California utilities agree to pay $10.5 billion into new wildfire fund

California’s investor-owned utility companies have agreed to open up their wallets to pay into the state’s wildfire fund in exchange for less financial responsibility when blazes are linked to their equipment.

The unprecedented decision to spend billions of dollars from shareholders under a new model to pay for damages championed by Gov. Gavin Newsom speaks to the immense financial threat that power providers face as they operate in a state that endured the worst blazes in the country last year.

The fund, propped up by $21 billion split equally between utility customers and shareholders, is meant to act as a second insurance policy for publicly traded electricity companies and to offset concerns from Wall Street about massive monetary liabilities that have threatened to upend the energy market in California.

“The reason it makes sense is that the risk could be so great, and the stocks have been hit so hard, that the value of getting better certainty made it worth putting up money with no return,” said Steve Fleishman, a senior utilities analyst for Wolfe Research. “But in the normal course of the utility, no one would ever do this.”

Under state guidelines, a utility or its customers are responsible for paying property damages from wildfires linked to the company’s equipment. With aging infrastructure electrifying remote areas of increasingly hot and dry terrain, the cost and risk have grown significantly in recent years. Pacific Gas & Electric filed for bankruptcy, anticipating some $30 billion in liability for fires in 2017 and 2018, earlier this year.

Ratings agencies threatened to downgrade Southern California Edison and San Diego Gas & Electric if lawmakers failed to pass legislation this month to significantly reduce the industry’s risk.

Newsom pushed the wildfire fund at the Capitol as a solution to the problem. Utilities will be required to earn a safety certification, which links executive compensation to safety performance and requires companies to perform work to mitigate fire risk, before the onset of wildfire season in order to participate.

The law takes $10.5 billion from electricity customers through the continuation of a charge on monthly bills that was set to expire next year. In return, wildfire costs that would typically lead to higher bills for customers will instead be paid out by the fund, potentially avoiding price hikes.

For their $10.5 billion, the utilities are allowed to tap into the fund to pay wildfire damages that exceed insurance coverage. The law also shifts the burden of proof in regulatory proceedings — another benefit for the utilities — and requires outside groups to intervene to prove that the company failed to properly manage its system to prevent the fire. If proven, the utility would have to repay the wildfire fund for the costs up to a cap, a first-of-its-kind limit to a company’s risk exposure defined as 20% of its transmission and distribution equity.

The state gave the utilities until Friday to signal their intent to participate in the fund. The companies will be responsible for depositing their share of an initial $7.5-billion total into the fund in the first year and then $300,000 annually for the next decade.

One week after Newsom signed the law, SDG&E said it would join the fund and pay its share of the total, set at 4.3% or roughly $450 million. Edison on Thursday agreed to pay its initial contribution of approximately $2.4 billion and follow with annual contributions of approximately $95 million for the next decade. PG&E also notified the California Public Utilities Commission of its decision to pay into the fund on Thursday.

PG&E’s participation must be confirmed through the courts and its initial $4.8-billion contribution would not be due until the bankruptcy process concludes, while the other utilities must make their payments by Sept. 10. In order to participate, the state is requiring the company to exit the bankruptcy process no later than June 30, 2020, without raising costs for its customers.

“California’s ever-growing risk of wildfire is a reality we must face squarely, and a matter of deep concern to all of us who call this place home. We appreciate Gov. Newsom’s leadership in addressing this complex issue, with the recognition that there is more that needs to be done,” Bill Johnson, chief executive of PG&E Corp., said in a statement.

A San Diego law firm filed a lawsuit late last week against state officials over Assembly Bill 1054, the law that created the wildfire fund, on behalf of two PG&E customers.

Michael Aguirre, a lawyer who has represented utility customers in cases in which utilities are seeking to recover losses from wildfires, said the law violates long-standing safety standards and requires customers to prove that utilities acted imprudently before a wildfire. The lawyer said the change violates the state and federal due process rights of utility customers and the 5th Amendment’s takings clause in the U.S. Constitution by imposing unjust and unreasonable rates on customers.

“The whole process is being driven by Wall Street and that’s been the problem from the get-go,” Aguirre said.

Aguirre’s firm has asked the court for an injunction against the law, which would prevent the state from putting any money into the fund. Aguirre said the court will make a decision on the injunction in the next two months.

At least for now, ratings agencies expect the fund to calm some concerns in the markets.

The day after Newsom signed the bill into law, Moody’s said it would provide a stable outlook for Edison and SDG&E if both companies opt into the insurance fund. The credit ratings agency said it would potentially upgrade Edison in the future if wildfire risk diminishes and the law is “successfully implemented on a timely basis and seasoned.”

As wildfire season begins, Fleishman said his firm believes prevention will remain critical going forward.

“The fund only exists as long as it’s funded,” he said. “It doesn’t last forever. It’s important to see progress on limiting fires.”

The law also requires PG&E, Edison and SDG&E to spend a combined total of $5 billion on safety improvements over five years, while blocking the companies from seeking a return on investment that state regulators would have otherwise granted. The state can allow the debt to be securitized by issuing bonds that will be paid off by ratepayers over time.

The budget Newsom signed in January spends nearly $1 billion on emergency response, wildfire recovery and prevention projects. Of that money, approximately $226 million is dedicated to fuel-reduction projects. As the wildfire fund bill moved through the Legislature, lawmakers asserted that the state needs to dedicate more resources to wildfire prevention.

PG&E has taken several actions to mitigate the risk of fires in its electrical territory — a swath of land that stretches from Humboldt County south through Santa Barbara — after its equipment was found to have likely sparked the Camp fire last year.

The San Francisco company says it has visually inspected nearly all of its 50,000 transmission structures and 700,000 distribution poles in or next to high-fire-risk areas of the state. The utility has also installed 231 weather stations, described as capable of providing “hyper-local information” on conditions, to date this year with the goal of installing 600 by the end of 2019. More than 300 high-definition cameras to spot wildfires are operational, according to the company.

To reduce contact between trees and power lines, PG&E said it plans to prune or remove about 375,000 trees along 2,500 miles of distribution lines in 2019. But by mid-June, only 50% of the lines were inspected and the company said it has only cleared 20%.

The company said it also enhanced its reclosers, devices that automatically send pulses of electricity through tripped lines, with “remote-functioning capability” in areas of elevated or extreme risk. Active reclosers can spark wildfires if pulses are sent to downed lines that are in contact with vegetation.