted responsibly.
The proposed change is one of many reasons San Diego attorney Michael Aguirre is opposed to the legislation.
“So you’re asking me for money but I have to prove to you why I shouldn’t have to pay? That is really a fundamental change of the utility code that’s been in effect for a hundred years,” said Aguirre, who has battled SDG&E in the utility’s quest to recover $379 million in costs from the 2007 wildfires in the San Diego area from customers.
“This is a utility company dream come true, where you just basically tap into the power of the state of California to charge utility customers unlimited amounts of money for the foreseeable future.”
Aguirre said the bill is being rushed through the Legislature, and its section calling for ratepayers to pay into the insurance fund by extending the $2.50 a month fee will be subject to legal challenges.
SDG&E representatives have not come out in favor of AB 1054 although in an email to the Union-Tribune, a company spokeswoman called it “a good starting point.”
“A comprehensive solution should be adopted to adequately protect the interests of all Californians and should take into account the significant investments our region and SDG&E have made over the past decade to protect our communities from devastating wildfires,” communications manager Denice Menard said.
Since the 2007 Witch, Guejito and Rice fires destroyed more than 1,300 homes, killed two people, injured 40 firefighters and forced more than 10,000 to seek shelter at Qualcomm Stadium, SDG&E has spent about $1 billion in ratepayer funds on programs to fight and prevent wildfires in its service territory.
SDG&E has also joined Southern California Edison and the International Brotherhood of Electrical Workers union in establishing a lobbying effort called WildfireAction.com that is pushing lawmakers “to help California better prevent, prepare for and respond to the increased frequency and severity of the threat of wildfires.”
Credit ratings agencies such as Moody’s, Fitch and Standard & Poor’s have downgraded California utilities in recent months, citing “the potential for multi-billion dollar exposure related to wildfire risk.”
Moody’s dropped Southern California Edison’s rating in March to a level two notches away from speculative grade, or junk. It downgraded SDG&E as well, to a level three notches from junk. Moody’s withdrew ratings from PG&E in February after the Northern California utility filed for bankruptcy.
The ratings agencies have warned of further downgrades unless California institutes legislative or regulatory changes to shore up the long-term financial prospects of the state’s power companies.
Downgrades increase the utilities’ cost of borrowing, which is passed on to customers.
After Newsom introduced the wildfire proposal last month, Moody’s vice president Jeff Cassella released a statement saying the measure “appears to include several credit supportive elements to mitigate wildfire risk” for utilities but “the extent of the credit support will depend on the details.”
Paul Patterson, an analyst who covers utilities for the New York City research firm Glenrock Associates, said he thinks the ratings agencies may not consider July 12 a drop-dead date to decide whether to issue downgrades or not.
“I can’t really speak for Wall Street but it would be preferable that the governor’s deadline would be met but we’ll see what happens,” Patterson said. “I think it depends on how far along they are (with a legislative solution). If they leave (July 12) in disagreement, if there appears to be some impasse that isn’t bridgeable, I think that could be a problem.”
Patterson said he believes California policymakers need to make changes when it comes to wildfire liability and a properly crafted safety certification program for utilities could lead to a situation “where one doesn’t have to wonder whether or not some gigantic wildfire is going to basically wipe out a company.”
Aguirre, however, said ratings downgrades are not necessarily something to be feared.
“I would tell the ratings agencies you’re right to downgrade (California utilities) because their management doesn’t deserve a passing grade,” Aguirre said. “If you send the message that management is not doing well, the institutional investors will demand new management come in and take the steps necessary to provide safe electricity. This will help send the kind of message to the market that correction is needed.”
A coalition of renewable energy trade associations including wind, solar and geothermal sources has come out in favor of AB 1054.
“Our renewable projects have brought clean energy to California attracted by forward looking policies and financially stable utilities,” Jan Smutny-Jones of the Independent Energy Producers said in a statement. “California’s energy future is dependent upon getting to a financially stable market, as AB 1054 intends.”
Another section of the bill relating to the Wildfire Safety Advisory Board has drawn criticism. As written, the legislation would exempt the board from the state’s Open Meeting Act and some of its communications could be done in private “to encourage candid and timely advice” by the board to the CPUC’s Wildfire Safety Division.
“It is basically in violation of the California constitution,” said April Maurath Sommer, executive director of the Wild Tree Foundation, an environmental group based in the Bay Area. “The public should be able to know what the government is doing, This is a real transparency problem that I can’t see that there’s any benefit to.”
Newsom said the proposal is not in its final form and may very well change.
The legislative debate comes as the number and intensity of fires in California is on the rise.
According to CalFire’s list of the 10 most destructive wildfires in state history, seven of them have occurred since 2015. Six of the 10 have occurred in just the past two years.
Last November’s Camp Fire in PG&E’s Northern California service territory killed 85 people, making it the single deadliest fire in state history. PG&E cited $30 billion in potential liabilities when it filed for bankruptcy protection in January.