By Kathleen Pender, SAN FRANCISCO CHRONICLE
July 13, 2019
If you’re wondering how the landmark wildfire bill Gov. Gavin Newsom signed Friday will affect utility customers, property owners and fire victims, you’re not alone.
The bill creates a $21 billion wildfire insurance fund that will reimburse investor-owned utilities for payments they make to victims of wildfires caused by their equipment. This assumes they join the fund within about two weeks and meet requirements including having a new “safety certification.”
But the fund is not like any type of insurance that exists today. It won’t sell policies, and fire victims won’t be able to seek restitution from the fund; only utilities can seek reimbursement for wildfire-related judgments or settlements.
Here are answers to basic questions about how the new fund will work, with the caveat that as with any complex law, there will be unintended and unforeseen consequences.
When does this take effect? The law took effect Friday and applies to wildfires from that date forward. The fund does not cover past wildfires, or future fires not caused by utility equipment.
Where will the $21 billion come from? Half will come from the state’s three large investor-owned utilities — Southern California Edison, San Diego Gas & Electric and Pacific Gas and Electric.
PG&E’s share is expected to be 64.2%, but it can’t fully participate unless and until it exits bankruptcy by June 30. If it wants to join, it must notify the fund quickly, get the bankruptcy court to approve its payment and meet other conditions, but the payment isn’t due until it exits bankruptcy. If it incurs a new fire liability between now and the day it exits, it can recover 40% of its claims, with the rest to be managed by the bankruptcy court, said Kellie Smith, an adviser to the bill’s sponsor, Chris Holden.
The utilities’ contribution must come from their assets or profits; it cannot come from ratepayers.
Three small investor-owned utilities also could join and contribute to the fund.
The other half will come from the sale of $10.5 billion in bonds by the California Department of Water Resources. These bonds would be repaid over roughly 15 years by a surcharge on utility customers’ monthly bills.
How much will it cost ratepayers? Customers won’t notice the surcharge, because it will replace a fee labeled DWR Bond Charge that has been on their bills since 2002. That charge has been paying off bonds the department sold after it began purchasing power on behalf of the utilities during the energy crisis.
The charge is about a half-cent per kilowatt hour and averages $2.50 per month for residential customers. It was supposed to drop off around August 2020; now it will continue until Dec. 31, 2035, at the latest.
Because the new bonds can’t be sold until the old ones are paid off, the state will lend the fund $2 billion, with authority to lend up to $10.5 billion if needed to manage claims.
With interest, underwriting and administrative fees, the bond sale would end up costing customers about $900 million a year, or $13.5 billion over 15 years. As long as there’s money in the fund, however, utilities cannot seek rate increases to cover new wildfire costs.
How will this affect victims of future fires? It won’t change their recovery process. Anyone seeking to recoup money for losses suffered in a utility-caused wildfire must still seek recovery from the utilities, almost always through the courts. This includes people seeking restitution for injury, death or uninsured property losses; government entities that incur costs or losses; and insurance companies that paid out claims.
The utility can then seek reimbursement from the fund for judgments and settlements it pays to these groups. Technically, the utility will get a bridge loan from the fund, then file an application for recovery with the California Public Utilities Commission, which will decide how much of that the utility can keep.
The commission will look at whether the amounts paid to victims were reasonable and whether the utility’s conduct, related to the fire’s ignition, was reasonable. If the utility had a valid safety certificate when the fire ignited, its conduct will be presumed reasonable unless “a party to the proceeding creates a serious doubt as to the reasonableness” of its conduct. In that case, the utility would “have the burden of dispelling the doubt,” the law says.
A safety certification requires the utility to have an approved wildfire mitigation plan and link executive incentive compensation to safety, among other things.
In determining how much the utility can recover, the commission can also take into account exacerbating factors including humidity, temperature and winds.
Will victims get faster or larger settlements? Faster, maybe, because the utilities will have a ready source of funds and be less likely to file for bankruptcy, which ties up claims. But probably not for more money, because the fund administrator would still have to deem the settlements reasonable.
Will this affect insurance premiums? It depends. The law limits the amount utilities can recover for payments to insurance companies to 40% of insured losses. For example, if insurance companies paid out $4 billion in claims and sued the utility, and the utility settled for 40 cents on the dollar, it generally could recover that amount from the fund. If it settled for more than 40 cents on the dollar, it would have to make a strong case to the fund’s administrator why it should get more.
In the past when utilities caused a fire, insurance companies have generally recovered 40% to 70% of their claims, “depending on how bad the conduct of the utility was,” said Rex Frazier, president of the Personal Insurance Federation of California, a trade group.
If the new system “replicates the system we largely have now,” it won’t affect premiums, Frazier said. “In San Bruno, PG&E settled for more than 100%, the facts were so horrendous.”
If the law “restricts settlements below where they are now, if 40% becomes the norm, that would in general lower our average long-term recovery and there would be upward pressure” on premiums.
What if the fund runs out of money? Utilities would do what they did before: Ask the commission for a rate increase to cover wildfire costs. As long as a utility had its safety certification, however, the commission would presume the utility acted reasonably, unless someone raises serious doubts. In the past, when utilities sought rate increases to cover wildfire costs, the burden was on them to prove they acted reasonably.
“It’s easier for (utilities) to charge ratepayers for their imprudence after enactment,” said Jamie Court, president of Consumer Watchdog. “If the fund runs out, under the new legislation the (commission) also has the ability to bond for the added costs — spreading it over time rather than simply putting it on as higher rates, which they can do now. That hides the true cost.”
The fund is expected to be sufficient to cover losses for 10 or 15 years, the governor’s office says. The hope is that by then, the state and utilities will have mitigated wildfires to the point where they won’t threaten lives and utility solvency.
Kathleen Pender is a San Francisco Chronicle columnist. Email: [email protected] Twitter: @kathpender
Kathleen Pender writes the Net Worth column in The San Francisco Chronicle. She explains how the big business and economic news of the day affect a household’s net worth. She covers saving, investing, debt, taxes, housing, mortgages, retirement plans, employment and unemployment with a focus on issues specific to California and the Bay Area.
When it comes to big financial decisions, she believes that the simplest answer is almost always the best and that people would stay out of money trouble if they didn’t get involved in things they can’t understand. Pender welcomes questions from readers and frequently answers them in her column.
She majored in business journalism at the University of Missouri-Columbia and was a Knight-Bagehot fellow in business journalism at Columbia University.