How Sacramento shifted $13.5 billion of future wildfire costs to consumers

San Diego Gas & Electric executives spent 10 years seeking permission to charge customers hundreds of millions of dollars for company losses due to three backcountry wildfires started by its equipment in 2007.

Lawyers for the power monopoly were thwarted at each turn — first by regulators, then by a state appellate court, the California Supreme Court and finally, in early October, when the U.S. Supreme Court declined to take up the case.

The judges all concluded that SDG&E should not be able to recover $379 million in damages left over from the Witch, Guejito and Rice fires. Investigations showed that the three wildfires were the result of negligence and mismanagement committed by the utility — a finding the company never conceded.

In reaching their decisions, the judges relied on what's known as the "just and reasonable" standard — the rule that utilities can only pass along to customers those costs that fairly serve consumers' interest. It has been a cornerstone of California energy regulation for more than 100 years.

Under Assembly Bill 1054, which was introduced, passed and signed into law within a matter of days over the summer, the legal standards have changed.

Now power companies are permitted to get future wildfire damages covered by ratepayers as long as they create a wildfire mitigation plan and receive a "safety certification" from the California Public Utilities Commission, whose regulatory authority dates back to 1911.

"If the electrical corporation has that valid safety certification, the electrical corporation's conduct would be deemed reasonable unless a party to the proceeding creates a serious doubt as to the reasonableness of the electrical corporation's conduct," the bill states.

SDG&E, Pacific Gas & Electric and Southern California Edison all received their safety certifications in August.

The law also says regulators can no longer consider a utility's past practices or history of violations when they examine whether fire damage can be covered — a rule change that critics say disarms the utilities commission.

"It's eating the chickens and saying that as long as the chickens are dead you can't look at who killed them," said Loretta Lynch, a San Francisco attorney and former California Public Utilities Commission president. "This is as close to a blank check as it gets."

The legislation's main feature is the creation of a $21 billion insurance pool that can be tapped by utilities to pay wildfire damage claims. Such claims already have pushed PG&E into bankruptcy and resulted in bond-rating downgrades for SDG&E and Edison.

The fund is designed to allow power companies to maintain their profitability and creditworthiness while the state confronts the rising threat from wildfires.

Those costs will be shared equally between the major utilities and their customers, although the $10.5 billion paid by consumers will be financed over 15 years through a new $900 million annual fee that will actually cost $13.5 billion in total.

The pooled insurance plan will not replace private insurance that utilities already purchase — and charge to ratepayers. Following the 2007 firestorm, SDG&E's insurance policies picked up about $1 billion in damages.

For the new insurance pool, residents, businesses and commercial users will all pay the same rate: approximately an extra half-cent for every kilowatt hour of electricity they consume. For typical homeowners, who use an estimated 500 kWh of per month on average, the extra cost will be about $2.50 a month.

In the SDG&E service territory, which covers about 4,100 square miles of San Diego County and a portion of southern Orange County, the cost of a kilowatt hour in summer was just over 27 cents before AB 1054 was signed into law.

State officials plan to issue billions of dollars worth of bonds to fund the insurance pool and begin paying claims to eligible fire victims. There is no guarantee that the fresh pot of money will be enough to cover all fire claims over the 15 years.

The legislation sped through the statehouse as an emergency matter and was immediately signed into law by Gov. Gavin Newsom, with full support from the utilities, Wall Street investors and labor unions.

The Governor's Office said doing away with the "just and reasonable" standard helps consumers by providing clarity for utilities and their investors.

Newsom aides said during a briefing that the legislation places a cap on the amount of money ratepayers can be assessed for future fires. It also makes sure utilities meet specific requirements before they can access the fund, they said.

Future firesThe new wildfire law takes this unusual step: For the first time, consumers are being required to pay for wildfires that have not yet happened.

In explaining its support for the legislation, SDG&E said proper management of the electrical grid is critical to the utility's "culture of operational excellence" and exceeds the company's legal and regulatory requirements.

"AB 1054 provides further incentive for utilities to be prudent managers by requiring them to obtain a wildfire safety certification as a condition to access the statewide wildfire recovery fund," company spokeswoman Zoraya Griffin said in an email.

"The creation of the wildfire fund provides improved certainty that those who are impacted by utility-related wildfires are compensated," she wrote. "The fund also serves as (a) safety net for ratepayers protecting them from increased rates due to wildfire claims."

Some consumer groups have serious misgivings about the law.

"Our view, basically, is that the prior legal / regulatory framework did work and yield better results," said Edward Lopez, executive director of the San Diego nonprofit Utility Consumers' Action Network, which opposed the regulatory change.

