How Sacramento shifted billions of dollars in future wildfire costs to consumers

San Diego Gas & Electric executives spent 10 years seeking permission to charge customers hundreds of millions of dollars for company losses due to three backcountry wildfires started by its equipment in 2007.

Lawyers for the power monopoly were thwarted at each turn — first by regulators, then by a state appellate court, then the California Supreme Court and, finally, by the U.S. Supreme Court when it declined in early October to take up the case.

The judges all concluded that SDG&E should not be able to recover $379 million in damages left over from the Witch, Guejito and Rice fires. Investigations showed that the three wildfires were the result of negligence and mismanagement committed by the utility — a finding the company never conceded.

In reaching their decisions, the judges relied on what’s known as the “just and reasonable” standard — the rule that utilities can only pass along to customers those costs that fairly serve consumers’ interest. It has been a cornerstone of California energy regulation for more than 100 years.

Under Assembly Bill 1054, which was introduced, passed and signed into law within a matter of days over the summer, the legal standards have changed.

Now power companies are permitted to get future wildfire damages covered by ratepayers as long as they create a wildfire mitigation plan and receive a “safety certification” from the California Public Utilities Commission, whose regulatory authority dates back to 1911.

“If the electrical corporation has that valid safety certification, the electrical corporation’s conduct would be deemed reasonable unless a party to the proceeding creates a serious doubt as to the reasonableness of the electrical corporation’s conduct,” the bill states.

SDG&E, Pacific Gas & Electric and Southern California Edison all received their safety certifications in August.

Law takes teeth out of panel, critics say

The law also says regulators can no longer consider a utility’s past practices or history of violations when they examine whether fire damage can be covered — a rule change that critics say disarms the utilities commission.

“It’s eating the chickens and saying that as long as the chickens are dead you can’t look at who killed them,” said Loretta Lynch, a San Francisco attorney and former California Public Utilities Commission president. “This is as close to a blank check as it gets.”

The legislation’s main feature is the creation of a $21-billion insurance pool that can be tapped by utilities to pay wildfire damage claims. Such claims already have pushed PG&E into bankruptcy and resulted in bond-rating downgrades for SDG&E and Edison.

The fund is designed to allow power companies to maintain their profitability and creditworthiness while the state confronts the rising threat from wildfires.

Those costs will be shared equally between the major utilities and their customers, although the $10.5 billion paid by consumers will be financed over 15 years through a new $900-million annual fee that will actually cost $13.5 billion in total.

The pooled-insurance plan will not replace private insurance that utilities already purchase — and charge to ratepayers. Following the 2007 firestorm, SDG&E’s insurance policies picked up about $1 billion in damages.

For the new insurance pool, residents, businesses and commercial users will all pay the same rate: about an extra half-cent for every kilowatt hour of electricity they consume. For typical homeowners, who use an estimated 500 kWh of per month on average, the extra cost will be about $2.50 a month.

In the SDG&E service territory, which covers about 4,100 square miles of San Diego County and a portion of southern Orange County, the cost of a kilowatt-hour in summer was just over 27 cents before AB 1054 was signed into law.

State officials plan to issue billions of dollars worth of bonds to fund the insurance pool and begin paying claims to eligible fire victims. There is no guarantee that the fresh pot of money will be enough to cover all fire claims over the 15 years.

The legislation sped through the statehouse as an emergency matter and was immediately signed into law by Gov. Gavin Newsom, with full support from the utilities, Wall Street investors and labor unions.

The governor’s office said doing away with the “just and reasonable” standard helped consumers by providing clarity for utilities and their investors.

Newsom aides said during a briefing that the legislation places a cap on the amount of money ratepayers can be assessed for future fires. It also makes sure utilities meet specific requirements before they can access the fund, they said.

Consumers pay for future fires

The new wildfire law takes this unusual step: For the first time, consumers are being required to pay for wildfires that have not yet happened.

In explaining its support for the legislation, SDG&E said proper management of the electrical grid was critical to the utility’s “culture of operational excellence” and exceeded the company’s legal and regulatory requirements.

“AB 1054 provides further incentive for utilities to be prudent managers by requiring them to obtain a wildfire safety certification as a condition to access the statewide wildfire recovery fund,” company spokeswoman Zoraya Griffin said in an email.

“The creation of the wildfire fund provides improved certainty that those who are impacted by utility-related wildfires are compensated,” she wrote. “The fund also serves as [a] safety net for ratepayers, protecting them from increased rates due to wildfire claims.”

Some consumer groups have serious misgivings about the law.

“Our view, basically, is that the prior legal [and] regulatory framework did work and yield better results,” said Edward Lopez, executive director of the San Diego nonprofit Utility Consumers’ Action Network, which opposed the regulatory change.

Lopez cited the long-running SDG&E effort to recover $379 million out of some $2.4 billion in total expenses from the 2007 firestorm as an example of the longstanding reasonableness standard working well. The utility recovered about $2 billion from insurers and two companies it sued after the fires.

“Customers were not assessed costs that resulted from imprudence and negligence,” Lopez said.

With the new law, California is alone, or nearly alone, in automatically considering utility-caused wildfire costs to be reasonable unless a third party can prove there are “serious doubts” about a company’s actions leading to the damages, experts say.

“All states have a version of the California general rate case process, where the utility’s costs for those operations, safety activities, etc. are reviewed and approved,” said Lynch, the former utilities commission president. “To my knowledge, the vast majority of states use a negligence standard in those reviews — meaning if the utility’s actions were negligent, then the ratepayers do not pay for any costs resulting from that negligence.”

The revised legal standard is being challenged by San Diego lawyer Michael Aguirre, who has sued state officials to try to overturn the law. The claim accuses the state of protecting utilities at the expense of ratepayers.

“The governor’s office brought in finance people to solve the problem of catastrophic wildfires,” Aguirre said. “They didn’t bring in people that know how to stop fires.”

McDonald writes for the San Diego Union-Tribune.