CONCURRENCE IN SENATE AMENDMENTS

CSA2 Bill Id:AB 1054

Author:(Holden, et al.)

As Amended Ver:July 5, 2019

2/3 vote. Urgency

SUMMARY:

This bill would create additional safety oversight and processes for utility infrastructure, recast recovery of costs from wildfire damages to third-parties, and authorize an electrical corporation and ratepayer jointly funded Wildfire Fund to address future related wildfire liabilities.

The Senate Amendments:

1. Establish the California Wildfire Safety Advisory Board (CWSAB) with relevant expertise. The CWSAB would be required to meet at least quarterly throughout the state and advise and make recommendations related to wildfire safety to the Wildfire Safety Division. The CWSAB must review and provide comments and advisory opinions to each local publicly owned electric utility (POU) and electrical cooperative regarding the context and sufficiency of its wildfire mitigation plans.
2. Authorize the California Public Utilities Commission (CPUC) to assess a penalty in an amount up to three times the penalty authorized by law for certain utility-related violations, if it finds that an electrical corporation has requested recovery of costs for which the CPUC had previously authorized cost recovery.
3. Authorize an electrical corporation to file an application requesting the CPUC to issue a financing order for the recovery of costs and expenses related to catastrophic wildfires under specified conditions, including fire risk mitigation capital expenditures associated with the electrical corporation's proportionate share of the $5 billion of safety improvements in aggregate by all three of the state's largest electrical corporations, through the issuance of bonds. Prohibit costs and expenses incurred by the electrical corporation after December 31, 2035.
4. Authorize the CPUC to issue a financing order to allow recovery through fixed recovery charges if the CPUC makes specified determinations, including the costs are just and reasonable, consistent with the public interest, and reduce the rates within the electrical corporation's service territory. A successor to a financing entity is bound by the requirements.
5. Require the CPUC, when determining an application by an electrical corporation to recover costs and expenses arising from a covered wildfire, as defined, to allow cost recovery only if the costs and expenses are determined just and reasonable based on reasonable conduct by the electrical corporation, as specified below:
   1. Costs and expenses in the application may be allocated for cost recovery in full or in part taking into account factors both within and beyond the utility's control, including humidity, temperature, and winds.
   2. An electrical corporation bears the burden to demonstrate, based on a preponderance of the evidence, that its conduct was reasonable, unless it has a valid safety certification for the time period in which the covered wildfire.
   3. If the electrical corporation has a valid safety certification, the electrical corporation's conduct would be deemed reasonable unless a party to the proceeding creates a serious doubt as to the reasonableness of the electrical corporation's conduct. If a serious doubt has been verified, the electrical corporation would have the burden of dispelling the doubt and proving the conduct was reasonable.
   4. The CPUC must find that an electrical corporation's conduct was reasonable if that conduct, related to the ignition, was consistent with actions that a reasonable utility would have undertaken in good faith under similar circumstances, at the relevant point in time.
6. Expand the definition of "change of control" for purposes of imposing specified employee retention and protection requirements.
7. Establish the Wildfire Fund (outside of the State Treasury) to pay eligible claims arising from a covered wildfire, as provided, and continuously appropriates moneys in the fund to the Wildfire Fund Administrator for that purpose. With respect to the Fund, the bill would:
   1. Define an eligible claim for third-party damages against an electrical corporation resulting from covered wildfires exceeding the greater of 1 billion dollars in the aggregate in any calendar year or the amount of insurance coverage required to be in place for the electrical corporation.
   2. Establish a Wildfire Fund allocation metric as the calculation of the land area of the electrical corporation in the high fire-threat district adjusted for risk mitigation efforts as determined by the Department of Finance (DOF). The bill states the approximate allocation metric is 64.2% for Pacific Gas & Electric, 31.5% for Southern California Edison, and 4.3% for San Diego Gas & Electric.
   3. Requires a participating large electrical corporation, to make an initial contribution of an amount equal to $7.5 billion multiplied by the Wildfire Fund allocation metric, and an annual contribution of $300 million multiplied by the Wildfire Fund allocation metric.
   4. Requires of a regional electrical corporation an initial contribution of an amount equal to $625 multiplied by the number of customer accounts serviced by the electrical corporation within the state, and an annual contribution amount equal $25 multiplied by the number of customer accounts serviced by the electrical corporation within the state.
8. Require the CPUC to initiate a rulemaking proceeding to consider requiring large electrical corporations to collect a nonbypassable charge from its ratepayers to support the Wildfire Fund, and requires the CPUC to direct each electrical corporation to collect the charge if the CPUC determines that the imposition of the charge is just and reasonable, as specified.
9. Specify the funding sources for the fund, which include proceeds of specified bonds, initial and annual specified contributions from electrical corporations, and revenues generated from the charge on ratepayers authorized by the CPUC.
10. Require the electrical corporation's wildfire mitigation plan, in calendar year 2020 and thereafter, to cover at least a three-year period. The Wildfire Safety Division may allow annual submissions to be updates to the plan with required submission of a comprehensive wildfire mitigation plan at least once every three years.
11. Require the executive director of the CPUC to issue a safety certification to an electrical corporation if it provides documentation that it has an approved and implemented wildfire mitigation plan. These requirements include establishing a specified safety committee. The requirements may also include tying 100% of the executive incentive compensation (IC) to safety performance and denying all IC in qualifying events.
12. Require, after January 1, 2020, that each local publicly owned electric utility or electrical cooperative submit, by July 1 of each year, its wildfire mitigation plan to the CWSAB for review.
13. Authorize Department of Water Resources (DWR) to issue revenue bonds for purposes of supporting the Wildfire Fund, on and after either the date on which the department legally defeases all of its remaining bonds under the provisions specified or the date on which it pays those obligations in full at maturity, whichever is earlier. Authorize DWR to recover, as a revenue requirement, amounts necessary to enable it to finance those bonds. Require the bond proceeds and revenues received by DWR to be deposited in the DWR Charge Fund, which the bill establishes in the State Treasury, and continuously appropriates moneys in Fund to DWR for specified purposes, including transfers to the Wildfire Fund and repayment of the bonds.
14. Transfer 9 million dollars ($9,000,000) from the General Fund to the DWR Charge Fund, thereby making an appropriation, and requires repayment to the General Fund at the earliest possible time.
15. State the bill would become operative only if Assembly Bill 111 or Senate Bill 111 is enacted during the 2019–20 Regular Session and becomes effective before January 1, 2020.

COMMENTS:

Investor-Owned Utilities (IOUs). The state has three major electric IOUs—Pacific Gas & Electric, Southern California Edison, and San Diego Gas and Electric (SDG&E)—along with three small IOUs that provide about three quarters of the state's electricity.

Catastrophic wildfires caused by utilities increase costs for utility ratepayers. Recent catastrophic wildfires caused by utilities in California have caused tens of billions of dollars in property damage. Under current legal standards, these damages will directly lead to increased costs for utilities, which could be passed on to ratepayers. Moreover, the recognition of increased potential costs associated with wildfire risks has affected the credit markets, contributing to one investor owned utility (Pacific Gas and Electric) declaring bankruptcy, as well as credit downgrades for other utilities. These credit downgrades will make it more difficult and expensive for utilities to secure financing for capital investments, which will also increase costs for ratepayers, as well as potentially affect other policy goals.

Recent wildfires could make utilities a risky investment. Companies that are viewed as risky investments must pay higher rates of return in order to raise capital from investors (by issuing bonds or stock), often to build or repair infrastructure. Several factors are causing investors increasingly to view utilities as a risky investment, contributing to one IOU (PG&E) filing for bankruptcy and other major IOUs having their credit ratings downgraded substantially. The costs for past fires, the potential costs for future fires and the uncertainty over future willingness to raise rates are significant contributors to the downgrades.

Culmination of reports and recommendations - This bill encompasses many of the recommendations included in both the governor's strike force report and the SB 901 (Dodd), Chapter 626, Statutes of 2018, Commission recommendations. The key provisions include: establishing a new process for electric IOUs to recover costs related to catastrophic wildfires (changes to the prudency standard), authorizing financing of specified costs (including wildfire safety mitigation), bolstering and changing to electric utility wildfire safety oversight (including a Wildfire Safety Division), and establishment of a Wildfire Fund to address the property claims stemming from utility-caused wildfires (provides for either a liquidity-only fund or broader insurance fund).

According to the Author:

We have no good choices but this bill presents a unique opportunity to get our utilities back to investment grade status, with no increase in electric rates. This bill will also double-down on safety by establishing a new comprehensive oversight division and advisory council for all utilities in the state – investor and publicly owned. The investor owned utilities will also be held to account by tying executive compensation to safety; investing a minimum of $5 billion in their lines and poles, without profit; complying with wildfire mitigation plans; and passing a safety culture assessment; all as conditions of participating in the insurance fund established by this bill.

Arguments in Support:

The California State Association of Counties: The bill requires utilities to receive a safety certification that requires the establishment of a safety committee on the boards of the directors of the Investor-Owned Utilities (IOUs); links executive compensation to safety performance measures; and requires IOUs to create an aggregated $5 billion safety and wildfire mitigation investment over a period of five years, without profit on such expenditures.

Arguments in Opposition: Californians for Energy Choice argues: What is most alarming about this legislation is that it exclusively addresses wildfire cause culpability, wildfire planning bureaucracy, and financing, while providing no mandates or earmarks at all for funding actual remediation prevention or long term solutions.

FISCAL COMMENTS:

According the Senate Committee on Appropriations

1. "One-time cost of $2 billion (Surplus Money Investment Fund [SMIF]) in 2019-20 for an initial loan to capitalize the Wildfire Fund, with a total loan authorization of up to $10.5 billion as needed from the SMIF, upon a determination by the Department of Finance (DOF) to cover claims payable from the Wildfire Fund. These transfers would be a short-term loan repaid from proceeds of specified ratepayer charges or bonds within a fiscal year.
2. At the time of this analysis, the DWR initially estimated administrative costs of $10 million to $13 million annually (DWR Charge Fund) to administer the surcharge and issue bonds as necessary. First-year administrative costs would be covered by a one-time $9 million loan from the General Fund to the DWR Charge Fund. This loan would be repaid from the DWR Charge Fund "at the earliest possible time."
3. Unknown significant CPUC costs. A CPUC cost estimate was unavailable at the time of this analysis. Staff assumes the CPUC would incur administrative costs in the low millions annually that are not funded by the CPUC appropriation in AB 111 or SB 111 (see related legislation below). Specifically, the CPUC would incur costs related to the activities of the new California Wildfire Safety Advisory Board, for staff time related to surcharge rate setting proceedings and catastrophic wildfire cost recovery proceedings, and for administrative duties related to the issuance of specified safety certificates. (Public Utilities Reimbursement Account and Public Advocates Office Account)
4. Both costs and savings to the state as a utility ratepayer.
   1. Unknown potential costs due to changes in proof of liability for wildfire costs.
   2. Costs of roughly $5 million to $10 million annually (General Fund and special funds) due to "continuation" of the DWR bond surcharge on ratepayers that would have otherwise phased out, likely by 2022.
   3. Costs in the low tens of millions annually (General Fund and special funds) for increased wildfire safety spending by utilities.
   4. To the extent this bill improves utility credit ratings from what they would be absent this bill, unknown savings due to lower utility borrowing costs.
5. To the extent the bill encourages increased wildfire safety spending and higher utility safety standards that reduce the occurrence of catastrophic wildfires from what otherwise would have occurred, this bill would result in unknown potential savings for reduced fire suppression (General Fund).
6. Any costs to the Department of Finance, the California Catastrophe Response Council, the Wildfire Fund Administrator, and the Wildfire Safety Division for duties specified in this bill are expected to be covered by the appropriations in AB 111 or SB 111, and SB 110 (see related legislation below)

VOTES:

ASM UTILITIES AND ENERGY: Vote Not Relevant

YES:

ABS, ABST OR NV:

ASM APPROPRIATIONS: Vote Not Relevant

YES:

ABS, ABST OR NV:

ASSEMBLY FLOOR: Vote Not Relevant

YES:

ABS, ABST OR NV:

SENATE FLOOR: 31-7-2

YES: Allen, Archuleta, Atkins, Bates, Beall, Bradford, Caballero, Dahle, Dodd, Durazo, Galgiani, Glazer, Lena Gonzalez, Hertzberg, Hill, Hueso, Jackson, Leyva, McGuire, Mitchell, Monning, Moorlach, Nielsen, Pan, Portantino, Roth, Rubio, Skinner, Stern, Umberg, Wieckowski

NO: Chang, Grove, Jones, Morrell, Stone, Wiener, Wilk

ABS, ABST OR NV: Borgeas, Hurtado

ASM UTILITIES AND ENERGY: 11-1-3

YES: Holden, Patterson, Burke, Carrillo, Cunningham, Eggman, Cristina Garcia, Eduardo Garcia, Mayes, Quirk, Santiago

NO: Ting

ABS, ABST OR NV: Chen, Muratsuchi, Reyes

UPDATED:

VERSION: July 5, 2019

CONSULTANT: Mary McDonald / U. & E. / (916) 319-2083 FN: 0001261

Date of Hearing: July 10, 2019

ASSEMBLY COMMITTEE ON UTILITIES AND ENERGY

Chris Holden, Chair

ABPCA Bill Id:AB 1054 (

Author:Holden) – As Amended Ver:July 5, 2019

SUBJECT: Public utilities: wildfire and employee protection

SUMMARY: This bill would create additional safety oversight and processes for utility infrastructure, recast recovery of costs from wildfire damages to third-parties, and authorize an electrical corporation and ratepayer jointly funded Wildfire Fund to address future related wildfire liabilities.

