By Ivan Penn and Peter Eavis, THE NEW YORK TIMES
June 21, 2019
With the effects of climate change intensifying, California is under ever-greater siege from wildfires, often caused by the equipment that brings power to homes. One of the state’s utilities is already in bankruptcy largely because of the resulting liability claims.
On Friday, Gov. Gavin Newsom laid out a proposal for helping to meet such claims while also helping to shield the utilities’ ratepayers and the companies themselves. The plan follows two years of the worst wildfires in California history, which killed dozens of people and destroyed the town of Paradise.
The key element, the administration said, was a $21 billion fund financed by utility investors and ratepayers to help settle claims arising from wildfire disasters. The plan would also tie executive compensation at the state’s investor-owned utilities to safety.
“Climate change has created a new reality in the state of California,” Mr. Newsom, a Democrat, said in a statement. “It’s not question of ‘if’ wildfire will strike, but ‘when.’”
But the plan will require legislative approval, and leaders of the State Senate and the Assembly have been developing their own ideas. The Assembly speaker, Anthony Rendon, and the Senate leader, Toni Atkins, both Democrats, said Friday that they would review the governor’s plan once they received a formal bill.
Some critics said that despite the stated objectives, the plan could leave much of the financial burden on ratepayers. “They’re going to move the goal posts and pretend that the shareholders are paying for it,” said Loretta Lynch, a former president of the California Public Utilities Commission, which regulates the state’s three investor-owned utilities.
The largest utility, Pacific Gas & Electric, filed for bankruptcy protection in January and faces tens of billions of dollars in liabilities related to the recent wildfires. It would not be able to benefit from the fund proposed by Mr. Newsom until it exits bankruptcy, a process in which it will have to restructure its finances and develop a plan to resolve existing claims.
Paul Moreno, a PG&E spokesman, said in a statement that the utility was “looking at all options when it comes to working with the governor and legislature.”
One continuing source of tension between the utilities and political leaders is the profit that the companies should be allowed. The companies say they need a higher return on their normal business operations to help cover the prospective cost of wildfires.
Utilities in the United States are typically allowed to earn a 10.5 percent return, but PG&E has asked that its roughly 11 percent return be increased to 16 percent. The two other investor-owned utilities — Southern California Edison and San Diego Gas and Electric — are also seeking increases. The combined requests would cost ratepayers $2.7 billion a year, according to the Utility Reform Network, a consumer-advocacy group.
The governor’s office said Mr. Newsom opposed the higher return.
Mr. Newsom is navigating difficult political waters. While working to develop a plan that helps protect the state, he has also had to find ways to improve confidence among banks and other investors that California is solving the problems related to the kind of wildfire liability that put PG&E into bankruptcy.
All the while, he must show Californians that he is not simply bailing out utilities at the consumers’ expense.
The governor’s proposal would require the utilities to spend $3 billion on safety improvements every three years. The improvements would include early warning and wildfire-detection systems and upgrades to utility equipment to harden the electric grid against fires. The plan would also require utilities to obtain an annual safety certification from the Public Utilities Commission.
Energy policy experts said they supported the idea. “This would provide an opportunity for experienced safety experts to have a major input,” said Steven Weissman, a lecturer at the Goldman School of Public Policy at the University of California, Berkeley.
The utilities could not earn a profit from the $3 billion in safety spending or on any other money related to Mr. Newsom’s plan. Half of the $21 billion wildfire fund would be covered by the utilities; the other half would be financed by bonds paid off by utility ratepayers.
Much rides on whether the wildfire fund would be big enough to absorb the costs of future fires.
One plan is to have the $21 billion fund buy insurance that would enable it to cover as much as $30 billion of wildfire costs, according to the administration.
But even this may not be enough, given that PG&E estimated its liabilities from recent wildfires at over $30 billion. It’s also not clear who would top up the fund once it makes payments to cover wildfire damages. Much would rest on whether the utility was clearly at fault.
Investors that provide financing to California’s utilities hope that the fund and other elements of the overhaul would protect the companies from the sort of financial shock that prompted PG&E to file for bankruptcy protection. The fund would play a big role in ensuring that the utilities can keep an investment-grade credit rating even as they get hit with large wildfire claims.
But on Friday, Jeffrey Cassella, an analyst at Moody’s Investors Service, said he needed more details to assess whether the fund would bolster the companies’ creditworthiness.
Wildfire victims and their advocates praised the plan but cautioned against allowing the utilities to collect additional profits through the regulatory process.
“I think this is a reasonable proposal as long as there are no monkey tricks at the P.U.C.,” said Jamie Court, president of Consumer Watchdog, a nonprofit consumer-advocacy organization, referring to the state’s Public Utilities Commission. “The trick is making sure the shareholders do pay.”
Patrick McCallum, co-chairman of the wildfire victims group Up From the Ashes, said the utilities must not only take part in the governor’s plan but also ensure that those who suffered losses in previous fires received appropriate compensation from PG&E.
The governor’s plan would leave intact the legal doctrine known as inverse condemnation, which holds the state’s utilities liable for wildfires caused by their equipment even if they are not determined to have been negligent. But under one version of the plan, the utilities would not have to reimburse the wildfire fund for claims arising from fires started by their equipment if they were found to have “acted reasonably.”
PG&E announced this week that it had reached a $1 billion agreement to compensate 14 public entities for wildfire losses. The deal still requires court approval as part of the utility’s overall bankruptcy plan. PG&E has yet to reach agreement with homeowners like Mr. McCallum in the bankruptcy case.
The bankruptcy court approved PG&E’s request this month to create a $105 million wildfire victims’ assistance fund to help with housing costs for uninsured victims of the 2017 and 2018 wildfires and to help those whose insurance benefits had been exhausted from those two years.
In the past week, the governor has been consulting consumer advocates, utility representatives and state lawmakers about his plan. A bill with his proposal is expected to be presented to the Assembly next week. Mr. Newsom’s goal is to have a legislative package approved by July 12, before the official start of wildfire season.
Correction: June 21, 2019
Because of an editing error, an earlier version of a capsule summary with this article misstated the size of a fund proposed by Gov. Gavin Newsom to help victims of California wildfires. As the article correctly noted, it would be $21 billion, not $21.