Sneak Peek: Newsom Looks to Balance Fire Victims, Wall Street

Gov. Gavin Newsom, who entered office in January amid a mounting wildfire crisis, will outline a series of possible ways forward for California including a proposal to create a re-insurance fund run by the state, according to people familiar with the discussions.

The insurance fund is aimed at making future fire victims financially whole, while also protecting publicly traded utilities from insolvency. The concept has been percolating around the Capitol for weeks.

The proposal will be one of several included in a report, set to be issued Friday, outlining what Newsom's administration believes are the key areas that need to be tackled to protect California from the devastating wildfires it has witnessed in recent years — and make sure that PG&E is the only major California utility that ends up in bankruptcy proceedings this year.

PG&E filed for Chapter 11 bankruptcy protections in January, citing $30 billion in potential liabilities from two years of devastating wildfires.

Newsom's report will also at least broach two other controversial topics: Reforming the California Public Utilities Commission, and revisiting state liability laws that can leave utilities on the hook for damages even when they are not negligent.

A Balancing Act

The governor is not expected to make a definitive legislative proposal, however, on any of the ideas included in the report.

"I think all those things will be on the table," said Napa state Sen. Bill Dodd, whose district was devastated by the 2017 North Bay fires and who has been intimately involved in wildfire discussions in the state Capitol over the past year.

But Dodd said there are many details still to be worked out — including who would pay into an insurance fund, and how to make sure PG&E shareholders don't walk away unscathed.

Dodd's position underscores the tough position Newsom finds himself in as he tries to weigh the political reality in the state Capitol with demands from Wall Street.

Dodd said any proposals viewed as offering help or financial protection for the utilities, like an insurance fund, should be tied to concrete concessions from PG&E to ensure that the company improves its safety practices, and include requirements that shareholders -- not just ratepayers — have skin in the game.

"Why should they be afforded any more protections when they already took the path of least resistance by filing for bankruptcy?" Dodd said. "If ratepayers have any role in the company's financial future, in terms of financial backstops, we need to see they are serious about safety and following the rules and the law."

Wall Street Lobbies Sacramento

The governor's office, according to those familiar with the discussions, knows that its key audience for any proposal is the state Legislature, not Wall Street.

But Newsom's office is crafting its ideas with an eye toward protecting ratepayers from bearing the brunt of multibillion-dollar wildfires while also trying to calm investors' nerves. The two major bond rating agencies recently warned that the state's two other investor-owned utilities — San Diego Gas & Electric and Southern California Edison — could be just one large fire away from bankruptcy, and last month downgraded both companies' bond ratings, making it more expensive for them to borrow money.

As those warnings rattled Wall Street in recent months, investors and their lobbyists have poured into Sacramento to argue for legislative action. The conversations seem to have calmed some nerves: PG&E's stock has soared from less than $7 a share since just before the company filed for Chapter 11 bankruptcy protection to about $19 a share today.

Former state Assemblyman Mike Gatto, who has been following the debate closely, said that stock price indicates investors are feeling confident that whatever comes out of Sacramento won't be too punitive to PG&E.

"The stated goals of many lawmakers and the governor is stabilizing the utility markets," he said. "So I think Wall Street is assuming that it is impossible to stabilize the utility markets and make sure that no other utility enters bankruptcy ... and at the same time punish PG&E."

But it's also not politically feasible to stick taxpayers or ratepayers with the entire bill, he said, noting that all those competing priorities will make it difficult for the governor to find consensus among lawmakers.

"I think they're really walking a tightrope," Gatto said. "I think they clearly need to take steps to make the power markets more stable and make sure that we don't have a whole bunch of bankrupt cities at the same time."

Report Also Tackles CPUC, Liability

The report will additionally raise the issue of streamlining the California Public Utilities Commission, according to those involved in discussions, so that the regulatory agency can deal more quickly with issues of safety and liability — perhaps by taking away some of the CPUC's sprawling workload. The CPUC currently oversees a broad portfolio of industries — electric, natural gas, telecommunications, water, railroad, rail transit and passenger transportation — and has been criticized as slow to respond.

Gatto proposed legislation three years ago to eliminate the CPUC and redistribute its broad portfolio to other agencies, and said he has heard that the governor is looking at that proposal as a possible roadmap for changes at the CPUC.

And, perhaps most controversially, the report is not expected to foreclose on the concept of changing a much debated state liability law, known as inverse condemnation. A change to that law would be aimed at inuring utilities from paying for fires if they did not act negligently, but there are no indications that the governor's office plans to immediately pursue any change, which would set up a divisive and bitter fight in the state Capitol.