W

ith one of California's three investor-owned utilities in bankruptcy proceedings and major credit ratings agencies warning that a severe wildfire this year could push either of the other two in the same direction, a new debate is erupting in Sacramento over how to tackle the deepening crisis.

One of the major proposals being floated: A utility-backed, state run re-insurance fund to cover losses from wildfires that exceed private insurance coverage purchased by utilities and homeowners.

The utilities are also watching closely to see how the California Public Utilities Commission implements a bill aimed at keeping them out of bankruptcy while passing on as much costs to shareholders as possible.

These discussions have picked up steam as the warnings from Wall Street have grown louder in recent weeks.

“Without any regulatory reform, we view it as entirely possible that another electric utility could face a devastating wildfire during the 2019 wildfire season and, depending on the magnitude and severity, its board of directors could similarly determine that the best course of action would be to file for a voluntary bankruptcy before year-end 2019,” S&P Global Ratings wrote in a Feb. 19 analysis.

“As we see it, there’s a window of opportunity to bring clarity to the regulatory construct. However, that window will start to close at the beginning of the 2019 wildfire season … as early as June,” the agency added.

Other California Utilities’ Credit Ratings Downgraded

PG&E is already mired in Chapter 11 bankruptcy proceedings — and the state’s two other publicly traded utilities have also been dinged by Wall Street. San Diego Gas & Electric Co. and Southern California Edison each recently had their bond ratings lowered by the credit agency Moody’s, which cited its view that both companies could face future huge liabilities related to wildfire risk they view as unique to California.

Caroline Choi, senior vice president for corporate affairs at Southern California Edison, said that executives at that utility — which serves 15 million people in central, coastal and Southern California — have “not contemplated bankruptcy.”

Southern California Edison was recently blamed by state investigators for the 2017 Thomas Fire in Ventura and Santa Barbara counties, and even before that had its credit rating slashed.

"We believe we can absorb the damages associated with (the Thomas Fire) ... we are many degrees away from where PG&E is today,” she said, but added that with “any one or two major fires we might be in the same situation, but we are not anywhere near that situation today.”

Choi said what Edison wants lawmakers and state regulators to focus on this year is setting a clear process for how and when utilities can pass on wildfire-related costs to ratepayers.

Lawmakers Consider New Liability Laws

That’s a softer approach than PG&E — the state's largest utility — took last year, when it pushed hard for a change in state liability laws in an attempt to shield company shareholders from billions of dollars in potential liability related to a series of disastrous wildfires sparked by its equipment. But lawmakers balked, seeing the proposal as a bailout of an unpopular utility that critics charge has not responsibly managed its infrastructure.

It appears that at least for now, the three large utilities are not lobbying for a change in that liability law, known as inverse condemnation, this year. Inverse condemnation is a legal principle that holds that when private company like a utility is given access to private property for its equipment, they are responsible for any damages that equipment causes. In California, this has been interpreted by courts and regulators to meant that a utility is liable for the costs of a fire it causes even if the utility did not act negligently.

Choi said that while Edison would still like to see the Legislature tackle the inverse condemnation issue eventually, the utility is not pursuing that change in 2019 — but would like to see a way for those liability costs to be spread among a bigger pool than just utility shareholders.

“What we are saying is if (liability laws don’t change) then the socialization of costs must be addressed,” she said.

In its March 5 credit rating statements, Moody’s agreed, writing that a change in the state liability law seems “unlikely” this year. The credit ratings service endorsed a bill by Assemblyman Chad Mayes, R-Yucca Valley, that would create a re-insurance fund for utility-caused wildfires.

Backers of this plan say it would protect wildfire victims who are under-insured or have no insurance while also insulating utility ratepayers from footing the bill for catastrophic wildfires like those in 2017 and 2018.

In a statement, Mayes noted that electrical utilities rely on borrowing money to operate — and particularly, to make the aggressive clean energy investments California has mandated.

"Unfortunately, our public and private utilities simply cannot access enough insurance coverage to protect them from catastrophic wildfires,” he stated. “This proposal creates a new insurance product, currently not available in the commercial insurance market, to restore market stability, ensure victims are made whole, protect ratepayers, and keep the lights on for our residents and businesses."

