“It’s part of the state’s DNA,” Gov. Gavin Newsom talks climate change and wildfire risk
Gov. Gavin Newsom proposed creating a $21 billion fund to pay for future wildfire costs Friday, with the costs split evenly between ratepayers and shareholders of PG&E Corp. and California’s two other major utilities.
The three companies must also spend a combined $3 billion on wildfire safety measures to become eligible for the so-called “insurance fund,” putting the total package at $24 billion.
Newsom called his long-awaited proposal the best and fairest way to deal with rising costs of future mega-fires. His advisers said customers of the big three utilities won’t face rate hikes. But they’ll contribute to the program anyway, through a $2.50 monthly charge they’ve been paying since the early 2000s. The surcharge was due to expire next year, but Newsom’s plan would extend it for 15 years.
As for the catastrophic wildfires from 2017 and 2018, Newsom leaves it to PG&E and the company’s investors to pay for the damages to the thousands of Northern Californians who lost homes, businesses and loved ones — a multibillion-dollar liability that drove PG&E into bankruptcy in January.
Newsom’s advisers said the plan will help stabilize PG&E’s finances by giving all three of the big utilities — PG&E, Southern California Edison and San Diego Gas & Electric — more certainty about whether they can bill ratepayers for the costs of future fires. That would enable PG&E to gather the estimated $30 billion needed to settle claims for victims of last November’s Camp Fire and the 2017 wine country fires. PG&E would have until June 30, 2020, to assemble the financing and get a bankruptcy plan approved in court.
The plan is designed to get money into wildfire victims’ hands relatively quickly, accelerating a process that otherwise could take years. A coalition of wildfire victims said it supports the proposal.
While Newsom’s plan calls on the three companies to spend more on fire safety, it doesn’t include any money to “harden” homes in high-risk areas against wildfires. Nor does it address the rising costs — and diminishing availability — of property insurance in some fire-prone areas of the state.
Newsom said in a statement that his proposal “treats wildfire victims fairly and protects California consumers.”
He added, “The framework we will pursue maximizes shareholder contributions to a solution, minimizes ratepayer exposure to sticker shock rate increases and mandates a culture of safety in our utilities to prevent wildfires.”
PG&E, in a statement responding to the proposal, said it’s committed to working with Newsom “and all stakeholders on shared solutions that will compensate wildfire victims fairly and equitably and mitigate the ever-growing threat of wildfire risk.” PG&E shares fell 61 cents, to close at $22.96.
The plan was released about an hour after PG&E’s new chief executive officer, Bill Johnson, faced shareholders at the utility’s annual meeting in San Francisco, its first since filing for bankruptcy.
Newsom has been wrestling with the wildfire crisis since taking office, and he engaged in months of behind-the-scenes negotiations with lawmakers, utility executives, wildfire victims’ groups, insurance companies, Wall Street firms and credit ratings agencies. Newsom met privately with three Democratic state senators on Wednesday, and his advisers expect lawmakers to formally introduce a bill sometime next week.
One of the attendees, Sen. Bill Dodd, D-Napa, whose district was ravaged by the 2017 fires, said his primary goal is to prevent rate hikes.
“We look forward to carefully vetting the details of his draft and engaging in a collaborative process to develop a solution,” Dodd said in a statement. “My ultimate focus remains on protecting ratepayers from undue costs, ensuring victims are compensated and on improving safety for all Californians.”
Newsom wants the legislation passed by July 12 — the final day before state lawmakers take a month-long summer recess.
The governor has been quick to scold PG&E over its safety record and other issues and has spoken out against making ratepayers swallow the wildfire damages the utility caused. Yet he also wants to get PG&E back on its feet.
His plan also aims to keep Wall Street’s credit agencies from downgrading Edison and SDG&E to junk-bond status. If the companies reach junk status, they would have extreme difficulty borrowing and might be driven into bankruptcy along with PG&E. Experts warn this would expose the state to billions of dollars in wildfire costs.
In April, Newsom floated the possibility of rewriting the controversial legal doctrine known as “inverse condemnation,” which puts utilities on the hook for fires caused by their equipment, even if they managed the equipment properly. But he and key legislative leaders signaled last month that they weren’t ready to go that far.
“We’re not going to go down that road this year or next year,” Dodd said earlier this week.
A coalition of wildfire victims called Up from the Ashes, which represents residents from across Northern California and has been consulting with Newsom’s advisers, hailed the proposal as “a plan we can back.”
“It’s complicated and politically difficult, but Newsom’s come out with a proposal for future victims,” said the coalition’s leader, Patrick McCallum, a lobbyist who lost his home in the 2017 Tubbs Fire. “Yes, we’d like to include some funds for 2017-2018 victims and 2015 Butte Fire victims. But we’re going to strongly support this package while continuing to look for solutions for these victims.”