Lopez cited the long-running SDG&E effort to recover $379 million out of some $2.4 billion in total expenses from the 2007 firestorm as an example of the longstanding reasonableness standard working well. The utility recovered about $2 billion from insurers and two companies it sued after the fires.

"Customers were not assessed costs that resulted from imprudence and negligence," Lopez said.

With the new law, California is alone, or nearly alone, in automatically considering utility-caused wildfire costs to be reasonable unless a third party can prove there are "serious doubts" about a company's actions leading to the damages, experts say.

"All states have a version of the California general rate case process, where the utility's costs for those operations, safety activities, etc. are reviewed and approved," said Lynch, the former utilities commission president. "To my knowledge, the vast majority of states use a negligence standard in those reviews — meaning if the utility's actions were negligent, then the ratepayers do not pay for any costs resulting from that negligence."

The revised legal standard is being challenged by San Diego lawyer Michael Aguirre, who has sued state officials to try and overturn the law. The claim accuses them of protecting utilities at the expense of ratepayers.

"The Governor's Office brought in finance people to solve the problem of catastrophic wildfires," Aguirre said. "They didn't bring in people that know how to stop fires."

'New wildfire reality'

Newsom already was facing challenges when he was sworn in early this year as California's 40th governor.

PG&E, which was on probation for corporate crimes related to a deadly 2010 gas pipeline explosion, was also responsible for igniting the Camp Fire in November 2018 that killed 85 people and destroyed most of Paradise, Calif.

Days after Newsom's inauguration, PG&E filed for bankruptcy to protect itself from tens of billions of dollars in anticipated claims. By early March, SDG&E and Edison were both downgraded by a Wall Street rating agency over fears that new fires could cost shareholders billions.

The governor responded by creating a "strike force" to examine the situation and develop solutions.

The resulting study framed the escalating wildfire threat confronting California primarily as a climate change issue — rather than evidence that PG&E and other monopolies had failed to comply with state regulations requiring them to prudently maintain their equipment.

"Climate change has created a new wildfire reality for California," the report's opening line reads. "The state's fire season is now almost year round."

The 61-page report provides a five-part roadmap that attempts to address the challenge: preventing fires and improving emergency response, mitigating climate change through cleaner energy, creating a "fair allocation" of future damages, making regulators more effective and holding the state's largest utility more accountable.

The report lays some blame on PG&E.

"Despite repeated assurances from management that the company would change, PG&E has failed to implement the fundamental management and cultural reforms to prioritize safety and reliable service," it states.

In addition to recommending that future wildfire damages be shared by consumers and the utilities that cause them, the report says regulators should do a better job enforcing rules that are already on the books.

For decades, regulations have required utilities to maintain their equipment in a safe manner, including trimming vegetation that could contact power transmission and distribution lines in periods of high winds. They also call for routine inspections and equipment upgrades to prevent wildfires.

State regulators have not always enforced the orders — or penalized violations.

"The current structure of the CPUC does not align with California's need for a regulator that can effectively address wildfire safety and can be nimble in today's changing energy market," the strike force concluded.

Early this year, as a safety precaution, the judge overseeing PG&E's criminal probation in the pipeline-explosion case ordered the utility to visually inspect every transmission or distribution line before it could be placed into service.

"For each segment of its electrical grid, PG&E shall document the foregoing inspections and the work done and shall rate each segment's safety under various wind conditions (from little wind to high wind)," U.S. District Court Judge William Alsup ordered.

Lawyers for the California Public Utilities Commission objected to the order, saying the ruling would undermine regulators' ability to do their jobs.

"In practice, the proposed order will in all likelihood conflict with and frustrate the extensive federal statutory and state constitutional and statutory regulatory scheme under which CPUC regulates PG&E," commission lawyers responded.

Confronted with the objection from state utility regulators, Alsup withdrew the demand.

Still more fires

Most of the recommendations put forward by the governor's wildfire strike force were included in AB 1054.

All three investor-owned utilities received the required safety certification within weeks of the bill's signing, although PG&E also must satisfactorily emerge from bankruptcy before it can access the wildfire fund.

The Northern California utility's latest plan to provide billions of dollars in stock to wildfire victims to cover their damages was rejected by Newsom, who is insisting on an entire new board of directors and other changes. Last week, the state utilities commission announced a proposed settlement that would charge PG&E shareholders almost $1.7 billion for starting a series of utility-caused fires in 2017 and 2018 although the plan has yet to be approved.

The legislation failed to prevent more wildfires once the winds picked up and temperatures soared.

