By Megan Fan Munce, SAN FRANCISCO CHRONICLE
A bitter battle is playing out in the waning days of California’s legislative session, pitting two industries that profoundly impact residents — insurance companies and electric utilities — against one another.
At stake is who should bear more of the costs when blown fuses or downed power lines spark wildfires that level communities: utility companies and their ratepayers, or insurance companies and their policyholders?
The answer will affect which parts of the state end up paying the most. Higher utility bills would disproportionately affect people in hot places that consume more energy, like the Central Valley, whereas insurance rates hikes would hit hardest in high-wildfire risk areas like the Sierra foothills.
Gov. Gavin Newsom and utility companies want to put an end to insurance companies suing utilities when they start fires — a practice they say creates a massive amount of liability that eventually trickles down into higher costs for ratepayers. Insurers and wildfire survivors accuse the utilities of trying to escape accountability and pass the buck on to insurance companies, who would almost certainly raise their own rates in response.
Both the Assembly and Senate have countered Newsom with plans that preserve insurers’ rights to sue; sources familiar with the negotiations say Newsom has proposed phasing the ability to sue out over time.
As of Friday morning, negotiations were ongoing. Legislators face a Friday night deadline to introduce legislation they want to pass before the regular legislative session ends Monday. On Wednesday, Newsom didn’t rule out the possibility he might call a special session to address the issue in the fall.
It’s not the last time Newsom and the legislature have pursued last-minute utility reforms at the end of session.
In the wake of the Camp Fire and PG&E’s bankruptcy, the legislature created the California Wildfire Fund, a $21 billion reserve funded 50-50 by utility ratepayers and shareholders in order to pay the costs of utility-sparked wildfires. Utilities can access the fund after paying the first $1 billion in damages themselves.
Experts believe the original Wildfire Fund could be bankrupted by eventual claims from the Eaton Fire, which county officials determined was started by sparks (opens in new tab) from an out-of-service transmission tower owned by Southern California Edison.
Last year, after the Eaton and Palisades fires, the legislature re-upped the Wildfire Fund with an additional $18 billion account reserved for future fires.
But the near-exhaustion of a fund meant to last up to 20 years (opens in new tab) raised concerns that utilities won’t be able to keep up with the cost of California’s megafires, made more frequent and more severe due to climate change-driven droughts and hot weather as well as the continued advance of homes into backwoods areas.
That’s how the state has found itself contemplating whether utilities should continue to hold all of the costs themselves.
‘Great moral hazard’
The argument put forth by survivors and insurers seems simple: if utilities start fires, then they should be asked to pay — pay fire survivors for the emotional damages they suffer; pay local government for destroyed schools; and pay insurance companies for the billions they disburse in claims to survivors and local businesses.
If utilities can’t be sued, then it creates “great moral hazard,” said Jamie Court, president of the advocacy group Consumer Watchdog.
Insurance companies add that it avoids a situation where everyone, but especially those in high-fire risk areas, end up paying higher insurance premiums.
When someone else crashes into your car, your insurance can pay you and then go after the at-fault driver’s insurance to recoup the cost. Insurers do the same thing after a wildfire — but in this case, they’re going after utilities.
In a world without subrogation, insurers (and in turn, the reinsurance companies that back them up) would get no reimbursement for their losses — costs they’d then turn around and reflect in higher rates.
The American Property and Casualty Insurance Association, using analysis shared by the governor’s office, estimated the end of subrogation could lead to a 10% to 20% increase in home insurance rates statewide. The impact could lead to rates for the California FAIR Plan, the state’s insurer of last resort, being at least 50% higher given the amount of homes it insures in wildfire-prone areas, according to a statement from the insurer.
On Wednesday, the chief executives of 15 of California’s largest insurers sent a letter to Newsom and the legislature urging them to reconsider. If not, they wrote, the proposal would threaten the fragile progress made in easing California’s years-long insurance crisis (opens in new tab). The California Department of Insurance declined to comment.
Spreading the risk
Advocates of Newsom’s proposal say leaving subrogation in place won’t prevent increased costs, it’ll just shift them elsewhere — to utility bills.
California is the only state in the nation to hold utilities strictly liable when they start fires, meaning companies are on the hook financially regardless of whether they were negligent or not.
Under Newsom’s plan, and a counterproposal made by the Assembly, utilities’ withdrawals from the Wildfire Fund would be capped at $6 billion per fire.
