Heading into another wildfire season, California’s political leaders have moved with unusual speed to help the state’s utilities erect a backstop against huge liability claims.
The State Legislature gave final approval on Thursday to a measure that would set up a fund to help compensate victims for losses from fires started by the utilities’ equipment.
The bill is based on a proposal last month by Gov. Gavin Newsom, and legislators rushed to pass it before a summer break. It is a response to two years of devastating wildfires that in January led Pacific Gas & Electric, California’s largest utility, to file for bankruptcy protection.
PG&E has estimated that its liability from recent fires exceeds $30 billion. Investigators found that its equipment was responsible last year for the worst wildfire in state history, the Camp Fire, which killed 84 people and destroyed the town of Paradise. Under California legal doctrine, utilities are liable for fire damage caused by their equipment, even if no negligence is involved.
“No one has ever said this bill is going to be the silver bullet or fix-all,” said Assemblyman Chris Holden, chairman of the Utilities and Energy Committee. “We are moving in the right direction, but we have a long way to go.”
The legislation is aimed at improving the financial health of the big investor-owned utilities — which include Southern California Edison and San Diego Gas & Electric — and preventing further bankruptcies as climate change makes fires more frequent and destructive. The state is concerned that without its intervention, investors and creditors will shun the companies, potentially starving them of financing.
The bill sent to Mr. Newsom creates two models for a fund that would help pay claims beyond the utilities’ insurance coverage. One, called a liquidity fund, envisions a pool of about $10 billion financed by a bond sale. The money for bond payments will come from a charge that was added to utility bills after California’s energy crisis in 2001. It was scheduled to expire next year.
After any payouts, the fund would be made whole again — either by ratepayers or by shareholders, depending on whether the company was found to have acted reasonably in addressing the fire hazard.
The bill includes a second option that could enlarge the pool to as much as $21 billion. In addition to the financing from bonds, this arrangement, called an insurance fund, would be supplemented by contributions from the utilities themselves. One inducement for the utilities to choose this model is a provision that their obligation to reimburse the fund for any payouts would be capped.
Shielded in this way, the utilities would be more likely to maintain the investment-grade credit ratings needed to borrow at affordable interest rates. “They face a downgrade to junk-bond status if they do not do this,” said Michael Wara, a research fellow at the Steyer-Taylor Center for Energy Policy and Finance at Stanford University.
The utilities have 15 days after the bill is signed to choose whether to take part in the fund as contributors. The establishment of the larger fund requires the participation of both Southern California Edison and San Diego Gas & Electric. PG&E’s eligibility is contingent on its emergence from bankruptcy and settling of existing claims.
Whether or not the utilities contribute, the fund created by the legislation cannot be tapped for expenses from past wildfires.
The big question is whether a $21 billion fund will be enough to cover the damages that the utilities may have to pay in the coming years. A single catastrophic fire could drain much of the fund. PG&E, for instance, said in a financial filing this year that its liability related to the Camp Fire could come to $10.5 billion.
“The insurance pool is only so big, so if we have a fire season like we’ve had in the past two years, it won’t be enough,” Mr. Wara said. The hope is that large fires become less frequent as the utilities invest large sums to make their service areas safer. “It is now incumbent on the utilities to get their house in order,” he said.
The measure requires the utilities to spend $5 billion on safety improvements. And lawmakers tied future executive compensation at the utilities to the companies’ safety performance.
Some of the fires that have swept the state in recent years started when trees fell onto power lines. The Camp Fire was ignited after a live wire broke free of a tower that was a quarter-century past what PG&E deemed its “useful life.” The companies have said they are stepping up tree-trimming and their inspections and upgrades of power lines.
Advocates for wildfire victims praised the legislation, Assembly Bill 1054.
“With fire season fast approaching, and so many existing victims still struggling, putting A.B. 1054’s protections into practice quickly is going to make a tremendous difference,” said Patrick McCallum, a leader of the advocacy group Up From the Ashes, who lost his home in a 2017 fire that ravaged Northern California’s wine region. “It’s our best hope going forward.”