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'What happens if we do nothing?': Calif. senators weigh wildfire, utility crises


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Six trends shaping the industries and sectors we cover in 2021

Six trends shaping the industries and sectors we cover in 2021


Essential Energy Insights - January 2021

'What happens if we do nothing?': Calif. senators weigh wildfire, utility crises

With legislative deadlines looming, a special California Senate panel on May 8 grappled with the urgent and complicated question of how to respond to the state's entangled utility and wildfire crises. Among the options lawmakers are considering are potentially sweeping regulatory and wildfire liability reforms and a possible multibillion-dollar fund to absorb the financial fallout of recent and future blazes linked to electric infrastructure.

They are also considering doing nothing.

"What happens to California when there's another wildfire?" Sen. Bob Hertzberg asked members of Gov. Gavin Newsom's "strike force" on catastrophic wildfires, climate change and the state's energy future. "What happens if we do nothing?"

Despite the tricky task of fairly spreading out the cost of wildfires fueled by the dangerous mix of utility operations, forest mismanagement, a changing climate and population growth into high fire-risk areas, the governor's advisers made a case against inaction.

"You have utilities teetering on the brink of bankruptcy. You have ratings agencies putting significant pressure on California. And you have [Pacific Gas and Electric Co.] in bankruptcy. And you have risk of a post-petition fire," said Nancy Mitchell, an attorney with O'Melveny & Myers and a member of Newsom's task force that recently outlined possible legislative actions.

"There are likely to be higher costs for electricity ratepayers in California going forward," added Michael Ware, a Stanford University researcher and member of the state's Commission on Catastrophic Wildfire Cost and Recovery. "In my initial judgement, the markets are very nervous about the kind of risk-reward profile of California utilities."

Legislative action, however, could help to contain rate increases and quell the concerns of capital markets, he added.

The commission, created by last session's Senate Bill 901, plans to have a draft of recommendations by the end of May on changes to state laws around wildfire cost distribution.

Pacific Gas and Electric, or PG&E, along with Edison International's Southern California Edison Co. and Sempra Energy affiliate San Diego Gas & Electric Co., have all proposed significant rate hikes to account for wildfire liabilities. If lawmakers change California's practice of assigning liabilities to utilities for wildfires linked to their electric infrastructure, even if they were not negligent, the utilities said they would reduce their proposed wildfire risk premiums.

Lack of clarity around liabilities also is preventing PG&E from formulating a reorganization plan, PG&E Corp. CFO Jason Wells said in recent testimony in a federal courthouse in San Francisco. PG&E's corporate parent is part of the joint bankruptcy proceeding. The companies face total wildfire liabilities ranging from $14 billion to more than $30 billion for blazes in PG&E's services territory in the past two years, Wells said.

Sen. Hannah-Beth Jackson, however, questioned wildfire liability reform. "How are they going to be more responsible with less liability?" she said.

$40 billion fund?

Lawmakers and hearing witnesses also discussed the size of a "well-capitalized wildfire fund" outlined as an option in the governor's strike force report. The fund would cover a large share of liabilities that might otherwise hit ratepayers and give utilities a source of immediate money to pay claims.

Based on an analysis by Filsinger Energy Partners, a consulting firm on the governor's advisory team, a $40 billion fund would have a 7% chance of exhausting its claims-paying capacity over an eight- to 12-year period, assuming a continuation of recent wildfire trends, said Nathan Pollak, a director at the firm. That compares to a more than 50% likelihood that money would run out with a $25 billion fund.

Pressed by lawmakers on whether a $40 billion fund would be appropriate, members of the strike team and the wildfire commission declined to say.

"Thank you for the options, but we're up against a timeline," Hertzberg said, noting the governor wants to "get something big done" before the Legislature breaks for recess in July. "Is this the number we should use?"

One challenge to providing a definitive answer to that question, according to Carla Peterman, chair of the wildfire commission and a former member of the California Public Utilities Commission, is that wildfire risk modeling is immature. "It ultimately will come down also to some policy calls," she said.

Which stakeholders would actually capitalize the fund also remains uncertain. While a dedicated source of funding from utility shareholders was "on the table," contributions from a broad set of stakeholders would be best, Peterman said. But the commission has not yet decided whether to recommend such a fund, she added.