Newsom Proposes Huge Wildfire Insurance Fund for State's Big Power Companies

Gov. Gavin Newsom is proposing creation of a huge new wildfire insurance fund to help protect the financial stability of California's troubled major electrical utilities -- but only if they make safety improvements and agree to a new certification system that will link executive compensation to their ability to keep the public safe.

Officials in the governor’s office say the proposed fund, which could be as large as $21 billion, will protect ratepayers and fire victims as far as possible. They say the plan will also offer the utilities’ rattled investors some stability while still requiring them to bear most of the burden of paying for wildfire damage when it’s caused by the power companies’ carelessness.

The plan is the culmination of six months of work by the administration, which confronted an escalating wildfire and utility crisis even before Newsom took office in January -- a crisis that led to the state’s largest utility, PG&E, filing for bankruptcy protection just weeks later.

Newsom’s proposal takes special aim at PG&E, which is still mired in those bankruptcy proceedings and has yet to settle with thousands of wildfire victims who sued the company after the catastrophic fires of 2017 and 2018.

The governor’s proposal would tie PG&E’s ability to participate in the new insurance scheme to the company fairly compensating those wildfire plaintiffs and exiting bankruptcy proceedings by June 30, 2020.

Newsom unveiled the proposal, along with a “report card” laying out what his administration has done to “address the destabilizing effects of catastrophic wildfires on our California electricity customers,” on Friday morning.

He pledged to work with the Legislature to incorporate the proposal into a series of bills -- measures he hopes will be passed by July 12, when lawmakers start their summer recess and as fire season gets into full swing.

“We’re on our way to building a safer, more resilient energy future -- one that treats wildfire victims fairly and protects California consumers,” Newsom wrote in an introduction to the wildfire action report card. “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.”

The governor’s office said the insurance fund could be as large as $21 billion if utilities choose to participate and meet the requirements Newsom plans to write into legislation.

Under the plan, only the state’s three investor-owned utilities -- PG&E, Southern California Edison and San Diego Gas & Electric -- would participate in the fund.

The proposal calls for half of the fund to come from utility investors. Half would be funded by ratepayers through bonds.

Utilities could tap the fund if a fire caused by their equipment results in more than $1 billion in property damage. However, they would have to repay the fund if the California Public Utilities Commission finds they did not act “prudently” in maintaining and operating their equipment.

Still, the fund could offer reassurance to Wall Street investors by providing a financial backstop for the big utilities. And it could be worth far more than the estimated $21 billion fund balance because the utilities could take out additional reinsurance against the fund itself.

Newsom’s plan would impose several conditions on the big utilities before they could participate in the insurance system.

The conditions include $3 billion in safety investments, including hardening utility infrastructure, that the companies have already committed to in wildfire mitigation plans the CPUC approved last month. The governor's proposal specifies that the companies will be barred from earning profits on those safety investments.

The utilities would also have to participate in a new annual safety certification process. That process would be overseen by a new CPUC Wildfire Safety Division and an advisory board that would also have authority over the utility’s wildfire mitigation plans.

Under the proposal, utility board members themselves would have to report on safety issues directly to the new division, and executive compensation at the utilities would have to be tied to safety performance.

Reaction to the proposal was mixed.

Patrick McCallum, who lost his home in the 2017 North Bay fires and co-chairs Up From the Ashes, a coalition of wildfire victims, said the group will support Newsom’s proposal.

"This is a plan we can back,” McCallum said. “We applaud and support the governor’s efforts to protect future victims and their constitutional rights to recover, (to) do more to prevent the kind of devastating fires that have destroyed so many of our lives and bring financial stability to our state’s energy markets without shifting the cost to ratepayers and victims — potentially reducing rates in the long term.”

Noting the new insurance fund would not help those who lost homes or businesses in past fires, he added that PG&E must now “do the right thing” and compensate past wildfire victims.

“We are not part of the governor's plan, yet ours include some of the most devastating fires — resulting from multiple violations of state law,” he said. “All eyes are on PG&E as wildfire victims — many still homeless or living in temporary shelters — await their decision."

One longtime utility critic -- Loretta Lynch, a former CPUC commissioner -- said the plan sets a “very low bar,” noting that the utilities have already committed to make the billions of dollars in safety improvements mandated by Newsom’s proposal.

Lynch also raised concerns about the proposal to issue bonds to pay for the ratepayers’ portion of the insurance fund, saying that borrowing money is the most expensive option available.

“From my perspective, this proposal does not hold the utilities accountable to pay for wildfires they caused, because it lacks safeguards to make sure shareholders actually pay,” she said.