Specifically, this bill:

1. Makes several findings and declarations concerning the increased risk of utility caused or ignited catastrophic wildfires, the exposure of financial liability resulting from wildfire caused by utility equipment, the need of electrical corporations to access capital to fund ongoing operations, and the ability of a wildfire fund to support the credit worthiness of electrical corporations, among others.
2. Makes additional findings and declarations concerning the need to have electrical corporations invest in hardening of the state’s electrical infrastructure and vegetation management to reduce the risk of catastrophic wildfires, including a finding that $5 billion in safety investments in the aggregate by the large electrical corporations must be made without return on equity that would have otherwise been borne by ratepayers.
3. Establishes the California Wildfire Safety Advisory Board (CWSAB) consisting of seven members appointed by the Governor, Speaker of the Assembly, and Senate Committee on Rules, as provided, who would serve four-year staggered terms. Requires the board, among other actions, to advise and make recommendations related to wildfire safety to the Wildfire Safety Division (or, on and after July 1, 2021, the Office of Energy Infrastructure Safety, as established pursuant to AB 111 or SB 111 of the 2019–20 Regular Session). Requires the CWSAB to review and provide comments and advisory opinions to each local publicly owned electric utility (POU) and electrical cooperative regarding the context and sufficiency of its wildfire mitigation plans. Mandates that the board be selected from industry experts, academics, and persons with labor and workforce safety experience or other relevant expertise. At least three members must have experience in the safe operation, design, and engineering of electrical infrastructure.
4. Requires the California Public Utilities Commission (CPUC), when determining an application by an electrical corporation to recover costs and expenses arising from a covered wildfire, as defined, to allow cost recovery if the costs and expenses are determined just and reasonable based on reasonable conduct by the electrical corporation.
   • Requires the CPUC to find that an electrical corporation’s conduct was reasonable if that conduct, related to the ignition, was consistent with actions that a reasonable utility would have undertaken in good faith under similar circumstances, at the relevant point in time, and based on the information available to the electrical corporation at that time, as provided.
   • Provides that costs and expenses in the application may be allocated for cost recovery in full or in part, taking into account factors both within and beyond the utility’s control, including humidity, temperature, and winds.
   • Provides that an electrical corporation bears the burden to demonstrate, based on a preponderance of the evidence that its conduct was reasonable, unless it has a valid safety certification for the time period in which the covered wildfire that is the subject of the application ignited.
   • Provides, if the electrical corporation has that valid safety certification, the electrical corporation’s conduct would be deemed reasonable unless a party to the proceeding creates a serious doubt as to the reasonableness of the electrical corporation’s conduct.
   • Requires, once serious doubt has been raised, the electrical corporation to have the burden of dispelling the doubt and proving the conduct to have been reasonable.
   • This section becomes inoperative if timely payment of the initial contribution is not made by each large electrical corporation that is not the subject of an insolvency proceeding on the effective date of this section.
5. Authorizes the CPUC to assess a penalty in an amount up to three times the penalty authorized by law for certain utility-related violations.
6. Authorizes an electrical corporation to file an application requesting the CPUC to issue a financing order to authorize the recovery of costs and expenses related to catastrophic wildfires under specified conditions. The conditions include fire risk mitigation capital expenditures associated with the electrical corporation’s proportionate share of the $5B of safety improvements in aggregate by all three of the state’s largest electrical corporations. The financing will be done through the issuance of bonds by the electrical corporation that are secured by a rate component. Prohibits costs and expenses incurred by the electrical corporation after December 31, 2035 from being included in a financing order per this bill.
7. Authorizes the CPUC to issue a financing order to allow recovery through fixed recovery charges if the CPUC makes specified determinations, including that the costs are just and reasonable, consistent with the public interest, and reduce the rates on a present value basis that consumers within the electrical corporation’s service territory would pay as compared to the use of traditional utility financing mechanisms. Requires that any successor to a financing entity is bound by the requirements of the article and is required to perform and satisfy all obligations of the financing entity.
8. Expands the definition of “change of control” for purposes of the bill: (1) the sale of all or a material portion of the assets of the electrical corporation or gas corporation, its parent company, or its holding company, or any merger, consolidation, or acquisition of the electrical corporation or gas corporation, its parent company, or its holding company with, by, or into another corporation, entity, or person, (2) the voluntary or involuntary change in ownership in assets of an electrical or gas corporation to ownership by a public entity, or (3) in the case of a combined electrical and gas corporation, the change in ownership of all or a substantial portion of either the gas or electric line of business of the combined corporation.

Further:

• 1. Requires the predecessor employer, no later than 15 days before the effective date of a change of control, to post a notice of the change in a conspicuous place in a manner that is readily viewed by covered employees.
  2. Requires the successor employer, for three years after the 180-day covered employee retention period, to provide to employees who would have qualified as covered employees during the 90-day period immediately before a change of control no less than the wages, hours, and other terms and conditions of employment provided before the change of control, including any previously negotiated increase in wages, and to maintain no less than the total number of employees who would have qualified as covered employees during that 90-day period, except with commission approval based on proof of certain criteria.
  3. Prohibits a person or corporation from merging, acquiring, or controlling, including a change in control as revised by this bill, either directly or indirectly, any public utility organized and doing business in this state without first securing authorization from the CPUC.

1. Requires the CPUC to determine whether a proceeding is a catastrophic wildfire proceeding, defined as a proceeding to determine whether an electrical corporation’s costs and expenses relating to a covered wildfire, as defined, are just and reasonable, as specified:
   1. Establishes procedures and standards applicable to catastrophic wildfire proceedings, as specified, including specified ex parte rules, authorizes the CPUC to establish a quiet period during the three business days scheduled for a vote and to meet in closed session during that period.
   2. Authorizes an electrical corporation to file an application to recover expenses that are just and reasonable at any time after it has paid, or entered into binding commitments to pay, all or substantially all third-party damage claims related to a covered wildfire.
   3. Requires an electrical corporation, if it has received payments from the Wildfire Fund for a third-party damage claim for the covered wildfire, to file an application to recover the costs associated with the third-party claims of a covered wildfire by no earlier than the date when it has resolved all third-party damage claims and exhausted all right to indemnification against any third parties, or the date that is 45 days after the date the administrator requests the electrical corporation to make such an application.
2. Establishes the Wildfire Fund (outside of the State Treasury) to pay eligible claims arising from a covered wildfire, as provided, and continuously appropriates money in the fund to the Wildfire Fund Administrator for that purpose, thereby making an appropriation. With respect to the Fund, the bill would:
   1. Define an eligible claim to mean claims for third-party damages against an electrical corporation resulting from covered wildfires exceeding $1 billion (B) in the aggregate in any calendar year or the amount of insurance coverage required to be in place for the electrical corporation.
   2. Establish a Wildfire Fund allocation metric as the calculation involving the land area of the electrical corporation in the high fire-threat district, and the electrical corporation’s line miles of transmission and distribution lines in the high fire-threat districts as a proportion of all large electrical corporations’ line miles, adjusted to account for risk mitigation efforts, as determined by the Department of Finance (DOF). The bill states the expectation that the allocation metric is 64.2 percent for Pacific Gas & Electric, 31.5 percent for Southern California Edison, and 4.3 percent for San Diego Gas & Electric.
   3. Require of a participating large electrical corporation an initial contribution of an amount equal to $7.5B multiplied by the Wildfire Fund allocation metric, and an annual contribution of $300 million multiplied by the Wildfire Fund allocation metric.
   4. Require of a regional electrical corporation an initial contribution of an amount equal to $625 multiplied by the number of customer accounts serviced by the electrical corporation within the state, and an annual contribution amount equal $25 multiplied by the number of customer accounts serviced by the electrical corporation within the state.
3. Requires the CPUC to initiate a rulemaking proceeding to consider using its existing authority to require large electrical corporations to collect a nonbypassable charge from their ratepayers to support the Wildfire Fund, and would require the CPUC to direct each electrical corporation to collect that charge if the CPUC determines that the imposition of the charge is just and reasonable and that it is an appropriate exercise of its authority, as specified.
4. Specifies the funding sources for the fund, which include, among other sources, contributions from electrical corporations (not from ratepayers) and revenues generated from the charge on ratepayers.
5. Requires the electrical corporation’s wildfire mitigation plan, in the calendar year 2020 and thereafter, to cover at least a three-year period. Authorizes the division to allow the annual submissions to be updates to the plan but would require the submission of a comprehensive wildfire mitigation plan at least once every 3 years. Authorizes the electrical corporation to recover the cost of implementing the plan in its general rate case, or to elect to recover the cost of implementation as accounted in a memorandum account at the conclusion of the time period covered by the plan, subject to a specified limit for a large electrical corporation.
6. Requires the chief executive officer of an electrical corporation, in the electrical corporation’s general rate case application, to certify that the electrical corporation has not received authorization from the CPUC to recover those costs in a previous proceeding.
7. Requires the executive director of the CPUC to issue a safety certification to an electrical corporation if it meets certain requirements.
8. Requires, after January 1, 2020, that each local publicly owned electric utility or electrical cooperative submit, by July 1^st of each year, its wildfire mitigation plan to the CWSAB for review and comment, and to comprehensively revise its wildfire mitigation plan at least once every three years.
9. Requires the CWSAB to provide comments and an advisory opinion to each local publicly owned electric utility or electrical cooperative regarding the content and sufficiency of its plan and to make recommendations on how to mitigate wildfire risks. The local publicly owned electric utility or cooperative wildfire mitigation plan shall consider, as necessary, specific elements defined in the measure.
10. Requires local publicly owned electric utility or electrical cooperative shall, on or before January 1, 2020, and not less than annually thereafter, to present its wildfire mitigation plan in an appropriately noticed public meeting, accept public comments, and verify that the plan complies with all applicable rules, regulations, and standards, as appropriate.
11. Mandates the California Wildfire Safety Advisory Board by June 30, 2020, and annually thereafter, to make recommendations on specific items including performance metrics and processes for determining an electrical corporation’s compliance with its approved wildfire mitigation plan.
12. Mandates the executive director of the CPUC to issue a safety certification to an electrical corporation if the electrical corporation provides documentation of the following: 1) an approved wildfire mitigation plan; 2) is in good standing, which can be satisfied by the electrical corporation having agreed to implement the most recent safety culture assessment, if necessary; 3) has established a safety committee of its board of directors composed of members with relevant safety experience; 4) established an executive incentive compensation structure approved by the division and structured to promote safety as a priority and to ensure public safety and utility financial stability with performance metrics that are measurable and enforceable for all executive officers. This may include tying 100 percent of the incentive compensation to safety performance and denying all incentive compensation in the event the electrical corporation causes a catastrophic wildfire that results in one or more fatalities; 5) has established board-of-director-level reporting to the commission on safety issues; 6) has established a compensation structure for any new or amended contracts for executive officers. It is the intent of the Legislature that any approved bankruptcy reorganization plan should, in regards to compensation for executive officers of the electrical corporation, comply with the requirements.
13. Authorizes Department of Water Resources (DWR) to issue bonds, excluding any notes issued in anticipation of the issuance of bonds and retired from the proceeds of those bonds, in an aggregate amount up to $10.5B DWR shall not issue any bonds pursuant to this section until on and after either the date on which DWR legally defeased all of its remaining bonds under the provisions stemming from the bonds issued during the 2000-2001 energy crisis, or the date on which it pays those obligations in full at maturity, whichever is earlier. Authorizes the DWR to recover, as a revenue requirement, amounts necessary to enable it to finance those bonds.
14. Requires the bond proceeds and revenues received by DWR to be deposited in the DWR Charge Fund, which this bill would establish. Continuously appropriates the money in the DWR Charge Fund to the DWR for specified purposes, including transfers to the Wildfire Fund and repayment of the bonds.
15. Transfers $9 million from the General Fund to the DWR Charge Fund, thereby making an appropriation. The amount transferred pursuant to this subdivision shall be repaid from the DWR Charge Fund to the General Fund at the earliest possible time.
16. States the bill would become operative only if Assembly Bill 111 or Senate Bill 111 is enacted during the 2019–20 Regular Session and becomes effective before January 1, 2020.
17. Declares that it is to take effect immediately as an urgency statute.