But key details need to be worked out, including how much money the fund would need to stay solvent; who would pay into the fund; who would be eligible to benefit; and how to make sure that its existence doesn't deter people from buying home insurance. Another bill introduced last month, AB 740, could create a similar fund but would spread the costs among utility shareholders and ratepayers as well as insurance companies.

Choi said Edison is interested in Mayes’ idea and is “tracking” the bill, but has not decided whether to support it.

But UC Berkeley’s Steven Weissmann, a former administrative law judge at the CPUC, questioned whether an insurance fund like that would be large enough given the destructive nature of recent blazes.

“I wonder how there can be enough dollars in the world to possibly continue to reimburse for these wildfires one after another after another,” he said. “I would think that maybe that kind of a fund could take the edge off of things but it's hard to imagine how it could possibly cover all the liabilities.”

Legislators and Regulators Disagree on How to Implement 2018 Law

This isn’t the first time legislators have tried to find a way to keep the markets happy, utilities in business and ratepayers whole.

Last year, before the Camp Fire killed 85 people in Butte County, legislators thought they had tackled this problem by passing a bill, SB 901, that would allow the CPUC to assess a utility’s financial health and risk of going bankrupt in cases where they faced massive potential wildfire liabilities — a process known as a “stress test.” Under the law, signed by Gov. Jerry Brown, regulators could allow a utility facing insolvency to pass some of those wildfire liabilities on to ratepayers.

But lawmakers and the CPUC seem to have different ideas about when regulators should apply the stress test. Some lawmakers have asked why the CPUC didn’t apply this to PG&E last year — before they declared bankruptcy but when it was clear they were on the edge.

The CPUC works as a quasi-legal system where requests to the commission, from ratesetting to safety plans, are set proceedings that go before an administrative law judge. After the judge rules, the five-member commission then votes. All of this normally takes years, by design.

CPUC President Michael Picker defended the process at an Assembly hearing this winter.

“Our assumption was that you wanted us to use our existing processes, which require that the company bring forward all the claims at one time so that we can really assess their costs,” Picker said.

Picker pointed out that since no one actually knows how much money PG&E will actually have to pay out, it’s difficult to say how much money the company needs. For instance, Cal Fire investigators determined in January that PG&E was not responsible for causing the Tubbs Fire. Those lawsuits are still playing out. But if the CPUC had let PG&E issue bonds to pay for its potential liability around the Tubbs Fire, it’s possible that they could have passed those costs onto ratepayers.

At the hearing Picker argued that it wasn’t the CPUC’s job to stop PG&E from going bankrupt.

“They made their decisions based on their own reasons,” Picker said. “This was their choice. I don’t have the ability to tell them yea or nea.”

But how to ensure the health and stability of the utilities is a problem the commission has to deal with, said Michael Wara, director of the Climate and Energy Policy Program at Stanford University and a member of a new five-member body charged with advising the state on wildfire reforms.

“It's not something that the PUC is designed to deal with, but for better or worse the PUC is having to deal with it,” Wara said, adding that the unprecedented situation is "really pushing the commission to even beyond its limits and it's creating a context where there's a lot of calls for reform to make the agency more efficient and more focused.”

State Sen. Bill Dodd, who wrote SB 901, said he’s disappointed at how the CPUC has handled the stress test issue and believes they could have done this without waiting for the utilities to make a formal request — and possibly helped PG&E avoid bankruptcy.

“Unfortunately, the CPUC has proven to be about as nimble as a beached whale,” he said. “I believe they had the power to avoid all this ratemaking process and implement the stress test, I believe they a have power now, but they are taking all this time.”

“They said they wanted the company to make a formal request — I believe it’s important for the CPUC understand what the cash position of PG&E is, of SDG&E, of Southern California Edison, and where they are headed,” he added.

The bond ratings of these utilities aren’t just an issue for shareholders or utility executives: Ratepayers will be hit as the costs to borrow increases, said Wara.

“The sad truth is even if ratepayers don't pay at the front end, they're going to end up paying at the back end because the utilities will face much higher borrowing costs. I mean, they already do,” he said.

Wara said the stress test was “an attempt to try to create some sort of a more flexible approach for the PUC to minimize the impacts on ratepayers because otherwise under the existing law, the PUC had a fairly kind of rigid procedure that they would have to follow.”

“The Legislature recognized that this was an extraordinary situation and they wanted to give the PUC the flexibility to in a transparent way come up with an outcome that would be the best possible one for ratepayers,” he said.