California Gov. Gavin Newsom on July 12 signed into law legislation that aims to reduce wildfire risks while establishing a system to lower the exposure investor-owned utilities have for liabilities from wildfires.
“This was a long process, an inclusive process,” Newsom said in a signing ceremony. “This is part of a process … we have more work to do.”
The California Assembly approved the wildfire bills — A.B. 1054 and A.B. 111 — on July 11, three days after they cleared the Senate. The bills create two wildfire liability funds for IOUs that could grow to $21 billion and require wildfire mitigation investments.
Starting next year, local publicly owned electric utilities and cooperative utilities must submit by July 1 each year a wildfire mitigation plan to be reviewed by the California Wildfire Safety Advisory Board, which was created by the new law. This was the primary impact of the legislation on public power utilities.
“AB 1054 is a positive step toward both mitigating wildfire and dealing with unfortunate cases where there is damage to property and humanity,” said Barry Moline, Executive Director of the California Municipal Utilities Association.
“While our goal is no more wildfires, they are a fact of life in California,” he said. “Publicly owned utilities have implemented significant measures to reduce the possibility of igniting a wildfire from electrical equipment, and are stepping up their efforts even further. Governor Newsom and legislative leaders have taken action to better prepare Californians and keep them safer in this hotter, dryer era.”
Southern California Edison, a subsidiary of investor-owned Edison International, said the bills take initial steps to return California to a regulatory framework providing the financial stability utilities require to invest in safety and reliability and move towards a clean energy future.
Last month, S&P Global Ratings said the ratings agency would likely downgrade California's electric IOUs to possibly below investment grade this month if the state didn't take steps to reduce their financial risks from wildfires.
"The downgrades would reflect the higher wildfire risks that California's electric utilities are facing without adequate regulatory protections to effectively reduce those risks," S&P said.
San Francisco-based Pacific Gas & Electric and its parent, PGE Corp., filed for bankruptcy Jan. 29 in the face of about $30 billion in estimated wildfire-related liabilities.
California wildfires killed 139 people and burned more than 2.8 million acres in the last two years.
The legislation, which takes effect immediately, creates a liquidity fund to cover IOU wildfire-related claims. The fund is set to be capitalized with a $10.5 billion loan from the state. Ratepayers will continue to pay an existing surcharge, originally created to pay for the 2000 California energy crisis, into the new liquidity fund. For residential customers, the cost is approximately $2.50 per month, based on consumption. If used, the fund will be replenished by ratepayers or utility shareholders after the California Public Utilities Commission determines if a utility acted properly in the lead up to a wildfire.
During PUC wildfire-related cost-recovery reviews, actions by utilities that have an “annual safety certification” issued by the commission will be deemed reasonable unless a party to the proceeding creates a serious doubt about the utility’s behavior, according to an analysis of the bills prepared by legislative staff.
The PUC will be allowed to tie all executive incentive compensation to the utility’s safety performance.
The IOUs will be required to buy insurance to cover wildfire claims at levels to be set by the liability fund administrator. Only claims in excess of the greater of $1 billion or the amount of insurance coverage required by the fund administrator are eligible for coverage by the fund, according to San Diego Gas and Electric Co., a subsidiary of investor-owned Sempra Energy.
The legislation gives San Diego Gas and Electric Co., SCE and PG&E once out of bankruptcy, the option of establishing a second, larger wildfire fund with shareholder contributions to reimburse the utilities if they pay victims’ claims in the future.
The option will only be available if both SDG&E and SCE opt to contribute to the wildfire fund. The utilities have 15 days to decide if they will contribute to the fund.
Electrical corporations (small IOUs) that have less than 250,000 customers can also participate in the fund. They must pay $625 per customer account in the first year, followed by annual payments of $25 per customer.
If these utilities contribute to the fund, their liability loses would be covered if the PUC determines they behaved prudently. If their actions are deemed imprudent, shareholders would cover liability costs up to a cap, which would be set at 20 percent of a utility’s transmission and distribution rate base.
If the state’s three IOUs join the wildfire fund, they would make a combined $7.5 billion payment in the first year, followed by annual $300 million payments over a decade.
The wildfire and liability funds could total $21 billion.
The new law requires the IOUs to spend a combined $5 billion on wildfire prevention measures. They wouldn’t be allowed to earn a return on equity on those investments.