EXISTING LAW:

1. Establishes that private property may be taken or damaged for a public use only when just compensation, ascertained by a jury unless waived, has first been paid to, or into court for, the owner. (California Constitution, Article I § 19) This section includes requirements for the exercise of eminent domain; the taking of private property for public use. This section has been held by the California Supreme Court to require just compensation when a property has been damaged by a public improvement project, known as inverse condemnation. (Reardon v. San Francisco (1885) 66 Cal. 492, 501). The courts have further held that the section is applicable to privately-owned public utilities (Gay Law Students Association v. Pacific Telephone & Telegraph Co. (1979) 23 Cal.3d 458, 469), and (Barham v. Southern California Edison Company (1999) 74 Cal. App 4th 744).
2. Establishes the CPUC and authorizes the CPUC to exercise ratemaking and rulemaking authority over all public utilities, as defined, subject to control by the Legislature. (California Constitution, Article XII §§1,2, 3, 5,6)
3. Authorizes, via the Public Utilities Act, the CPUC to supervise and regulate every public utility, including electrical corporations, and to do all things that are necessary and convenient in the exercise of such power and jurisdiction. (Public Utilities Code §701)
4. Authorizes the CPUC to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable. (Public Utilities Code §451)
5. Existing law authorizes the CPUC, in a proceeding on an application by an electrical corporation to recover costs and expenses arising from a catastrophic wildfire occurring on or after January 1, 2019, to allow cost recovery if the costs and expenses are just and reasonable, after consideration of the conduct of the utility, including consideration of specified factors. (Public Utilities Code §451.1)
6. Authorizes an electrical corporation to file an application requesting the CPUC to issue a financing order to authorize the recovery of costs and expenses related to a catastrophic wildfire through the issuance of bonds by the electrical corporation that are secured by a rate component, as provided. (Public Utilities Code §§451.2, 850, 850.1, 850.2)
7. Establishes procedural requirements that are applicable to all CPUC hearings, investigations, and proceedings and provides that the technical rules of evidence are not applicable to those hearings, investigations, and proceedings, which are governed by the rules of practice and procedure adopted by the commission. (Public Utilities Code §1701 et seq.)
8. Requires each electrical corporation to annually prepare and submit a wildfire mitigation plan to the CPUC for review and approval and requires the CPUC to consider whether the cost of implementing an electrical corporation’s plan is just and reasonable in the electrical corporation’s general rate case. (Public Utilities Code §8386)
9. Requires each local publicly owned electric utility (electric POU) and electrical cooperative, by January 1, 2020, and annually thereafter, to prepare a wildfire mitigation plan. (Public Utilities Code §8387)
10. Prohibits a person or corporation from merging, acquiring, or controlling, either directly or indirectly, any public utility organized and doing business in this state without first securing authorization to do so from the CPUC. (Public Utilities Code §851)
11. Requires a successor employer, in the context of a change of control of an electrical or gas corporation, to retain all covered employees, as defined, for at least 180 days immediately following the effective date of a change of control. Prohibits the successor employer from reducing the total compensation of a covered employee during that period. Prohibits, for two years after the 180-day period, a successor employer from reducing the total number of employees who would have been covered employees for succession purposes below the total number of those employees who were protected during that 180-day period, unless approved by the CPUC. Prohibits the CPUC from authorizing a successor employer to reduce the number of those employees unless the successor employer makes a specified showing. (Public Utilities Code §854)
12. Authorizes, until January 1, 2003, the Department of Water Resources (DWR) to enter into contracts for the purchase of electric power. Authorizes the DWR to sell power to retail end use customers and local electric POU under certain circumstances. Authorizes DWR to issue revenue bonds and entitles the department to recover, as a revenue requirement, amounts necessary to enable it to finance the bonds and purchase electric power pursuant to these provisions. (Water Code §§80000, et seq., 80100, et seq., 80130, et seq., 80200, 80260)

Fiscal Impact: According to Senate Appropriations:

• One-time cost of $2B (Surplus Money Investment Fund [SMIF]) in 2019-20 for an initial loan to capitalize the Wildfire Fund, with a total loan authorization of up to $10.5B as needed from the SMIF, upon a determination by the Department of Finance (DOF) to cover claims payable from the Wildfire Fund. These transfers would be a short-term loan repaid from proceeds of specified ratepayer charges or bonds within a fiscal year.
  
• At the time of this analysis, the Department of Water Resources (DWR) initially estimated administrative costs of $10 million to $13 million annually (DWR Charge Fund) to administer the surcharge and issue bonds as necessary. First-year administrative costs would be covered by a one-time $9 million loan from the General Fund to the DWR Charge Fund. This loan would be repaid from the DWR Charge Fund “at the earliest possible time.”
  
• Unknown significant costs to the CPUC. A CPUC cost estimate was unavailable at the time of this analysis. Staff assumes the CPUC would incur administrative costs in the low millions annually that are not funded by the CPUC appropriation in AB 111 or SB 111 (see related legislation below). Specifically, the CPUC would incur costs related to the activities of the new California Wildfire Safety Advisory Board, for staff time related to surcharge rate setting proceedings and catastrophic wildfire cost recovery proceedings, and for administrative duties related to the issuance of specified safety certificates. (Public Utilities Reimbursement Account and Public Advocates Office Account)
  
• Both costs and savings to the state as a utility ratepayer.
  • Unknown potential costs due to changes in proof of liability for wildfire costs.
  • Costs of roughly $5 million to $10 million annually (General Fund and special funds) due to continuation of the DWR bond surcharge on ratepayers that would have otherwise phased out, likely in 2022.
  • Costs in the low tens of millions annually (General Fund and special funds) for increased wildfire safety spending by utilities.
  • To the extent this bill improves utility credit ratings from what they would be absent this bill, unknown savings due to lower utility borrowing costs.
    
• To the extent the bill encourages increased wildfire safety spending and higher utility safety standards that reduce the occurrence of catastrophic wildfires from what otherwise would have occurred, this bill would result in unknown potential savings for reduced fire suppression (General Fund).
  
• Any costs to the Department of Finance, the California Catastrophe Response Council, the Wildfire Fund Administrator, and the Wildfire Safety Division for duties specified in this bill are expected to be covered by the appropriations in AB 111 or SB 111, and SB 110 (see related legislation below).

BACKGROUND:

Wildfire Damages Have Been Growing. Catastrophic wildfires have a wide variety of adverse effects, including loss of life, property damage injuries, and adverse environmental effects, such as air pollution. The 2017 and 2018 fire seasons were especially costly, with annual property damages estimated to be about $20B Those particularly destructive wildfires took 139 lives and destroyed communities in both Northern and Southern California. According to a recent report by the California Legislative Analyst’s Office, the extent to which this pattern of catastrophic wildfire damages will continue in the future years is currently unclear. The major problem is uncontrolled, catastrophic fires in areas near human populations. It is important to note that fires in many parts of California are a natural part of ecological processes and many have significant forest health benefits. However, as illustrated in the figure below, the last two decades have seen a substantial increase in the frequency of catastrophic wildfires.^[1]

Increasing in Frequency and Intensity. Approximately 10 percent of the fires are started by utility equipment, and many of those fires result in little or no property damage. Wildfires seem to be more frequent and more intense, due to a combination of recent drought, longer fire seasons, forest management practices, increasing development in the wildland urban interface (WUI), and ignition for electric utility infrastructure. However, some of the most damaging fires are started by utility equipment. For example, utility power lines caused at least 8 of the 20 most destructive fires (40 percent) in California’s history. Wildfires caused by power lines may also contribute to a rapid spread of fire which is difficult to control. According to the California Department of Forestry and Fire Protection (CalFire) investigations, Pacific Gas and Electric (PG&E) equipment started the 2018 Camp Fire in Paradise, which destroyed nearly 19,000 structures and killed 86 people.

Impacts of inverse condemnation. The California Constitution provides the basis for recovery against government entities and public utilities via the theory of inverse condemnation. Section 19 of Article 12 requires that just compensation be paid when private property is taken for public use. This is commonly understood as eminent domain. In the case where a property is damaged by a public improvement project, the application is known as inverse condemnation. The policy underlying the concept of inverse condemnation is that the costs of a public improvement benefiting the community should be spread among those receiving the benefit, as opposed to being allocated to a single person within a community. In the case of inverse condemnation, unlike in cases of negligence, the responsible entity is held strictly liable where a public improvement causes property damage. The California Supreme Court and appellate courts have held that inverse condemnation is applicable to privately-owned public utilities (Gay Law Students Association v. Pacific Telephone & Telegraph Co. (1979) 23 Cal.3d 458, 469), (Barham v. Southern California Edison Company (1999) 74 Cal. App 4th 744). In the Barham decision, the court also held that the electric investor-owned utility (IOU) was akin to a government entity and could recover costs associated with the damages from its ratepayers (roughly $150,000 for communications equipment damaged due to a short circuit after a large bird sat on the electric line).

Cost recovery by IOUs. CPUC-regulated utilities, including electric IOUs, routinely submit requests for cost recovery related to their operations, including expanding their infrastructure, paying for operation expenses, etc. As required by statute in Public Utilities Code §451, the CPUC may only approve a utility’s request for cost recovery that is deemed just and reasonable. Review of utility expenses to ensure they are just and reasonable is the primary purpose for the CPUC’s existence and the main task of the agency as an economic regulator. Expenses related to wildfire damages, just as other expenses related to the operation of a utility, must be reviewed by the CPUC to ensure they meet the requirements that they are just and reasonable. As part of that review, the CPUC assesses whether the utility was a “prudent manager” of its infrastructure and operations – known as a prudency review or prudent management standard. Generally, the utility submits an application for cost recovery, and the burden of proof is on the utility to demonstrate it has behaved reasonably.

San Diego wildfires in 2007. With the backdrop of the deadly North Bay Fires (including Nunns, Atlas, and Tubbs Fires), in the fall of 2017, the CPUC adopted a decision denying a request by San Diego Gas & Electric (SDG&E) for cost recovery from ratepayers for $379M. of uninsured expenses related to the 2007 San Diego wildfires (Application 15-09-010). The application addressed third-party damage claims arising from the Witch, Guejito and Rice wildfires which were ignited by utility infrastructure. The $379 million represents the delta of a total $2.4B in costs and legal fees incurred by SDG&E, minus commercial liability insurance coverage and third party payouts, and about $40 million paid by the utility shareholders as a deductible of sorts. The CPUC’s decision included a concurrence by two commissioners, including President Picker, who called on the Legislature, the governor, and the courts to help address the issue of wildfire damages, the application of inverse condemnation by the courts, and financial impacts on utilities, including ratepayers.

Electric IOU credit ratings downgraded. With some exceptions, regulated utilities, those who are provided the opportunity to earn a rate of return through rates regulated by the CPUC, generally enjoy high investment grade credit ratings. The investment grade credit ratings allow the utility to access less expensive capital in the financial market than might otherwise be the case. The utilities’ business model is also heavily dependent on access to capital in order to finance its operations. Most investors have viewed utilities as secure investments, since the regulated utility business models, generally, afford a utility the opportunity to earn a rate of return. Generally, these more affordable rates for capital also benefit ratepayers whose pay for the operation of the utility through rates. However, the combination of increasing severity and frequency of wildfires, the application of inverse condemnation, and the CPUC decision denying SDG&E’s application for cost recovery, resulted in declining credit ratings for all three of the state’s largest electrical utilities and impacts to the ratings of smaller IOUs and also electric publically owned utilities (POUs). Credit ratings agencies, including Standard & Poor’s and Moody’s, raised concerns about the increased risks to investing in California electric utilities until changes to inverse condemnation were made.

SB 901 (Dodd, Chapter 626, Statutes of 2018). In 2018, the Legislature and governor responded to the threat of wildfires with the passage of several bills to reduce the risk of wildfires, including SB 901. The bill was heard in a bipartisan conference committee process. The bill addressed numerous issues concerning wildfire prevention, response and recovery, including funding for mutual aid, fuel reduction and forestry policies, bolstered the requirements of wildfire mitigation plans by electric utilities, and cost recovery by electric corporations of wildfire-related damages. SB 901 authorizes the CPUC to use a reasonable standard approach in determining whether the utility would be allowed to recover in rates expenses related to damages stemming from a wildfire caused by the utility’s equipment. Specifically, SB 901 authorizes the CPUC to consider 12 factors to determine whether the expenses are allowed or disallowed for recovery for wildfires occurring after December 31, 2018, these include consideration of the conduct of the utility. SB 901 also specifies that for applications by an electrical corporation to recover costs and expenses arising from catastrophic wildfires ignited in 2017, the CPUC is required to determine just and reasonableness without specifying the 12 enumerated factors identified for the fires in 2019 and beyond. In the case of the 2017 wildfires, SB 901 requires the CPUC to consider the electric utility’s financial status and determine the maximum amount the corporation can pay without harming ratepayers, also known as a financial stress test, and requires the CPUC to limit the disallowance from the 2017 wildfires to the threshold determined by the stress test.

Pacific Gas and Electric Company (PG&E) bankruptcy. Earlier this year, PG&E’s credit ratings were further downgraded by the credit ratings agencies to a point characterized as “junk status.” The credit ratings downgrade occurred following information that the CPUC was investigating PG&E concerning gas safety reporting violations, on the heels of the Camp Fire which was speculated (and since found to have been) caused by PG&E electric infrastructure, and in the midst of a criminal probation stemming from the San Bruno gas pipeline explosion. Such a downgrade would greatly diminish the utility’s ability to access capital, a bedrock of the regulated utility business model. As such, nearly a week after the downgrade, PG&E notified its workforce (and the public) that it intended to file for Chapter 11 bankruptcy protection on or around January 29, 2019. The notice by the company was in compliance with a provision of SB 901, which required a minimum 15-day notice to the utility workforce of any such action. PG&E remains in bankruptcy process and is not likely to come out of bankruptcy until the company can resolve pending wildfire claims, which the company estimates to be $30B.

Governor’s Strike Force Report. In April, Governor Newsom issued a report from his Strike Force regarding Wildfires and Climate Change: California’s Energy Future. The strike force report sets out steps the state must take to reduce incidence and severity of wildfires. The report was structured into five parts, including a section on responding and preventing wildfires, as well as, a section on allocating responsibility for wildfire costs, among others. As it relates to safety, the report included recommendations to bolster safety incentives, such as changes to the allowed return on equity based on wildfire performance, as well as, cost-effective financing for wildfire mitigation safety investments. In relation to allocating responsibility for wildfire costs, the report identified three concepts for allocating responsibility for wildfire costs: a liquidity-only fund coupled with modification of cost recovery standards, adopting a fault-based standard in-lieu of the strict liability standard, and creation of a catastrophic wildfire fund coupled with a revised cost recovery standard.

SB 901 Commission report. SB 901 also established a Commission on Catastrophic Wildfire Cost and Recovery and required the five-member commission to engage the public and provide recommendations to address changes to law that would ensure equitable distribution of costs among affected parties. The Commission held five public meetings this spring, including in communities affected by wildfires in recent years. The Commission issued their report in June detailing 15 recommendations, including: the strict liability interpretation of inverse condemnation should be replaced with a fault-based negligence standard, revise and clarify the prudent manager standard for utilities, consolidate and strengthen the standards for utility wildfire mitigation and response, establish a broadly sourced Wildfire Victims Fund, among other recommendations.

