Governor Newsom Signs Utility Wildfire Response Bill AB 1054

On June 12 Governor Gavin Newsom signed AB 1054, a complicated bill responding to recent utility-caused catastrophic wildfires. After several months of legislative hearings and debate, the Governor's office and a handful of legislators introduced the lengthy bill on June 27. Legislators acted quickly to comply with the Governor's self-imposed July 12th deadline in hopes that the legislation would prevent another credit downgrading for the state's two major Investor Owned Utilities that are not currently in bankruptcy.

Debate in the California Legislature on AB 1054 recognized the cost implications to ratepayers. Several members, including the authors of the bill, committed to working with the Governor on follow up measures that would help to mitigate the impacts of rising electricity rates on agricultural and industrial ratepayers.

AB 1054 requires the state’s three main investor owned utilities (IOUs), Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric, to make $5 billion in aggregate safety investments (system hardening) without return on equity that would otherwise be borne by ratepayers. The measure also establishes the California Wildfire Safety Advisory Board (CWSAB), consisting of seven members to advise and make recommendations related to wildfire safety for both IOUs and public owned utilities (POUs).

AB 1054 seeks to clarify the current “prudent manager” standard used to determine whether a utility can recover costs arising from a covered wildfire. The measure allows cost recovery if the costs and expenses are determined just and reasonable based on reasonable conduct by the electrical corporation. It considers factors both within and beyond the utility’s control, including humidity, temperature and winds.

AB 1054 also establishes a Wildfire Fund to pay eligible claims arising from a covered wildfire. The fund will be jointly funded by utility shareholders and utility ratepayers. Utility shareholders will contribute $7.5 billion initially and an additional $3 billion over 10 years ($300 million per year) to the wildfire fund. Ratepayer contributions will include a non-by-passable energy usage charge of $0.005 (half cent/kWh) for 15 years to securitize $10.5 billion for the wildfire fund. The total charge equates to $13.5 billion (or roughly 900 million a year). Farming and food processing’s share of the $13.5 billion is expected to total roughly $1 billion over the 15-year period. The measure requires utilities (shareholders) to repay monies to the fund when they are found imprudent with limits. Ratepayers will have no obligation to repay monies in the fund.  Further, the measure limits insurance subrogation of liability to the fund to not exceed 40% in utility caused fires where the utility acted prudently.

AB 1054 expands employee protection measures to include the sale of all or a material portion of the assets of the electrical corporation, including the voluntary or involuntary change in ownership of assets to a public entity (municipalization). The successor employer is required to maintain all wages, hours and other benefits for three years for all employees.

Finally, AB 1054 requires PG&E to resolve all pre-bankruptcy claims and achieve a CPUC approved reorganization plan that is both consistent with the state’s climate goals and renewable portfolio standards and determined to be neutral to the ratepayers of the IOU. Thus, PG&E shareholders are responsible for all liability claims from 2017 and 2018 wildfires, a liability estimated at approaching $30 billion.

While AB 1054 is costly from a ratepayer perspective, it does reduce ratepayers’ exposure to significant liability costs. It reduces ratepayers’ exposure to costs associated with California’s strict liability standard for utility caused wildfires by limiting liability costs to ratepayers to $13.5 billion statewide. Further, it reduces ratepayers’ exposure to significant costs relating to IOU credit rating downgrades due to wildfire risk that would significantly increase utility borrowing costs. Finally, it reduces PG&E ratepayers’ exposure to liability costs resulting from the bankruptcy by making the PG&E shareholders responsible for all liability claims.

CLFP will continue to work with the California Legislature and the Governor Newsom on measures that will help to mitigate the impacts of rising electricity rates on agricultural and industrial ratepayers resulting from the enactment of AB 1054.

 For more information, contact Trudi Hughes.