Anything above that could be passed directly on to ratepayers, unless the utility was found to have been imprudent. In the case that a utility failed to take reasonable care to prevent the fire, then their shareholders could be ordered to bear the costs instead.
In the case of the Eaton Fire claims, estimated to be between $14 billion to $16 billion, that would be up to $9 billion that could potentially be passed on to ratepayers.
Even without a major wildfire, the threat alone of the unfettered costs could increase what consumers pay more for the portion of their bills (opens in new tab) that goes towards wildfire mitigation.
California utilities have faced a history of credit rating downgrades tied to concerns about wildfire liability and the state of the Wildfire Fund. S&P hasn’t given PG&E an investment grade credit rating since it emerged from bankruptcy; last year, the agency also downgraded Edison’s credit rating, leaving it just one notch away from the same fate.
On a July 30 earnings call (opens in new tab), Edison CEO Pedro Pizarro said there was a “strong likelihood” that Edison and the other investor-owned utilities could face credit downgrades if the legislature didn’t take “sufficient action.”
When a utility’s rating drops, the cost it must pay to borrow money rises. That makes wildfire mitigation and infrastructure maintenance more expensive — costs that directly flow on to ratepayer’s bills, said Merrian Borgeson, the Natural Resources Defense Council’s California policy director for climate and energy.
According to legislative analysis (opens in new tab), every 1% increase in utilities’ financing costs increases the average ratepayers’ bills by $60 per year.
“This is a real social problem, not just a utility shareholder problem,” Borgeson said.
To some, there are reasons to prefer increasing insurance premiums instead of utility bills.
The cost of home insurance in California is largely defined by two factors: the value of a home, including its contents, and the likelihood of it burning down in a wildfire. Spreading the cost of wildfires through insurance premiums would almost certainly mean charging more to those who live in high-risk areas or who have high-value homes.
Utility costs, meanwhile, fall on everyone, but disproportionately on those who live in hot places. Though owning a larger home or more expensive appliances may cause a household to use more energy, the amount customers pay in monthly electrical bills is largely uncorrelated to their income (opens in new tab).
Comparatively, that makes it a much more regressive way to socialize the cost of wildfires, according to Michael Wara, director of Stanford University’s Climate and Energy Policy Program.
Raising insurance costs in high-risk areas also beneficially spreads out financial incentives to invest in measures that reduce the risk of fires spreading, according to Meredith Fowlie, a professor of agricultural and resource economics at UC Berkeley.
While utilities can clear out vegetation near their equipment and underground powerlines, they have no control over many of the factors that determine if a wildfire they start ends up becoming a megafire, Fowlie said — such as whether a community in the path of the fire has defensible space or homes are built with wildfire-safe materials.
This type of mitigation done by homeowners and cities reduces the risk of fires spreading no matter whether they’re started by utilities, lightning or acts of arson. That isn’t to say that the state should stop pushing utilities to do everything they can to reduce the risk of their equipment sparking fires, Fowlie said, but that it should also consider how to provide the right signals and support for homeowners to also invest in fire safety.
But doing so will require more than just increasing insurance premiums, Fowlie said.
Mitigation and future costs
State law requires insurance companies to give homeowners discounts for mitigation, but these discounts often aren’t meaningful unless the homeowner does a whole suite of renovations, according to Carolyn Kousky, founder of the nonprofit Insurance for Good.
California must find ways to reduce risk across entire communities, both in rural areas and neighborhoods where grass or forest fires could jump to suburban homes, like they did in Los Angeles County, Kousky said. Doing so is the ultimate answer to bringing down costs.
The debate has left wildfire survivors finding themselves in a curious predicament: backing insurance companies against the utilities when they’re more used to battling both.
Survivor groups have decried Newsom’s proposal as a bailout that strips away accountability. But at the same time, Shimica Gaskins, who lost her East Altadena home to the Eaton Fire, said California can’t lose sight of the fact that insurance companies, too, have been a barrier to recovery.
She wishes all of the energy and last-minute negotiations being put into the liability reforms could’ve instead gone towards any number of priorities wildfire survivors put forward, such as a proposed $25 million fund (opens in new tab) that would have gone towards affordable housing developments in Altadena and grants for underinsured homeowners, like herself, to rebuild.
Gaskins hopes legislators remember the stakes at hand are more than just money.
“Recovery isn’t just about rebuilding a house. It’s about rebuilding our economic security, our community, our future,” she said. “That’s what we need them to have at the center of when they’re negotiating: our futures.”
Chronicle staff writers Sophia Bollag and Kathryn Palmer contributed reporting.