Yet Mike Danko, a Bay Area lawyer representing wildfire victims, said he isn’t convinced PG&E will try to pay victims in full. He cited a story by Bloomberg on Friday that said the utility is considering submitting a bankruptcy plan that would offer $14 billion to victims of past fires — about half what PG&E had estimated is owed.
“That wouldn’t cut it,” Danko said.
At the center of Newsom’s plan is a $21 billion insurance fund to pay claims to victims of future wildfires that are caused by faulty utility equipment.
The state would loan the fund $2 billion to get it started, but then withdraw its money as the utilities put in their dollars. Half the money would come from PG&E, Edison and SDG&E’s shareholders. The other half would come from their ratepayers, although their rates wouldn’t actually go up. Rather, the money would come from an existing surcharge included on customers’ current monthly bills — roughly $2.50 a month.
California imposed the surcharge when the state Department of Water Resources began buying electricity on behalf of the three utilities during the 2001 energy crisis. The charge was scheduled to expire next year, but instead it would be extended through 2035.
Consumer advocate Mark Toney, of The Utility Reform Network in San Francisco, complained that the charge should be taken off ratepayer bills next year, as promised. Customers already get billed for the money utilities spend to reduce fire risk, he said.
“Ratepayers are paying 100 percent for wildfire mitigation ... billions for tree trimming, system hardening,” Toney said.
The three utilities can tap into the fund after big fires caused by their equipment. If the state Public Utilities Commission decides the utilities acted “prudently,” they can tap into the fund without having to pay it back, even though their equipment caused the fire. If the commission decides the utilities behaved recklessly, company shareholders would have to reimburse the fund.
The PUC’s decisions would be guided by a new “prudent manager” standard that assumes the utilities behaved properly unless proven otherwise.
Newsom’s advisers said this standard is designed to give utilities a clearer idea about whether ratepayers will have to bear some of the financial burden of big wildfires, which they believe will enhance the companies’ ability to draw investors. In that way, PG&E is expected to be able to pay its obligations to the 2017-18 fire victims.
Newsom’s plan does carry an odd wrinkle: Utilities can choose not to create the $21 billion insurance fund and instead opt for a $10.5 billion “liquidity fund” financed solely from the $2.50-a-month charge on existing utility bills. But if the companies tap into that fund, they would have to reimburse it dollar for dollar. The reimbursement would come from ratepayers if the utilities commission determines the companies behaved prudently, and from shareholders if they didn’t.
In another twist, Newsom didn’t give lawmakers discretion on which fund to choose. Instead, he left the decision up to Edison and SDG&E. PG&E would have to go along with whatever the two Southern California utilities choose, according to the governor’s advisers. Newsom’s staff expects the utilities will choose the larger insurance fund because it provides more security.
The governor’s plan sets aside two rival plans floated in the past few weeks by hedge funds that own much of PG&E’s stock and bonds. Although those plans called for Wall Street to inject billions of new dollars into the bankrupt utility to pay fire claims and other debts, Newsom’s advisers said the governor’s proposal does a better job of buffering ratepayers and gives the state more control over the process.
There’s an entry fee of sorts before utilities are eligible to tap into the insurance fund. The three companies would have to spend an additional $3 billion combined on wildfire-safety measures, with PG&E paying the largest share, followed by Edison and SDG&E. The dollars can be billed to ratepayers, although the companies wouldn’t be allowed to tack on a profit margin — unlike most utility expenditures.
They would also have to tie executive pay to the companies’ safety performance, create safety committees on their boards of directors and conduct annual “safety culture reviews.”
PG&E would have to go a step further. It would need to have the U.S. bankruptcy judge approve a reorganization plan by the end of June 2020. The plan would have to pay for all court-approved wildfire claims from 2018 and before, and do so without charging ratepayers a dime. Advisers to Newsom say this is a big improvement over last year’s wildfire legislation Dodd authored, Senate Bill 901, which opened the door to allowing ratepayers to be billed for some of the costs of the 2017 fires.
McCallum said the June 2020 deadline adds clarity for past wildfire victims to know when they might get their money from PG&E.
“It adds pressure for PG&E to get to a quicker settlement, and that’s good for victims,” McCallum said.
Much of Newsom’s proposal is still being fleshed out. Among other things, Newsom’s team is figuring out exactly how much each of the three utilities would contribute to the $21 billion insurance fund and $3 billion buy-in, though PG&E would likely pay the most.
“In the coming days, I will continue working with the Legislature to turn this framework into a package of bills that make the changes we need,” Newsom said in a statement. “Our goal remains passing this legislative package by July 12, in time to have solutions for this season’s wildfires.”