Utility Wildfire Response Bill will have an Impact on Ratepayers

Last week, the California Assembly provided the final legislative approval of a complicated bill responding to recent utility caused catastrophic wildfires, with a vote of 63-8. After several months of legislative hearings and debate, the Governor’s office and a handful of legislators revealed the lengthy bill on July 5th, just one week ahead of the Governor’s self-imposed July 12th deadline. The Administration and supporters are hopeful that the legislation will prevent another credit downgrading for the state’s two major Investor Owned Utilities that are not currently in bankruptcy.

The lively debate on the Assembly floor recognized the cost implications for ratepayers. Several members, including the authors of the bill, committed to working with the Governor on follow up measures that would help to mitigate the impacts of rising electricity rates on agricultural and industrial ratepayers.

The bill, AB 1054 was signed by the Governor last Friday. Speaking at the signing ceremony, Newsom said that once lawmakers return from recess in August, they will do work on insurance, home hardening, fire suppression, and emergency management. He also acknowledged the possibility of cleaning up some of AB 1054’s language.

Simply, the bill creates a Wildfire Fund to pay victims of utility-related wildfires and conditions utility access to the fund on safety certifications. Realistically, the bill is far from simple and comes with a price tag that will be borne, at least in part, by ratepayers.  It appears, however, to be a vast improvement over SB 901 enacted last year that left ratepayers exposed to significant liability costs.

Under the current situation, ratepayers are exposed to significant costs associated with California’s strict liability standard for utility caused wildfires. Ratepayers are also currently exposed to significant costs relating to IOU credit rating downgrades due to wildfire risk that significantly increase utility borrowing costs. Finally, PG&E ratepayers are currently exposed to liability costs resulting from the PG&E bankruptcy, which under AB 1054, becomes the sole responsibility of PG&E shareholders.

AB 1054 includes numerous provisions related to addressing wildfires caused by utility infrastructure.  The bill requires the state’s three main IOUs – San Diego Gas & Electric (SD&E), PG&E, and Southern California Edison – to make $5 billion in aggregate safety investments without a return on equity that would otherwise be passed on to ratepayers. Ratepayers, including farming and food and fiber processing operations, will also face ongoing rate impacts associated with system hardening and wildfire mitigation efforts moving forward. However, at least $5 billion of these costs will not include the normal IOU return on equity, which results in significant net savings of approximately $2.5 billion.

The level of additional ratepayer exposure depends largely on how the Wildfire Fund is funded which will be decided by Southern California Edison and SD&E – the two IOUs not currently in bankruptcy.

AB 1054 creates two options for a fund. These funds differ based on the funding source, and the choice can trigger different liability standards at the CPUC.

The default option is a “Liquidity Fund” that would be funded by an initial transfer of $2 billion from the general fund and supplemented by the rate increases imposed by the CPUC and regional utilities. Under this option, the current standard used at the CPUC for cost recovery, the “prudent manager” standard, will remain. This standard has meant that sometimes utilities will be held to a strict liability standard regardless of “fault,” but that they will not be able to pass those costs along to ratepayers. Ratepayers pay to initially fill the fund, but there would be no direct change to the distribution of future financial risk.

Alternatively, the two IOUs can decide to make initial and annual contributions to an “Insurance Fund” in exchange for reduced risk to ratepayers and shareholders for future fires when the utility acts reasonably.  This option requires funding from the large utilities of $7.5 billion and annual contributions of $300 million, along with the CPUC and regional utility rate increases. So long as the initial contribution is made and the utility maintains a valid safety certification, the utility’s conduct with respect to future wildfires is deemed to have been reasonable unless a party “creates a serious doubt as to the reasonableness of the electrical corporation’s conduct.”

Under both options, ratepayers will contribute $10 billion in bonds to the Wildfire Fund by extension of an existing annual charge that was scheduled to sunset.

The Insurance Fund option is the best option for ratepayers as it limits ratepayer exposure to $13.5 billion and ensures utility shareholders are picking up a portion of liability moving forward. The financial impact is 0.005/kWh (half-cent) for each kilowatt used for the next 15 years. This money will be refunded to the ratepayers if not used for wildfire liability. Ratepayer exposure to increased costs of borrowing is also reduced. Finally, ratepayer exposure under the strict liability is limited to $13.5 billion statewide.

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