COMMENTS:

1. Culmination of reports and recommendations - This bill encompasses many of the recommendations included in both the governor’s strike force report and the SB 901 Commission recommendations. The key provisions include: establishing a new process for electric IOUs to recover costs related to catastrophic wildfires (changes to the prudency standard), authorizes financing of specified costs (including wildfire safety mitigation), bolstering and changes to electric utility wildfire safety oversight (including a Wildfire Safety Division), and establishment of a Wildfire Fund to address the property claims stemming from utility-caused wildfires (provides for either a liquidity-only fund or broader insurance fund). Additionally, this bill includes new triggers related to change of control of an IOU as an effort to protect the existing workforce of the electric IOUs.
2. IOU wildfire cost recovery process - AB 1054 proposes changes to the CPUC’s current cost recovery process as explained above and only available to electric IOUs who participate in the Wildfire Fire Insurance Fund (more below). This bill would establish a new type of proceeding, known as the catastrophic wildfire proceeding and establishes specified processes for this proceeding category. This bill would recast the considerations afforded to an application for cost recovery related to wildfire expenses by an electric IOU, including explicitly stating that the costs and expenses arising from a wildfire ignited by electric utility infrastructure (covered wildfire) are just and reasonable if the conduct of the electric IOU is “consistent with actions that a reasonable utility would have undertaken in good faith under similar circumstances, at the relevant point in time.” This bill also explicitly states that costs and expenses may be recovered in full or in part with consideration for factors outside the control of the utility “including humidity, temperature, and winds.” These changes and others replace much of the 12 points of criteria established in SB 901, but fundamentally are still largely consistent with the existing requirements of Public Utilities Code §451 which afford the CPUC broad authority to determine what is just and reasonable. However, a fundamental distinction is that AB 1054 proposes new language to provide the electrical utility the presumption that they acted reasonably if they have a valid safety certification at the time period of the covered wildfire. In this respect, the burden of proof would switch to other parties in the proceeding to raise “serious doubt” as to the electric IOU’s reasonableness. The authors of this bill have addressed this concern by requiring that presumption to shift back to the electric IOU once serious doubt has been raised. Nonetheless, this is a new approach to address the calls for more certainty in the cost recovery process in order to restore the regulatory compact. Time will tell just how effectively this new approach will perform for ratepayers and for electric IOUs.
3. Electric IOU wildfire safety - As noted above, AB 1054 includes several new provisions addressing electric IOU wildfire safety oversight and processes. The combination of the safety efforts attempt to mitigate the wildfire ignitions from electric utility infrastructure. The provisions include some to provide greater oversight, others to direct the utilities to make specified investments and others to bolster safety focus by the management of the utility. These include:

• Establishment of a CWSAB to provide recommendations to the Wildfire Safety Division (or, on and after July 1, 2021, the Office of Energy Infrastructure Safety, as established pursuant to AB 111 or SB 111 of the 2019–20 Regular Session). The bill requires the board to consist of seven members, five appointed by the Governor, and one each by the Speaker of the Assembly and the Senate Committee on Rules. This bill requires the advisory board to develop recommendations related to wildfire safety and mitigation performance metrics, including recommendations related to wildfire mitigation plans developed by electric utilities, including advisory opinions of each local electric POU’s wildfire mitigation plan.
• Requiring the Wildfire Safety Division (or, on and after July 1, 2021, the Office of Energy Infrastructure Safety, as established pursuant to AB 111 or SB 111 of the 2019–20 Regular Session) to approve or deny each wildfire mitigation plan from the electric IOU within three months. Provides specified requirements of the Wildfire Safety Division, including working with Cal FIRE to identify a list of qualified independent evaluators with experience in assessing the safe operation of electrical infrastructure.
• Prohibiting a large electrical corporation from including in its equity rate base its share of the first $5B. in aggregate by large electrical corporations on fire risk mitigation capital expenditures. This is intended to reduce the ratepayer costs of the return on equity (ROE) of the $5B. Based on the estimate provided by the Governor’s strike force, the potential ratepayer benefits would be roughly $2.5B in foregone profit, assuming a 20-year depreciable life.
• Requiring the electric IOU to foster a greater safety culture. Specifically, this bill requires as a prerequisite to attaining a safety certificate that the electric IOU shall establish a safety committee of its board of directors, implement the findings of its most recent safety culture assessment, and a compensation structure structured to promote safety, among others.

1. Wildfire Fund - In addition to the provisions mentioned above, AB 1054 establishes a Wildfire Fund as a mechanism to address third-party damages against an electrical corporation from wildfires ignited by the utility, the costs of which exceed the greater of $1B or the amount of the insurance coverage required of the electric IOU. The Wildfire Fund would be overseen by an appointed administrator. The Fund would be capitalized, initially, with a loan from the state’s Surplus Money Investment Fund, requiring a minimum of $2B of transfers in the 2019-20 fiscal year. The fund establishes two paths to address wildfire damages: a liquidity fund and an insurance fund.
2. Liquidity Fund - Within 14 days of the effective date of this bill, AB 1054 would require the CPUC to initiate a proceeding to collect a nonbypassable charge from ratepayers of the electric IOU to extend an existing charge. This option provides a line of credit (revolving liquidity fund) that will pay eligible claims of third-party damages from wildfires ignited by electrical IOUs. Requires the electrical IOUs in order to participate in the fund to meet specified conditions by June 30, 2020, including: the electrical IOU is not in bankruptcy or criminal probation. This bill provides that if a utility that has been in bankruptcy may participate in the fund if it has resolved its insolvency proceeding including settlement of pre-bankruptcy claims, a CPUC approved reorganization plan that is both consistent with the state’s climate goals and renewable portfolio standard and is determined to be neutral, on average, to the ratepayers of the electrical IOU. The liquidity fund allows the electrical IOU to receive payments from the fund for eligible claims. The electric IOU would then be allowed to recover in rates those expenses that are deemed to be just and reasonable.
3. Insurance Fund - Within 15 days of the effective date of this bill, each large electrical corporation not subject to insolvency must notify the CPUC of its commitment to provide the initial contribution and the annual contributions that are not recoverable from ratepayers ($10.5B). The insurance fund would provide between $30-40B in claims-paying capacity for utility caused wildfires. The fund would be jointly funded by both electric IOU ratepayers (via an existing charge on utility bills) and the electric IOUs via non-ratepayers funds. The insurance fund also includes a cap on costs for participating electric IOUs. Specifically, participating electrical IOUs expenses deemed just and reasonable would be recovered from the fund, while costs not deemed just and reasonable would be capped up to an amount equivalent to 20 percent of the IOU’s transmission and distribution equity rate based over three calendar years. According to the CPUC, on average from 2016-18, 20 percent of transmission and distribution equity rate base for each large electric IOU was approximately $2.1B for PG&E, $2.2B for SCE, and $692 million for SDG&E. The insurance fund would also limit subrogation claims from insurance companies to 40 percent, or more, should the administrator approve. According to some reports, the 40 percent may be less than the average of existing subrogation claims. However, the time value of more expeditiously receiving a payment for the claim may increase the appeal for insurance companies. All the insurance fund options assume $1B per utility in annual commercial insurance requirements, a capitalization from non-ratepayer funds of $7.5B in total from the three largest electric IOUs, and an additional contribution of $3B over ten years.
4. DWR charge - In the case of both approaches, liquidity fund and insurance fund, ratepayers would contribute with the “extension” of the existing DWR charge that is scheduled to end around 2021. The existing DWR charge is roughly $0.005 per kilowatt hour (kWh) for most customers of all three of the large electrical IOUs, except qualifying low-income customers and customers needing electricity for medical necessity are exempted. The charge adds roughly a few dollars to the average residential customer monthly utility bill. The DWR charge was adopted as part of the state’s efforts to address the energy crisis in 2000-01. DWR was used to procure electricity and a nonbypassable charge on customer’s bills was issued to collect roughly $12B to cover the costs of electricity purchased on behalf of electric IOU customers (plus interest). In 2019, the DWR bond surcharge is $0.00503/kWh (each year changes slightly due to sales forecast and bond service amount changes).  This bill would allow for the continued collection of the DWR charge and allows the CPUC to move the rate up in order to meet the revenue requirement, with the goal of colleting up to $10.5B.
5. Effects on ratepayers – Left unchecked the current efforts to address wildfire liability from utility ignited wildfires have the potential to straddle ratepayers with billions in wildfire liability expenses. The amount of electricity a customer uses has little bearing on whether a wildfire will be ignited. On the other hand, utility management and operations can have a significant amount of influence over whether a wildfire will be ignited by the utility’s equipment. Additionally, the level of destruction of a wildfire may be the result of multiple factors including wind speeds, the volume of and location of properties to the ignition source, and others. Yet, the application of strict liability on electrical utilities could result in ratepayers bearing a significant amount of the costs. It seems any option may still impact ratepayers, as forgoing action can also increase the costs of capital which could then be passed on to ratepayers. The LAO used credit ratings as a proxy for perceived utility financial risk from the investment community—which can affect both interest rates for bonds and shareholder ROE. As a result, the table includes estimated costs related to debt and equity. For context, SCE is currently rated BBB- and SDG&E is rated BBB+. (PG&E is currently in bankruptcy.) In 2017, the three major utilities had credit ratings ranging from BBB+ to A. Nonetheless, the costs to ratepayers of any option are not insignificant. However, the continued downgrade of the utilities credit ratings will likely result in increased costs to ratepayers. The credit ratings agencies have all commented on the likelihood of further downgrading the electric utilities credit ratings if no meaningful action is taken by July 12, 2019. According to an analysis by the LAO, the effects of credit downgrades of electric utilities increase the costs of borrowing by the utilities as illustrated in the table below.

1. Durability - Any solution should be considered in terms of its durability. Unfortunately, unless the severity and frequency of wildfires, particularly those caused by utility infrastructure, are significantly reduced no solution will provide long-term durability. The Wildfire Insurance Fund itself could be exhausted rapidly if wildfires continue at their recent pace and severity. However, the increased investments in electric utility grid hardening, situational awareness, and in the near-term, the use of public safety power shutoffs, may help to significantly reduce the risk of utility-caused catastrophic wildfires. Unfortunately, none of these options come without significant costs. After destructive fires in 2003 and 2007, SDG&E ratepayers, per the direction of the utility’s management and with CPUC approval, invested about $1B in grid hardening and situational awareness to better address the risk of wildfires. Although their service territory is the smallest of the three large electrical IOUs, one can expect that similar investments in SCE and PG&E service territory will likely require significantly more resources. This bill attempts to fast-track and front-load some of these investments by requiring $5B in the aggregate for utility wildfire safety investments with no return on equity for the utility. Assuming these investments are targeted to the best use, Californians should have some reassurance that utility-ignited wildfires would be reduced.
2. Change of control - Additional provisions of this bill address the desire for protections for the existing workforce of the electric IOUs. Most significantly, the language provides additional protection should the ownership of the utility change. Specifically, the language extends by one year (two year to three years) the language in SB 901 that provides for a period where employees who would have qualified as covered employees had they been employed during the 90-day period immediately before a change of control and requires the successor to maintain the number and wages of covered employees. Additionally, the language includes provisions that require a change of control to be triggered by a voluntary or involuntary change in ownership of assets from and electrical or gas corporation to ownership by a public utility. It is unclear whether that language materially changes the review the CPUC would otherwise perform to approve any change in assets by the IOU.
3. Prior/Related Legislation

AB 111 (Committee on Budget, 2019) would create the California Catastrophe Response Council, with seven members, to oversee the California Earthquake Authority (CEA) and the Wildfire Fund Administrator. The bill would also require the CPUC to establish the Wildfire Safety Division, and provide that on and after July 1, 2021, to establish an Office of Energy Infrastructure Safety within the Natural Resources Agency as the successor to the WSD. The bill would also appropriate $47,600,000 from the Public Utilities Commission Utilities Reimbursement Account and $2,500,000 from the Public Utilities Commission Public Advocate’s Office Account to the CPUC for the purpose of fulfilling its duties.

SB 111 (Committee on Budget and Fiscal Review, 2019) is duplicative of AB 111, except the bill would repeal Section 326.1 of the Public Utilities Code as added by AB 1054 of the 2019–20 Regular Session. The bill would become operative only if AB 1054 of the 2019–20 Regular Session becomes effective before January 1, 2020.

AB 235 (Mayes, 2019) would authorize the CPUC, when determining recovery by an electrical corporation for costs and expenses arising from a utility caused catastrophic wildfire, occurring on or after January 1, 2019, to consider the IOU's financial status and determine the maximum amount the IOU can pay without harming ratepayers or materially impacting the IOU's ability to provide adequate and safe service.

AB 740 (Burke, 2019) would have created a catastrophic wildfire cost sharing mechanism that will reimburse wildfire victims, for losses related to utility caused wildfires. The bill has been amended to remove the provisions related to a catastrophic wildfire fund.

SB 70 (Nielson) establishes the Electrical Infrastructure Undergrounding Working Group (Group) to promote undergrounding of electrical infrastructure and implementation of a statewide joint trenching policy

SB 167 (Dodd, 2019) requiring electrical corporations to include impacts on customers enrolled in specified programs as part of the protocols for deenergizing portions of their electric distribution system within their wildfire mitigation plans filed at the California Public Utilities Commission (CPUC).