High-voltage lines run by Edison and PG&E are the primary suspects in the Saddleridge and Kincade fires that struck Los Angeles and Sonoma counties, respectively, in late October. Those fires leveled almost 400 homes and other buildings before they were contained.

PG&E alerted the utilities commission that its equipment may have ignited five other fires during the last week of October, according to mandated public filings.

To prevent more utility-sparked wildfires during extreme winds or other high-risk weather patterns, PG&E, Edison and SDG&E all shut off power temporarily in vulnerable areas. The self-imposed blackouts were hugely unpopular and caused havoc for customers across the state.

The Governor's Office said it regrets that the new law has yet to stop wildfires from striking the state, but officials were grateful that no deaths were recorded during the most recent blazes. They said they budgeted $1 billion this year for new wildfire-prevention projects.

The Newsom aides also said they are facing decades of disinvestment in forest management and decades of utilities not doing what they must to prevent powerline-related fires.

Pressed on whether regulators could be tougher on the companies they oversee, the aides pointed out that the majority of current utilities commission members were appointed by former Gov. Jerry Brown.

Diane Conklin, of the Mussey Grade Road Alliance, a community group that regularly intervenes in utilities commission proceedings, said Newsom needs to do more to distance himself from the industry-friendly policies of his immediate predecessor.

"Concern for corporate interests cannot and must not be the primary interests of the governor or regulators," she said. "The welfare of Californians has to be the central issue."

Judge to decide

The lawsuit challenging the consumer-funded insurance pool and changes to the "just and reasonable" standard is pending at the U.S. District Court in San Francisco.

Plaintiffs Alex Cannara and Gene Nelson accuse state regulators of bypassing the rules for raising utility rates and improperly considering the interests of publicly traded corporations over those of electricity customers.

"AB 1054 is the result of investor-owned utilities contributing millions of dollars in lobbying efforts to remove the prudent manager standard and create a multibillion-dollar scheme to finance utility-caused fires," the complaint states.

They want the court to invalidate the law because no evidentiary hearing was held before the utilities commission imposed the $13.5 billion in new charges. They also argue that the bill was drafted in private meetings between state officials, financial advisers, utility executives and labor leaders.

The state Attorney General's Office, which is defending AB 1054, wants the case dismissed when it lands before a judge in February.

Among other things, state lawyers questioned the "plaintiffs' speculative concerns and disagreement with the wisdom of the California Legislature's policy choices" and argued that the lawsuit failed to state a claim upon which relief could be granted.

"AB 1054 sought to address the immediate public safety and market stability risks posed by utility-caused catastrophic wildfires by including numerous provisions to reduce utility wildfire risk," the motion to dismiss states.

Aguirre based some of the allegations in the lawsuit on emails he obtained under the state Public Records Act.

The communications show repeated meetings between various senior Newsom aides, PG&E officials, Wall Street analysts and union leaders. Agenda summaries and feedback show most of the discussions focused on financing rather than improving safety.

"From a credit and marketing standpoint, AB 1054 presents an attractive security structure for funding a portion of the wildfire victim fund with a securitization of (utility) ratepayer contributions," the executive summary from a Bank of America Merrill Lynch memo stated.

While the new law allows third-party consumer advocates, nonprofit groups or others to challenge a utility's application to tap the insurance pool to pay future wildfire damages, meeting the "serious doubt" standard likely will not be easy, critics say.

Intervening groups will have to expend their own time and money securing enough evidence to convince regulators that a utility should not qualify for the ratepayer-funded insurance.

An email that a Boston investment fund manager sent to Newsom's point man on the legislation last summer makes note of how difficult it will be for any third party to create the serious doubt required to force utility shareholders to pay their own wildfire damages.

"If you are later found to be prudent (no stakeholder can prove 'serious doubt'), you don't need to reimburse the fund," the analyst wrote on July 11.

The governor's consultant replied: "The utility can draw from the fund to pay settled claims before a CPUC determination of prudency."

Though SDG&E tried for 10 years to recover the $379 million in leftover costs from wildfires its equipment ignited, the company was never allowed to pass along those expenses to its customers.

Edison and PG&E were permitted to join the commission proceeding before the SDG&E application was rejected. The two larger utilities also later filed briefs supporting SDG&E's unsuccessful petition before the U.S. Supreme Court.

The new law does not enable SDG&E to seek repayment for those outstanding 2007 wildfire expenses, because AB 1054 applies only to utility-caused fires that started after July 12.

SDG&E reported $669 million in earnings last year, a 64 percent increase over 2017.

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