California lawmakers and Gov. Gavin Newsom have successfully shepherded a $21 billion wildfire bill through the waning days of the 2019 legislative session, offering the state's big investor-owned utilities a lifeline against following Pacific Gas & Electric into bankruptcy if they’re hit with multibillion-dollar wildfire liabilities this year.
On Thursday, the California Assembly passed AB 1054 by a 63-8 vote, following Monday’s 31-7 vote in the Senate. The bill now awaits Newsom's signature. Both houses cleared the two-thirds majority necessary for an “urgency bill,” that is, a law that will go into effect as soon as possible.
That’s because AB 1054 is meant to start providing Southern California Edison and San Diego Gas & Electric a financial backstop for the possibility of major fires being caused by their equipment this fire season, which has already begun.
The bill would create two separate funding mechanisms for utilities facing wildfire liabilities. The first is a $10.5 billion “liquidity fund,” paid for by an existing $2.50-per-month charge on customers’ bills, which would offer utilities short-term loans, repayable in full, to cover ongoing wildfire costs.
The second is a fund of up to $10.5 billion, to be raised by proportional contributions by SCE and SDG&E if they choose to participate, that would be available to pay out wildfire liability claims. PG&E won’t be allowed to take part until it has settled its existing 2017 and 2018 wildfire claims and emerged from bankruptcy protection — a fact that could leave it open to further wildfire liabilities this year.
AB 1054 also puts conditions on participation in the $10.5 billion insurance fund for all three utilities, including passing annual safety certifications, putting limits on executive pay, and investing a collective $5 billion in safety improvements that they won’t be able to recover in customer rates.
But if a utility meets these conditions, it will be able to withdraw from the fund to cover the potentially massive liabilities they face under the state’s "inverse condemnation" legal doctrine, which holds them responsible for fires caused by their equipment, even if they were following all safety rules and regulations.
The weight of these presumed liabilities pushed PG&E into bankruptcy in January, after an equipment failure at one of its transmission lines started the Camp Fire, the state’s deadliest wildfire to date. But an attempt by former Gov. Jerry Brown to change the doctrine to a more typical “fault-based” standard failed to overcome opposition from wildfire victims, attorneys, insurance companies and lawmakers representing constituents angry about PG&E’s safety failures.
PG&E had already been convicted of crimes in its handling of the deadly 2010 San Bruno natural-gas pipeline explosion, and is facing an SEC investigation into its wildfire accounting practices. Now its electricity system safety record has also been cast into doubt.
The Wall Street Journal reported Wednesday that PG&E documents show company officials knew for years that the transmission tower that failed and caused the Camp Fire was one of hundreds that were dangerously outdated, but delayed the necessary repairs. The federal judge overseeing PG&E’s criminal probation for its 2016 convictions in the San Bruno disaster case responded Wednesday by ordering the utility to provide "a fresh, forthright statement owning up to the true extent" of the claims made in the article, Bloomberg reported.
Public opinion in California is firmly behind punishing PG&E for its safety failures. Proposals for bringing it out of bankruptcy range from a creditor-offered plan to re-emerge from bankruptcy next year under a new name — Golden State Power Light & Gas Co. — to calls from some groups to break the utility up entirely.
Nevertheless, AB 1054 was able to garner the support of most of the groups opposed to a PG&E bailout, including the Up From the Ashes wildfire victim advocacy group, the Official Creditors Committee in PG&E’s bankruptcy case, The Utility Reform Network consumer advocacy group, and even lawmakers such as state Sen. Jerry Hill, the Democrat representing the San Bruno district devastated by PG&E’s pipeline explosion in 2010.
That’s largely because the bill was seen as a better choice than seeing SCE and SDG&E’s credit downgraded to junk status by ratings agencies that have been threatening to do just that for months, absent some kind of legislation to provide them a financial backstop in the event of another fire caused by their equipment.
As Gov. Newsom put it when he first proposed the $21 billion fund plan in June, “financially unstable electric utilities will put wildfire victims in jeopardy and cause California families’ electrical bills to skyrocket.”
Beyond this, however, AB 1054 has satisfied PG&E critics by treating the bankrupt utility much differently than it treats SCE and SDG&E, Rob Rains, an analyst with Washington Analysis, noted in a Wednesday interview.
First and most importantly, AB 1054 bars PG&E from participating in the fund until it successfully emerges from bankruptcy and settles its estimated $18.4 billion in insurance claims from the 2017 and 2018 fires. Because PG&E is not expected to exit bankruptcy this year, “there’s still this concern that there’s this donut hole in coverage, because PG&E can’t participate until they exit bankruptcy,” Rains said. “That leaves 2019 kind of hanging out there,” since any future wildfire claims won’t be subject to its current bankruptcy proceeding.
The formula outlined in AB 1054 also apportions the amount of money each utility must contribute to the fund more heavily on PG&E than on SCE and SDG&E, he said. According to his estimates, the bill would require PG&E to shoulder roughly 64 percent of the fund’s costs, compared to about 31.5 percent for SCE and only 4.3 percent for SDG&E.
The bill passed Thursday has a few modifications from Newsom’s original plan, Rains added. One is an increase in the amount of safety investment the three utilities must make without recovering them in customer rates, from the original $3 billion to the final $5 billion, he said. Second, the rules for PG&E to participate in the fund require its bankruptcy reorganization plan to be “consistent with the state’s climate goals as required” under the state’s renewable electricity standards.
That’s a potentially important addition for renewable energy developers with long-term power-purchase agreements with PG&E that now face those contracts being renegotiated or canceled in bankruptcy. While PG&E could still seek to modify those PPAs to reduce its costs and pay back creditors, that could put it in the position of being unable to access the new wildfire fund.