SB 550 (Hill, 2019) public utilities: merger, acquisition, or control of electrical or gas corporations.

SB 560 (McGuire, 2019) wildfire mitigation plans: deendergizing of electrical lines: notifications: mobile telephony services providers.

SB 901 (Dodd, Chapter 626, Statutes of 2018) addressed numerous issues concerning wildfire prevention, response and recovery, including funding for mutual aid, fuel reduction and forestry policies, wildfire mitigation plans by electric utilities, and cost recovery by electric corporations of wildfire-related damages.

SB 1028 (Hill, Chapter 598, Statutes of 2016) requires IOU electric utilities to file annual wildfire mitigation plans and requires the CPUC to review and comment on those plans. The bill also requires POU and electrical cooperatives to determine their risk of catastrophic wildfire that can be caused by their electric lines and equipment and, if a risk exists, submit wildfire mitigation plans to their governing board for its approval.

REGISTERED SUPPORT / OPPOSITION:

Support

Natural Resources Defense Council
Southern California Edison
Southern California Public Power Authority (SCCPA)

Up From the Ashes

Independent Energy Producers

The Utility Reform Network (TURN)

Engineers and Scientists of California, Local 20 IFPTE AFL-CIO

Oppose Unless Amended

Californians for Energy Choice

Opposition

Individuals

Analysis Prepared by: Mary McDonald / U. & E. /

1. California Legislative Analyst, “Allocating Utility Wildfire Costs: Options and Issues for Consideration” June 2019. ↑

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

AB 1054 (Holden) - Public utilities: wildfires

Bill Summary:

This bill would create additional safety oversight and processes for utility infrastructure, recast recovery of costs from wildfire damages to third-parties, and authorize an electrical corporation and ratepayer jointly funded Wildfire Fund to address future wildfire liabilities.

Fiscal Impact:

• One-time cost of $2 billion (Surplus Money Investment Fund [SMIF]) in 2019-20 for an initial loan to capitalize the Wildfire Fund, with a total loan authorization of up to $10.5 billion as needed from the SMIF, upon a determination by the Department of Finance (DOF) to cover claims payable from the Wildfire Fund. These transfers would be a short-term loan repaid from proceeds of specified ratepayer charges or bonds within a fiscal year.
  
• At the time of this analysis, the Department of Water Resources (DWR) initially estimated administrative costs of $10 million to $13 million annually (DWR Charge Fund) to administer the surcharge and issue bonds as necessary. First-year administrative costs would be covered by a one-time $9 million loan from the General Fund to the DWR Charge Fund. This loan would be repaid from the DWR Charge Fund “at the earliest possible time.”
  
• Unknown significant California Public Utilities Commission (CPUC) costs. A CPUC cost estimate was unavailable at the time of this analysis. Staff assumes the CPUC would incur administrative costs in the low millions annually that are not funded by the CPUC appropriation in AB 111 or SB 111 (see related legislation below). Specifically, the CPUC would incur costs related to the activities of the new California Wildfire Safety Advisory Board, for staff time related to surcharge rate setting proceedings and catastrophic wildfire cost recovery proceedings, and for administrative duties related to the issuance of specified safety certificates. (Public Utilities Reimbursement Account and Public Advocates Office Account)
  
• Both costs and savings to the state as a utility ratepayer.
  • Unknown potential costs due to changes in proof of liability for wildfire costs.
  • Costs of roughly $5 million to $10 million annually (General Fund and special funds) due to continuation of the DWR bond surcharge on ratepayers that would have otherwise phased out, likely in 2022.
  • Costs in the low tens of millions annually (General Fund and special funds) for increased wildfire safety spending by utilities.
  • To the extent this bill improves utility credit ratings from what they would be absent this bill, unknown savings due to lower utility borrowing costs.
    
• To the extent the bill encourages increased wildfire safety spending and higher utility safety standards that reduce the occurrence of catastrophic wildfires from what otherwise would have occurred, this bill would result in unknown potential savings for reduced fire suppression (General Fund).
  
• Any costs to the Department of Finance, the California Catastrophe Response Council, the Wildfire Fund Administrator, and the Wildfire Safety Division for duties specified in this bill are expected to be covered by the appropriations in AB 111 or SB 111, and SB 110 (see related legislation below).

Background:

Existing law:

1. Establishes that private property may be taken or damaged for a public use only when just compensation, ascertained by a jury unless waived, has first been paid to, or into court for, the owner. (California Constitution, Article I § 19) This section includes requirements for the exercise of eminent domain; the taking of private property for public use. This section has been held by the California Supreme Court to require just compensation when a property has been damaged by a public improvement project, known as inverse condemnation. (Reardon v. San Francisco (1885) 66 Cal. 492, 501). The courts have further held that the section is applicable to privately-owned public utilities (Gay Law Students Association v. Pacific Telephone & Telegraph Co. (1979) 23 Cal.3d 458, 469), and (Barham v. Southern California Edison Company (1999) 74 Cal. App 4th 744).
2. Establishes the California Public Utilities Commission (CPUC) and authorizes the CPUC to exercise ratemaking and rulemaking authority over all public utilities, as defined, subject to control by the Legislature. (California Constitution, Article XII §§ 1,2, 3, 5,6)
3. Authorizes, via the Public Utilities Act, the CPUC to supervise and regulate every public utility, including electrical corporations, and to do all things that are necessary and convenient in the exercise of such power and jurisdiction. (Public Utilities Code § 701)
4. Authorizes the CPUC to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable. (Public Utilities Code §451)
5. Existing law authorizes the CPUC, in a proceeding on an application by an electrical corporation to recover costs and expenses arising from a catastrophic wildfire occurring on or after January 1, 2019, to allow cost recovery if the costs and expenses are just and reasonable, after consideration of the conduct of the utility, including consideration of specified factors. (Public Utilities Code § 451.1)
6. Authorizes an electrical corporation to file an application requesting the CPUC to issue a financing order to authorize the recovery of costs and expenses related to a catastrophic wildfire through the issuance of bonds by the electrical corporation that are secured by a rate component, as provided. (Public Utilities Code §§ 451.2, 850, 850.1, 850.2)
7. Establishes procedural requirements that are applicable to all CPUC hearings, investigations, and proceedings and provides that the technical rules of evidence are not applicable to those hearings, investigations, and proceedings, which are governed by the rules of practice and procedure adopted by the commission. (Public Utilities Code § 1701 et seq.)
8. Requires each electrical corporation to annually prepare and submit a wildfire mitigation plan to the CPUC for review and approval and requires the CPUC to consider whether the cost of implementing an electrical corporation’s plan is just and reasonable in the electrical corporation’s general rate case. (Public Utilities Code § 8386)
9. Requires each local publicly owned electric utility (electric POU) and electrical cooperative, by January 1, 2020, and annually thereafter, to prepare a wildfire mitigation plan. (Public Utilities Code § 8387)
10. Authorizes, until January 1, 2003, the Department of Water Resources (DWR) to enter into contracts for the purchase of electric power. Authorizes the DWR to sell power to retail end use customers and local publicly owned electric utilities under certain circumstances. Authorizes DWR to issue revenue bonds and entitles the department to recover, as a revenue requirement, amounts necessary to enable it to finance the bonds and purchase electric power pursuant to these provisions. (Water Code §§ 80000, et seq., 80100, et seq., 80130, et seq., 80200, 80260)

Investor-Owned Utilities (IOUs). The state has three major electric IOUs—PG&E, Southern California Edison, and San Diego Gas and Electric (SDG&E)—along with three small IOUs that provide about three quarters of the state’s electricity and collect a total of roughly $30 billion in annual revenue.

Catastrophic wildfires caused by utilities increase costs for utility ratepayers. Recent catastrophic wildfires caused by utilities in California have caused tens of billions of dollars in property damage. Under current legal standards, these damages will directly lead to increased costs for utilities, which could be passed on to ratepayers. Moreover, the recognition of increased potential costs associated with wildfire risks has affected the credit markets, contributing to one investor owned utility (Pacific Gas and Electric) declaring bankruptcy, as well as credit downgrades for other utilities. These credit effects will make it more difficult and expensive for utilities to secure financing for capital investments, which will also increase costs for ratepayers, as well as potentially affect other policy goals.

Inverse condemnation. California’s current legal structure of inverse condemnation makes utilities liable for all property damage associated with fires started by their equipment. This covers a substantial share of the overall damages associated with wildfires. (In addition, there are other processes through which a utility might be held liable, including government recovery of fire suppression costs and tort cases brought against the utilities.)

IOU wildfire costs borne by both shareholders and ratepayers. Utilities generally buy commercial insurance to cover costs related to unexpected events such as wildfires. For example, the largest IOUs have policies that cover roughly $1 billion in damages. The costs of the premiums utilities pay for this insurance are passed on to ratepayers. However, if wildfire costs exceed the amount of the insurance—which can be the case for some catastrophic wildfires—the utility must pay for the difference. Some insurers have indicated that they do not plan to offer wildfire insurance for utilities in the coming years. Any uninsured utility wildfire costs can be borne by utility ratepayers and/or shareholders.

Wildfire claims under inverse condemnation are initially paid by the company, which then must seek authority from the CPUC to recover those costs from ratepayers through higher electricity rates. The CPUC must determine whether the utility was a prudent manager of its system before it authorizes cost recovery from ratepayers. If CPUC does not find that the utility was a prudent manager, utility shareholders bear the direct costs through lower company profits.

In 2017, the CPUC rejected a request from SDG&E to recover $379 million from ratepayers for fires that occurred in 2007 because it found that the utility did not meet the prudent manager standard. So far, this is the only example of an IOU requesting cost recovery for wildfire claims that exceeded the utility’s insurance coverage.

Chapter 626 of 2018 (SB 901, Dodd) specified certain factors that the CPUC may consider when evaluating whether IOUs acted prudently when their equipment causes wildfires (post‑2018)—such as the extent to which costs were caused by circumstances beyond the utility’s control, whether extreme climate conditions contributed to the damages, and the utility’s history of compliance with CPUC regulations.

SB 901 made changes to utility cost recovery for catastrophic wildfires. In 2018, the Legislature and governor responded to the threat of wildfires with the passage of several bills, including SB 901. The bill addressed numerous issues concerning wildfire prevention, response and recovery, including funding for mutual aid, fuel reduction and forestry policies, bolstered the requirements of wildfire mitigation plans by electric utilities, and cost recovery by electric corporations of wildfire-related damages. SB 901 authorizes the CPUC to use a reasonable standard approach in determining whether the utility would be allowed to recover in rates expenses related to damages stemming from a wildfire caused by the utility’s equipment. Specifically, SB 901 authorizes the CPUC to consider 12 factors to determine whether the expenses are allowed or disallowed for recovery for wildfires occurring after December 31, 2018, including consideration of the conduct of the utility. SB 901 also specifies that for applications by an electrical corporation to recover costs and expenses arising from catastrophic wildfires ignited in 2017, the CPUC is required to determine if costs are just and reasonable without specifying the 12 enumerated factors identified for the fires in 2019 and beyond. In the case of the 2017 wildfires, SB 901 requires the CPUC to consider the electric utility’s financial status and determine the maximum amount the corporation can pay without harming ratepayers, also known as a financial stress test, and requires the CPUC to limit the disallowance from the 2017 wildfires to the threshold determined by the stress test.

Recent wildfires make utilities a risky investment. Companies that are viewed as risky investments must pay higher rates of return in order to raise capital from investors (by issuing bonds or stock), often to build or repair infrastructure. Several factors are causing investors increasingly to view utilities as a risky investment, contributing to one IOU (PG&E) filing for bankruptcy and other major IOUs having their credit ratings downgraded substantially.

• Costs for Past Fires. IOUs face potentially billions of dollars in costs related to past fires. Moreover, it is uncertain whether CPUC will determine that the IOUs were prudent managers or how it will apply the SB 901 stress test to 2017 fires, allowing them to raise rates to cover those costs.
• Potential Costs for Future Fires. Given the continued state of California forests and proximity of dense or unhealthy forests to populated areas, there remains significant risk of future fires to be started by utility equipment, and there is uncertainty regarding whether CPUC will allow cost‑recovery for those fires.
• Uncertainty Over Future Willingness to Raise Rates. Even if CPUC allows IOUs to raise electricity rates to cover the costs of past or future fires, doing so could make CPUC reluctant to approve future rate increases to fund other utility expenditures or shareholder returns for fear that rates would become unaffordable for many customers.

Recent utility credit downgrades. Credit ratings agencies such as Moody’s, Fitch and Standard & Poor’s have downgraded California utilities in recent months, citing “the potential for multi-billion dollar exposure related to wildfire risk.”

Moody’s dropped Southern California Edison’s rating in March to a level two notches away from speculative grade, or junk. It downgraded SDG&E as well, to a level three notches from junk. Moody’s withdrew ratings from PG&E in February after it filed for bankruptcy.

The ratings agencies have warned of further downgrades unless California institutes legislative or regulatory changes to shore up the long-term financial prospects of the state’s power companies.

After Governor Newsom introduced the wildfire proposal last month, Moody’s vice president Jeff Cassella released a statement saying the measure “appears to include several credit supportive elements to mitigate wildfire risk” for utilities but “the extent of the credit support will depend on the details.”

Raising capital with dedicated rate components. Securitizing a dedicated rate component is one way to raise capital from ratepayers. A dedicated rate component is essentially a guaranteed charge included on ratepayers’ bills. For example, in the electricity crisis in the early 2000s (discussed below), the state authorized a dedicated rate component to pay debt service on bonds issued to cover costs of purchasing electricity. Since the dedicated rate component is a relatively low‑risk revenue stream, it can provide greater certainty to investors and, thus, reduces ratepayer financing costs related to raising capital.

California Energy Resources Scheduling (CERS). CERS was established on January 17, 2001, when Governor Gray Davis issued an Emergency Proclamation in response to California’s 2000-2001 energy crisis. CERS was authorized to purchase power on behalf of the State’s IOU customers to prevent rolling blackouts in the IOU service territories. CERS immediately began purchasing power to meet these needs.

On February 1, 2001, Assembly Bill 1X added Division 27 to the California Water Code, authorizing CERS to enter into long-term power contracts for IOU customers through December 31, 2002. CERS entered into 58 long-term power contracts at an estimated cost of over $40 billion. In late 2002, CERS issued bonds totaling $11.2 billion to pay for the power we previously purchased and to establish operating and bond reserves to support the ongoing program. Annual revenue requirements for allocation to IOU customers, with bond and power charges, were put in place to pay for bond and power costs. CERS stopped buying the residual net short power on behalf of IOU customers on January 1st, 2003. CERS retained the financial and legal responsibility for the power contracts. In 2012, the majority of CERS power contracts expired, and in 2015, the final power contract ended. DWR anticipates that the remaining bonds will be paid off in 2022, concluding the CERS program.

DWR Bond Charge. Beginning during the 2000-2001 energy crisis in California, DWR purchased power, entered into long-term contracts, and engaged in bond financing activity in order to meet a portion of the power supply needs of retail end use electric customers in the state. Pursuant to statute, the CPUC’s obligation since that time has been to calculate, revise, and impose corresponding DWR Bond Charges and Power Charges that collect these costs from the electric customers of Pacific Gas and Electric Company (PG&E), San Diego Gas & Electric Company (SDG&E), and Southern California Edison Company (SCE). This obligation is contained in the Rate Agreement between CPUC and DWR that was adopted by the CPUC.

DWR projects that it will incur the following bond-related costs in 2019: (a) $876 million for debt service on the bonds and (b) $12 million for administrative and general expenses. Funds to meet this requirement are provided from: (a) $37 million in interest earned on DWR’s bond charge account balances and (b) $812 million from the bond charge revenues collected from IOU customers. DWR’s modeling, which was approved by the CPUC, indicates that a Bond Charge of $0.00503/kWh is required to collect that $812 million in revenues.

Wildfire Mitigation Plans. Existing law requires each electrical corporation to annually prepare and submit a wildfire mitigation plan to the CPUC for review and approval. It also requires the commission to consider whether the cost of implementing an electrical corporation’s plan is just and reasonable in the electrical corporation’s general rate case.

Proposed Law: AB 1054, an urgency measure, would:

1. Establish the California Wildfire Safety Advisory Board (CWSAB) consisting of 7 members appointed by the Governor, Speaker of the Assembly, and Senate Committee on Rules, as provided. The CWSAB would be required to meet at least quarterly throughout the state and advise and make specified recommendations related to wildfire safety to the Wildfire Safety Division (or, on and after July 1, 2021, the Office of Energy Infrastructure Safety, as established pursuant to AB 111 or SB 111 of the 2019–20 Regular Session). The CWSAB must also review and provide comments and advisory opinions to each local publicly owned electric utility (POU) and electrical cooperative regarding the context and sufficiency of its wildfire mitigation plans. The bill would require all costs incurred by the CWSAB be part of the CPUC’s budget, as specified.
2. Require the CPUC, when determining an application by an electrical corporation to recover costs and expenses arising from a covered wildfire, as defined, to allow cost recovery if the costs and expenses are determined just and reasonable based on reasonable conduct by the electrical corporation, as specified below.
   1. The CPUC must find that an electrical corporation’s conduct was reasonable if that conduct, related to the ignition, was consistent with actions that a reasonable utility would have undertaken in good faith under similar circumstances, at the relevant point in time, and based on the information available to the electrical corporation at the time, as provided.
   2. Costs and expenses in the application may be allocated for cost recovery in full or in part taking into account factors both within and beyond the utility’s control, including humidity, temperature, and winds.
   3. An electrical corporation bears the burden to demonstrate, based on a preponderance of the evidence that its conduct was reasonable, unless it has a valid safety certification for the time period in which the covered wildfire that is the subject of the application ignited.
   4. If the electrical corporation has that valid safety certification, the electrical corporation’s conduct would be deemed reasonable unless a party to the proceeding creates a serious doubt as to the reasonableness of the electrical corporation’s conduct. If a serious doubt has been verified, the electrical corporation would have the burden of dispelling the doubt and proving the conduct was reasonable, as specified.
3. Authorize the CPUC to assess a penalty in an amount up to three times the penalty authorized by law for certain utility-related violations, if it finds that an electrical corporation has requested recovery of costs for which the CPUC had previously authorized cost recovery.
4. Authorize an electrical corporation to file an application requesting the CPUC to issue a financing order to authorize the recovery of costs and expenses related to catastrophic wildfires under specified conditions, including fire risk mitigation capital expenditures associated with the electrical corporation’s proportionate share of the $5 billion of safety improvements in aggregate by all three of the state’s largest electrical corporations, through the issuance of bonds by the electrical corporation that are secured by a rate component. The bill would also prohibit costs and expenses incurred by the electrical corporation after December 31, 2035 from being included in a financing order per this bill.
5. Authorize the CPUC to issue a financing order to allow recovery through fixed recovery charges if the CPUC makes specified determinations, including the costs are just and reasonable, consistent with the public interest, and reduce the rates on a present value basis that consumers within the electrical corporation’s service territory would pay as compared to the use of traditional utility financing mechanisms. The bill would also require that any successor to a financing entity is bound by the requirements of the article and is required to perform and satisfy all obligations of the financing entity.
6. Expand the definition of “change of control” for purposes of imposing specified employee retention and protection requirements to include: (1) the sale of all or a material portion of the assets of the electrical corporation or gas corporation, its parent company, or its holding company, or any merger, consolidation, or acquisition of the electrical corporation or gas corporation, its parent company, or its holding company with, by, or into another corporation, entity, or person, (2) the voluntary or involuntary change in ownership in assets of an electrical or gas corporation to ownership by a public entity, or (3) in the case of a combined electrical and gas corporation, the change in ownership of all or a substantial portion of either the gas or electric line of business of the combined corporation.
   
7. Require the CPUC to determine whether a proceeding is a catastrophic wildfire proceeding, defined as a proceeding to determine whether an electrical corporation’s costs and expenses relating to a covered wildfire, as defined, are just and reasonable, as specified.
   1. Establish procedures and standards applicable to catastrophic wildfire proceedings, as specified, including specified ex parte rules, authorizes the CPUC to establish a quiet period during the three business days scheduled for a vote and may meet in closed session during that period.
   2. Authorize an electrical corporation to file an application to recover expenses that are just and reasonable at any time after it has paid, or entered into binding commitments to pay, all or substantially all third-party damage claims related to a covered wildfire.
   3. Require an electrical corporation, if it has received payments from the Wildfire Fund for a third-party damage claim for the covered wildfire, to file an application to recover the costs associated with the third-party claims of a covered wildfire by no earlier than: the date when it has resolved all third-party damage claims and exhausted all right to indemnification against any third parties, or the date that is 45 days after the date the administrator requests the electrical corporation to make such an application.
8. Establish the Wildfire Fund (outside of the State Treasury) to pay eligible claims arising from a covered wildfire, as provided, and continuously appropriates moneys in the fund to the Wildfire Fund Administrator for that purpose, thereby making an appropriation. With respect to the Fund, the bill would:
   1. Define an eligible claim to mean claims for third-party damages against an electrical corporation resulting from covered wildfires exceeding the greater of one billion dollars in the aggregate in any calendar year or the amount of insurance coverage required to be in place for the electrical corporation.
   2. Establish a Wildfire Fund allocation metric as the calculation involving the land area of the electrical corporation in the high fire-threat district, and the electrical corporation’s line miles of transmission and distribution lines in the high fire-threat districts as a proportion of all large electrical corporations’ line miles, adjusted to account for risk mitigation efforts, as determined by the Department of Finance (DOF). The bill states the expectation that the allocation metric is 64.2 percent for Pacific Gas & Electric, 31.5 percent for Southern California Edison, and 4.3 percent for San Diego Gas & Electric.
   3. Require of a participating large electrical corporation, an initial contribution of an amount equal to $7.5 billion multiplied by the Wildfire Fund allocation metric, and an annual contribution of $300 million multiplied by the Wildfire Fund allocation metric.
   4. Require of a regional electrical corporation an initial contribution of an amount equal to $625 multiplied by the number of customer accounts serviced by the electrical corporation within the state, and an annual contribution amount equal $25 multiplied by the number of customer accounts serviced by the electrical corporation within the state.
9. Require the CPUC to initiate a rulemaking proceeding to consider using its existing authority to require large electrical corporations to collect a nonbypassable charge from its ratepayers to support the Wildfire Fund, and require the CPUC to direct each electrical corporation to collect that charge if the CPUC determines that the imposition of the charge is just and reasonable and that it is an appropriate exercise of its authority, as specified.
10. Specify the funding sources for the fund, which include proceeds of specified bonds, initial and annual specified contributions from electrical corporations, and revenues generated from the charge on ratepayers authorized by the CPUC.
11. Require the electrical corporation’s wildfire mitigation plan, in calendar year 2020 and thereafter, to cover at least a 3-year period. The bill would also authorize the Wildfire Safety Division to allow the annual submissions to be updates to the plan but would require the submission of a comprehensive wildfire mitigation plan at least once every 3 years. Electrical corporations would be authorized to recover the cost of implementing the plan in its general rate case, or to elect to recover the cost of implementation as accounted in a memorandum account at the conclusion of the time period covered by the plan, subject to a specified limit for a large electrical corporation.
12. Require the chief executive officer of an electrical corporation, in the electrical corporation’s general rate case application, to certify that the electrical corporation has not received authorization from the CPUC to recover those costs in a previous proceeding.
13. Require the executive director of the CPUC to issue a safety certification to an electrical corporation if it provides documentation that it has an approved wildfire mitigation plan that is being implemented, it is in good standing, it has established a specified safety committee, among other requirements.
14. Require, after January 1, 2020, that each local publicly owned electric utility or electrical cooperative submit, by July 1 of each year, its wildfire mitigation plan to the CWSAB for review and commission, and to comprehensively revise its wildfire mitigation plan at least once every 3 years.
15. Require the CWSAB to provide comments and an advisory opinion to each local publicly owned electric utility or electrical cooperative regarding the content and sufficiency of its plan and to make recommendations on how to mitigate wildfire risks.
16. Authorize DWR to issue revenue bonds for purposes of supporting the Wildfire Fund, on and after either the date on which the department legally defeases all of its remaining bonds under the provisions described above or the date on which it pays those obligations in full at maturity, whichever is earlier.
17. Authorize DWR to recover, as a revenue requirement, amounts necessary to enable it to finance those bonds.
18. Require the bond proceeds and revenues received by DWR to be deposited in the DWR Charge Fund, which the bill would establish in the State Treasury, and continuously appropriates moneys in Fund to DWR for specified purposes, including transfers to the Wildfire Fund and repayment of the bonds.
19. Transfers nine million dollars ($9,000,000) from the General Fund to the DWR Charge Fund, thereby making an appropriation, and requires repayment to the General Fund at the earliest possible time.
20. States the bill would become operative only if Assembly Bill 111 or Senate Bill 111 is enacted during the 2019–20 Regular Session and becomes effective before January 1, 2020.

Related Legislation:

AB 111 (Budget Committee), which is currently pending in the Senate Budget and Fiscal Review Committee, would create the 7-member California Catastrophe Response Council to oversee the California Earthquake Authority (CEA) and the Wildfire Fund Administrator. The bill would require the CPUC to establish the Wildfire Safety Division, and would establish the Office of Energy Infrastructure Safety within the Natural Resources Agency as the successor to the WSD, as of July 1, 2021. The bill would also appropriate $47.6 million from the Public Utilities Commission Utilities Reimbursement Account and $2.5 million from the Public Utilities Commission Public Advocate’s Office Account to the CPUC for the purpose of fulfilling its duties. AB 111 would only become operative if AB 1054 (Holden) is enacted this year.

SB 111 (Committee on Budget and Fiscal Review) which is currently pending in the Assembly Budget Committee, would create the 7-member California Catastrophe Response Council to oversee the CEA and the Wildfire Fund Administrator. The bill would require the CPUC to establish the Wildfire Safety Division, and would establish the Office of Energy Infrastructure Safety within the Natural Resources Agency as the successor to the WSD, as of July 1, 2021. The bill would also appropriate $47.6 million from the Public Utilities Commission Utilities Reimbursement Account and $2.5 million from the Public Utilities Commission Public Advocate’s Office Account to the CPUC for the purpose of fulfilling its duties. This bill would repeal Section 326.1 of the Public Utilities Code as added by AB 1054, and would only become operative if AB 1054 is enacted this year.

SB 110 (Committee on Budget and Fiscal Review), which is currently pending in the Assembly Budget Committee, would amend the 2019 Budget Act to appropriate an additional $2 million to DOF “for costs associated with the implementation of measures to respond to the threat of catastrophic wildfires and address the impact on victims, ratepayers, utilities, and other stakeholders. The bill would also add AB 111 and SB 111, as amended on July 5, 2019, to the list of specified budget trailer bills.

SB 901 (Dodd, Chapter 626, Statutes of 2018) addressed numerous issues concerning wildfire prevention, response and recovery, including funding for mutual aid, fuel reduction and forestry policies, wildfire mitigation plans by electric utilities, and cost recovery by electric corporations of wildfire-related damages.

Staff Comments:

SMIF loans to the Wildfire Fund. This bill would result in a one-time cost of $2 billion (SMIF) in 2019-20 for a loan to the Wildfire Fund, with the total loan authorization of $10.5 billion as needed from the SMIF to the Wildfire Fund. Loans from the SMIF are short-term cash loans with repayment expected within a fiscal year, including any interest accrued.

DWR Bond Charge administration. DWR expects to spend $12 million (DWR Bond Fund) on administration and general expenses related to electricity bonds in 2019. Since this bill continues the DWR Bond Charge after it otherwise would have been phased out (likely 2022), DWR’s estimate of continued administration costs between $10 million and $13 million is reasonable. As noted above, first year costs would be covered through a $9 million loan from the General Fund to the DWR Bond Fund.

CPUC administration. The CPUC would incur costs related to the activities of the new CWSAB, including staffing, travel and per diem reimbursements, and administrative costs to develop and make recommendations related to the contents of wildfire safety mitigation plans and mitigation performance metrics. The CPUC would also be required to establish new procedures and standards that would apply to a catastrophic wildfire proceeding, and dedicate staff time for surcharge rate setting and wildfire cost recovery proceedings, as well as workload related to the issuance of specified safety certificates. As noted above, the CPUC was not able to provide information regarding staffing or resource needs associated with this bill. Staff estimates CPUC administrative costs would be in the low millions annually.

The state as a ratepayer. The State of California is an electrical customer, purchasing roughly one percent of the state’s electricity. As such, the state incurs costs or savings when electricity rates rise or fall. This bill would likely result in both costs and savings to the state as a ratepayer.

• Unknown changes to share of wildfire costs covered by ratepayers under AB 1054. To the extent that this bill alters when utilities can recover costs from ratepayers, it could shift some of the share of wildfire costs borne by shareholders to ratepayers.
  • Proof of liability. Once a utility receives a valid safety certification, proof of liability would shift. This bill would provide that the electrical corporation’s conduct would be deemed reasonable unless a party to the proceeding creates a serious doubt as to the reasonableness. Parties looking to recover costs from power companies would have to prove a utility failed to manage its systems prudently or acted negligently. This is a shift from current law, under which the burden of proof has been placed on utilities to show they acted responsibly. The proof of liability would not change for utilities that are not certified.
  • Cap on future liability. If the CPUC finds that the utilities have acted “imprudently,” they would have to reimburse the fund. However, the amount they would have to reimburse would be capped at 20 percent of their “rate base” — the total value of their electrical equipment.
• Ratepayer costs.
  • Continued surcharge. Absent this bill, the DWR Bond Charge is anticipated to phase out in 2022. However, AB 1054 would reauthorize the surcharge on ratepayers. The surcharge is the same for all ratepayers each year. In 2019 the DWR bond surcharge is $0.00503/kWh (each year changes slightly due to sales forecast and bond service amount changes).
  • Increased utility spending to reduce risks of wildfires. Under AB 1054, in order to have access to the Wildfire Fund, utilities would be required to increase spending to reduce the risks of wildfires in their respective service territories, on top of what they are already spending. The power companies would be allowed to pass those costs onto customers. This would result in costs to the state as a ratepayer in the low tens of millions annually.
• Potential ratepayer savings. To the extent that that bill would reduce future fire‑related financial risks for utility investors, it is likely to have a positive effect on utilities’ credit ratings. If so, this would have additional indirect benefits for ratepayers by reducing financing costs for other utility investments because the utility is viewed as a less risky.

Utility financing costs are generally passed on to ratepayers. Utilities are a relatively capital‑intensive industry and, thus, rely heavily on raising up‑front capital to pay for infrastructure investments and maintenance. Every time the bond rating agencies downgrade the utilities, there is a corresponding increase in the costs of borrowing for the electrical corporations. In response to recent credit downgrades, the major IOUs filed applications to the CPUC to approve an increase in their authorized return on equity from about 10 percent to about 16 percent. If approved, PG&E estimates this change could increase monthly residential ratepayer bills in its territory by roughly 7 percent.

The Legislative Analyst’s Office estimates that a downgrade of a utility’s credit rating from “A” to “BBB” would result in a 1 percent to 4 percent increase in electricity rates, a $1 to $4 per month increase in the monthly bill for a residential customer, an increase of $500 million to $750 million in total annual ratepayer costs, and an increase of $5 billion to $11 billion in ratepayer costs over a 10-year period. For context, Southern California Edison is currently rated BBB- and San Diego Gas and Electric is rated BBB+. (PG&E is currently in bankruptcy.) In 2017, the three major utilities had credit ratings ranging from BBB+ to A.

Savings on fire suppression costs. To the extent that the improved utility safety practices under the certification process and required utility safety spending under AB 1054 reduce the number and severity of wildfires caused by utilities, the state could realize savings from reduced spending on emergency fire suppression.

The Department of Forestry and Fire Protection (CalFire) spends roughly $1 billion annually (General Fund) on “emergency fire suppression” – additional fire suppression resources needed when a fire continues to spread after the “initial attack” or about the first 24 hours. The vast majority of fires are contained during initial attack – the ones that are not usually grow to be the largest and most expensive wildfires.

Only about 10 percent of fires are started by utility equipment, and many of those fires result in little or no property damage. However, some of the most damaging fires are started by utility equipment. For example, utility powerlines caused at least 8 of the 20 most destructive fires (40 percent) in California’s history. Seven of these utility‑caused fires occurred since 2007, and six have occurred since 2015. Wildfires caused by powerlines can be particularly damaging, in part, because some of the factors that cause utility ignitions—such as high winds damaging electrical lines—also contribute to a rapid spread of fire that is difficult to control. For example, according to the CalFire investigations, PG&E equipment started the 2018 Camp Fire in Paradise, which destroyed nearly 19,000 structures and killed 86 people. PG&E estimates that it could be liable for up to $15 billion in damages from the fire.

-- END --

SENATE COMMITTEE ON ENERGY, UTILITIES AND COMMUNICATIONS

Senator Ben Hueso, Chair

2019 - 2020 Regular

Bill No: Hearing Date: 7/8/2019

SUBJECT:

DIGEST: This bill includes numerous provisions related to addressing wildfires caused by electric utility infrastructure, including: bolstering safety oversight and processes, recasting recovery of costs from damages to third-parties, including the authorization for an electrical corporation and ratepayer jointly funded Wildfire Fund to address future damages, and changes to provisions concerning the workforce of a change of ownership of a full or portion of an electrical or gas corporation.

ANALYSIS:

Existing law:

1. Establishes that private property may be taken or damaged for a public use only when just compensation, ascertained by a jury unless waived, has first been paid to, or into court for, the owner. (California Constitution, Article I § 19) This section includes requirements for the exercise of eminent domain; the taking of private property for public use. This section has been held by the California Supreme Court to require just compensation when a property has been damaged by a public improvement project, known as inverse condemnation. (Reardon v. San Francisco (1885) 66 Cal. 492, 501). The courts have further held that the section is applicable to privately-owned public utilities (Gay Law Students Association v. Pacific Telephone & Telegraph Co. (1979) 23 Cal.3d 458, 469), and (Barham v. Southern California Edison Company (1999) 74 Cal. App 4th 744).
2. Establishes the California Public Utilities Commission (CPUC) and authorizes the CPUC to exercise ratemaking and rulemaking authority over all public utilities, as defined, subject to control by the Legislature. (California Constitution, Article XII §§1,2, 3, 5,6)
3. Authorizes, via the Public Utilities Act, the CPUC to supervise and regulate every public utility, including electrical corporations, and to do all things that are necessary and convenient in the exercise of such power and jurisdiction. (Public Utilities Code §701)
4. Authorizes the CPUC to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable. (Public Utilities Code §451)
5. Existing law authorizes the CPUC, in a proceeding on an application by an electrical corporation to recover costs and expenses arising from a catastrophic wildfire occurring on or after January 1, 2019, to allow cost recovery if the costs and expenses are just and reasonable, after consideration of the conduct of the utility, including consideration of specified factors. (Public Utilities Code §451.1)
6. Authorizes an electrical corporation to file an application requesting the CPUC to issue a financing order to authorize the recovery of costs and expenses related to a catastrophic wildfire through the issuance of bonds by the electrical corporation that are secured by a rate component, as provided. (Public Utilities Code §§451.2, 850, 850.1, 850.2)
7. Establishes procedural requirements that are applicable to all CPUC hearings, investigations, and proceedings and provides that the technical rules of evidence are not applicable to those hearings, investigations, and proceedings, which are governed by the rules of practice and procedure adopted by the commission. (Public Utilities Code §1701 et seq.)
8. Requires each electrical corporation to annually prepare and submit a wildfire mitigation plan to the CPUC for review and approval and requires the CPUC to consider whether the cost of implementing an electrical corporation’s plan is just and reasonable in the electrical corporation’s general rate case. (Public Utilities Code §8386)
9. Requires each local publicly owned electric utility (electric POU) and electrical cooperative, by January 1, 2020, and annually thereafter, to prepare a wildfire mitigation plan. (Public Utilities Code §8387)
10. Prohibits a person or corporation from merging, acquiring, or controlling, either directly or indirectly, any public utility organized and doing business in this state without first securing authorization to do so from the CPUC. (Public Utilities Code §851)
11. Requires a successor employer, in the context of a change of control of an electrical or gas corporation, to retain all covered employees, as defined, for at least 180 days immediately following the effective date of a change of control. Prohibits the successor employer from reducing the total compensation of a covered employee during that period. Prohibits, for two years after the 180-day period, a successor employer from reducing the total number of employees who would have been covered employees for succession purposes below the total number of those employees who were protected during that 180-day period, unless approved by the CPUC. Prohibits the CPUC from authorizing a successor employer to reduce the number of those employees unless the successor employer makes a specified showing. (Public Utilities Code §854)
12. Authorizes, until January 1, 2003, the Department of Water Resources (DWR) to enter into contracts for the purchase of electric power. Authorizes the DWR to sell power to retail end use customers and local electric POU under certain circumstances. Authorizes DWR to issue revenue bonds and entitles the department to recover, as a revenue requirement, amounts necessary to enable it to finance the bonds and purchase electric power pursuant to these provisions. (Water Code §§80000, et seq., 80100, et seq., 80130, et seq., 80200, 80260)

This bill:

1. Makes several findings and declarations concerning the increased risk of catastrophic wildfires, the exposure of financial liability resulting from wildfire caused by utility equipment, the need of electrical corporations to access capital to fund ongoing operations, the ability of a wildfire fund to support the credit worthiness of electrical corporations, among others.
2. Makes additional findings and declarations concerning the need to have electrical corporations invest in hardening of the state’s electrical infrastructure and vegetation management to reduce the risk of catastrophic wildfires, including a finding that five billion dollars in safety investments in the aggregate by the large electrical corporations must be made without return on equity that would have otherwise been borne by ratepayers.
3. Establishes the California Wildfire Safety Advisory Board (CWSAB) consisting of seven members appointed by the Governor, Speaker of the Assembly, and Senate Committee on Rules, as provided, who would serve four-year staggered terms. Requires the board, among other actions, to advise and make recommendations related to wildfire safety to the Wildfire Safety Division (or, on and after July 1, 2021, the Office of Energy Infrastructure Safety, as established pursuant to AB 111 or SB 111 of the 2019–20 Regular Session). Requires the CWSAB to review and provide comments and advisory opinions to each local publicly owned electric utility (POU) and electrical cooperative regarding the context and sufficiency of its wildfire mitigation plans.
4. Requires the CPUC, when determining an application by an electrical corporation to recover costs and expenses arising from a covered wildfire, as defined, to allow cost recovery if the costs and expenses are determined just and reasonable based on reasonable conduct by the electrical corporation.
   1. Requires the CPUC to find that an electrical corporation’s conduct was reasonable if that conduct, related to the ignition, was consistent with actions that a reasonable utility would have undertaken in good faith under similar circumstances, at the relevant point in time, and based on the information available to the electrical corporation at the time, as provided.
   2. Provides that costs and expenses in the application may be allocated for cost recovery in full or in part taking into account factors both within and beyond the utility’s control, including humidity, temperature, and winds.
   3. Provides that an electrical corporation bares the burden to demonstrate, based on a preponderance of the evidence, that its conduct was reasonable, unless it has a valid safety certification for the time period in which the covered wildfire that is the subject of the application ignited.
   4. Provides, if the electrical corporation has that valid safety certification, the electrical corporation’s conduct would be deemed reasonable unless a party to the proceeding creates a serious doubt as to the reasonableness of the electrical corporation’s conduct.
   5. Requires, once serious doubt has been raised, the electrical corporation to have the burden of dispelling the doubt and proving the conduct to have been reasonable.
5. Authorizes the CPUC to assess a penalty in an amount up to three times the penalty authorized by law for certain utility-related violations, if the CPUC finds that an electrical corporation has requested recovery of costs for which the CPUC had previously authorized cost recovery.
6. Authorizes an electrical corporation to file an application requesting the CPUC to issue a financing order to authorize the recovery of costs and expenses related to catastrophic wildfires under specified conditions, including fire risk mitigation capital expenditures associated with the electrical corporation’s proportionate share of the five billion dollars of safety improvements in aggregate by all three of the state’s largest electrical corporations, through the issuance of bonds by the electrical corporation that are secured by a rate component. Prohibits costs and expenses incurred by the electrical corporation after December 31, 2035 from being included in a financing order per this bill.
7. Authorizes the CPUC to issue a financing order to allow recovery through fixed recovery charges if the CPUC makes specified determinations, including the costs are just and reasonable, consistent with the public interest, and reduce the rates on a present value basis that consumers within the electrical corporation’s service territory would pay as compared to the use of traditional utility financing mechanisms. Requires that any successor to a financing entity is bound by the requirements of the article and is required to perform and satisfy all obligations of the financing entity.
8. Expands the definition of “change of control” for purposes of the bill: (1) the sale of all or a material portion of the assets of the electrical corporation or gas corporation, its parent company, or its holding company, or any merger, consolidation, or acquisition of the electrical corporation or gas corporation, its parent company, or its holding company with, by, or into another corporation, entity, or person, (2) the voluntary or involuntary change in ownership in assets of an electrical or gas corporation to ownership by a public entity, or (3) in the case of a combined electrical and gas corporation, the change in ownership of all or a substantial portion of either the gas or electric line of business of the combined corporation. Further requires:
   1. Requires the predecessor employer, no later than 15 days before the effective date of a change of control, to post a notice of the change in a conspicuous place in a manner that is readily viewed by covered employees.
   2. Requires the successor employer, for three years after the 180-days covered employee retention period, to provide to employees who would have qualified as covered employees during the 90-day period immediately before a change of control no less than the wages, hours, and other terms and conditions of employment provided before the change of control, including any previously negotiated increase in wages, and to maintain no less than the total number of employees who would have qualified as covered employees during that 90-day period, except with commission approval based on proof of certain criteria.
   3. Prohibits a person or corporation from merging, acquiring, or controlling, including a change in control as revised by this bill, either directly or indirectly, any public utility organized and doing business in this state without first securing authorization from the CPUC.
9. Requires the CPUC to determine whether a proceeding is a catastrophic wildfire proceeding, defined as a proceeding to determine whether an electrical corporation’s costs and expenses relating to a covered wildfire, as defined, are just and reasonable, as specified:
   1. Establishes procedures and standards applicable to catastrophic wildfire proceedings, as specified, including specified ex parte rules, authorizes the CPUC to establish a quiet period during the three business days scheduled for a vote and may meet in closed session during that period.
   2. Authorizes an electrical corporation to file an application to recover expenses that are just and reasonable at any time after it has paid, or entered into binding commitments to pay, all or substantially all third-party damage claims related to a covered wildfire.
   3. Requires an electrical corporation, if it has received payments from the Wildfire Fund for a third-party damage claim for the covered wildfire, to file an application to recover the costs associated with the third-party claims of a covered wildfire by no earlier than: the date when it has resolved all third-party damage claims and exhausted all right to indemnification against any third parties, or the date that is 45 days after the date the administrator requests the electrical corporation to make such an application.
10. Establishes the Wildfire Fund to pay eligible claims arising from a covered wildfire, as provided. Continuously appropriates moneys in the fund to the Wildfire Fund Administrator for that purpose, thereby making an appropriation.
    1. Defines an eligible claim to mean claims for third-party damages against an electrical corporation resulting from covered wildfires exceeding the greater of one billion dollars in the aggregate in any calendar year or the amount of insurance coverage required to be in place for the electrical corporation.
    2. Establishes a Wildfire Fund allocation metric as the calculation involving the land area of the electrical corporation in the high fire-threat district, and the electrical corporation’s line miles of transmission and distribution lines in the high fire-threat districts as a proportion of all large electrical corporations’ line miles, adjusted to account for risk mitigation efforts. States the expectation that the allocation metric is 64.2 percent for Pacific Gas & Electric, 31.5 percent for Southern California Edison, and 4.3 percent for San Diego Gas & Electric.
    3. Requires of a participating large electrical corporation, an initial contribution of an amount equal to 7.5 billion dollars ($7,500,000,000) multiplied by the Wildfire Fund allocation metric and an annual contribution of 300 million dollars ($300,000,000) multiplied by the Wildfire Fund allocation metric.
    4. Requires of a regional electrical corporation an initial contribution of an amount equal to 625 dollars ($625) multiplied by the number of customer accounts serviced by the electrical corporation within the state and an annual contribution amount equal to 25 dollars ($25) multiplied by the number of customer accounts serviced by the electrical corporation within the state.
11. Requires the CPUC to initiate a rulemaking proceeding to consider using its existing authority to require large electrical corporations to collect a nonbypassable charge from its ratepayers to support the Wildfire Fund, and would require the CPUC to direct each electrical corporation to collect that charge if the CPUC determines that the imposition of the charge is just and reasonable and that it is an appropriate exercise of its authority, as specified.
12. Specifies the funding sources for the fund, which include, among other sources, contributions from electrical corporations (not from ratepayers) and revenues generated from the charge on ratepayers.
13. Requires the electrical corporation’s wildfire mitigation plan, in calendar year 2020 and thereafter, to cover at least a three-year period. Authorizes the division to allow the annual submissions to be updates to the plan but would require the submission of a comprehensive wildfire mitigation plan at least once every three years. Authorizes the electrical corporation to recover the cost of implementing the plan in its general rate case, or to elect to recover the cost of implementation as accounted in a memorandum account at the conclusion of the time period covered by the plan, subject to a specified limit for a large electrical corporation.
14. Requires the chief executive officer of an electrical corporation, in the electrical corporation’s general rate case application, to certify that the electrical corporation has not received authorization from the CPUC to recover those costs in a previous proceeding.
15. Requires the executive director of the CPUC to issue a safety certification to an electrical corporation if it meets certain requirements.
16. Requires, after January 1, 2020, that each local publicly owned electric utility or electrical cooperative submit, by July 1^st of each year, its wildfire mitigation plan to the CWSAB for review and comment, and to comprehensively revise its wildfire mitigation plan at least once every three years.
17. Requires the CWSAB to provide comments and an advisory opinion to each local publicly owned electric utility or electrical cooperative regarding the content and sufficiency of its plan and to make recommendations on how to mitigate wildfire risks.
18. Authorizes DWR to issue revenue bonds, on and after either the date on which DWR legally defeases all of its remaining bonds under the provisions stemming from the bonds issued during the 2000-2001 energy crisis, or the date on which it pays those obligations in full at maturity, whichever is earlier. Authorizes the DWR to recover, as a revenue requirement, amounts necessary to enable it to finance those bonds.
19. Requires the bond proceeds and revenues received by DWR to be deposited in the DWR Charge Fund, which this bill would establish. Continuously appropriates the moneys in the DWR Charge Fund to the DWR for specified purposes, including transfers to the Wildfire Fund and repayment of the bonds.
20. Transfers nine million dollars ($9,000,000) from the General Fund to the DWR Charge Fund, thereby making an appropriation.
21. States the bill would become operative only if Assembly Bill 111 or Senate Bill 111 is enacted during the 2019–20 Regular Session and becomes effective before January 1, 2020.
22. Declares that it is to take effect immediately as an urgency statute.

Background

Wildfires in 2017 and 2018. In recent years, Californians have experienced several catastrophic wildfires. In the two most recent years, 2017 and 2018, there were particularly destructive wildfires which took 139 lives and destroyed communities in both Northern and Southern California. According to the California Department of Forestry and Fire Protection (Cal FIRE), fifteen of the twenty largest California wildfires, as well as, fifteen of the twenty most destructive have occurred since 2000. Wildfires seem to be more frequent and more intense, due to a combination of recent drought, longer fire seasons, forest management practices, increasing development in the wildland urban interface (WUI), and ignition for electric utility infrastructure. About ten percent of fires are started by electric utility equipment, with many of those fires resulting in little or no property damage. However, some of the most damaging fires are ignited by utility infrastructure. According to an analysis by the Legislative Analyst’s Office (LAO), electric utility powerlines caused at least eight of the twenty most destructive fires in Californian’s history. The LAO further notes that seven of these utility-caused fires occurred since 2007, and six have occurred since 2015. These fires include: Atlas (2017) and Nunns Fires (2017), Thomas Fire (2017), and Camp Fire (2018) – the deadliest and most destructive wildfire in the state’s history.

Impacts of inverse condemnation. The California Constitution provides the basis for recovery against government entities and public utilities via the theory of inverse condemnation. Section 19 of Article 12, requires that just compensation be paid when private property is taken for public use. This is commonly understood as eminent domain. In the case where a property is damaged by a public improvement project, the application is known as inverse condemnation. The policy underlying the concept of inverse condemnation is that the costs of a public improvement benefiting the community should be spread among those receiving the benefit, as opposed to being allocated to a single person within a community. In the case of inverse condemnation, unlike in cases of negligence, the responsible entity is held strictly liable where a public improvement causes property damage. The California Supreme Court and appellate courts have held that inverse condemnation is applicable to privately-owned public utilities (Gay Law Students Association v. Pacific Telephone & Telegraph Co. (1979) 23 Cal.3d 458, 469), and (Barham v. Southern California Edison Company (1999) 74 Cal. App 4th 744). In the Barham decision, the court also held that the electric investor-owned utility (IOU) was akin to a government entity and could recover costs associated with the damages from its ratepayers (roughly $150,000 for communications equipment damaged due to a short circuit after a large bird sat on the electric line).

Cost recovery by IOUs. CPUC-regulated utilities, including electric IOUs, routinely submit requests for cost recovery related to their operations, including expanding their infrastructure, paying for operation expenses, etc. As required by statute in Public Utilities Code §451, the CPUC may only approve a utility’s request for cost recovery that is deemed just and reasonable. Review of utility expenses to ensure they are just and reasonable is the primary purpose for the CPUC’s existence and the main task of the agency as an economic regulator. Expenses related to wildfire damages, just as other expenses related to the operation of a utility, must be reviewed by the CPUC to ensure they meet the requirements that they are just and reasonable. As part of that review, the CPUC assesses whether the utility was a “prudent manager” of its infrastructure and operations – known as a prudency review or prudent management standard. Generally, the utility submits an application for cost recovery, and the burden of proof is on the utility to demonstrate it has behaved reasonably.

San Diego wildfires in 2007. With the backdrop of the deadly North Bay Fires (including Nunns, Atlas, and Tubbs Fires), in the fall of 2017, the CPUC adopted a decision denying a request by San Diego Gas & Electric (SDG&E) for cost recovery from ratepayers for $379 million of uninsured expenses related to the 2007 San Diego wildfires (Application 15-09-010). The application addressed third-party damage claims arising from the Witch, Guejito and Rice wildfires which were ignited by utility infrastructure. The $379 million represents the delta of a total $2.4 billion in costs and legal fees incurred by SDG&E, minus commercial liability insurance coverage and third party payouts, and about $40 million paid by the utility shareholders as a deductible of sorts. The CPUC’s decision included a concurrence by two commissioners, including President Picker, who called on the Legislature, the governor, and the courts to help address the issue of wildfire damages, the application of inverse condemnation by the courts, and financial impacts on utilities, including ratepayers.

Electric IOU credit ratings downgraded. With some exceptions, regulated utilities, those who are provided the opportunity to earn a rate of return through rates regulated by the CPUC, generally enjoy high investment grade credit ratings. The investment grade credit ratings allow the utility to access less expensive capital in the financial market than might otherwise be the case. The utilities’ business model is also heavily dependent on access to capital in order to finance its operations. Most investors have viewed utilities as secure investments, since the regulated utility business models, generally, affords a utility the opportunity to earn a rate of return. Generally, these more affordable rates for capital also benefit ratepayers whose pay for the operation of the utility through rates. However, the combination of increasing severity and frequency of wildfires, the application of inverse condemnation, and the CPUC decision denying SDG&E’s application for cost recovery, resulted in declining credit ratings for all three of the state’s largest electrical utilities and impacts to the ratings of smaller IOUs and also electric POUs. Credit ratings agencies, including Standard & Poor’s and Moody’s, raised concerns about the increased risks to investing in California electric utilities until changes to inverse condemnation were made.

SB 901 (Dodd, Chapter 626, Statutes of 2018). In 2018, the Legislature and governor responded to the threat of wildfires with the passage of several bills to reduce the risk of wildfires, including SB 901. The bill was heard through a conference committee process encompassing five members from each house and four from the minority party. The bill addressed numerous issues concerning wildfire prevention, response and recovery, including funding for mutual aid, fuel reduction and forestry policies, bolstered the requirements of wildfire mitigation plans by electric utilities, and cost recovery by electric corporations of wildfire-related damages. SB 901 authorizes the CPUC to use a reasonable standard approach in determining whether the utility would be allowed to recover in rates expenses related to damages stemming from a wildfire caused by the utility’s equipment. Specifically, SB 901 authorizes the CPUC to consider 12 factors to determine whether the expenses are allowed or disallowed for recovery for wildfires occurring after December 31, 2018, these include consideration of the conduct of the utility. SB 901 also specifies that for applications by an electrical corporation to recover costs and expenses arising from catastrophic wildfires ignited in 2017, the CPUC is required to determine just and reasonableness without specifying the 12 enumerated factors identified for the fires in 2019 and beyond. In the case of the 2017 wildfires, SB 901 requires the CPUC to consider the electric utility’s financial status and determine the maximum amount the corporation can pay without harming ratepayers, also known as a financial stress test, and requires the CPUC to limit the disallowance from the 2017 wildfires to the threshold determined by the stress test.

Pacific Gas and Electric Company (PG&E) bankruptcy. Earlier this year, PG&E’s credit ratings were further downgraded by the credit ratings agencies to a point characterized as “junk status.” The credit ratings downgrade occurred following information that the CPUC was investigating PG&E concerning gas safety reporting violations, on the heels of the Camp Fire which was speculated (and since found to have been) caused by PG&E electric infrastructure, and in the midst of a criminal probation stemming from the San Bruno gas pipeline explosion. Such a downgrade would greatly diminish the utility’s ability to access capital, a bedrock of the regulated utility business model. As such, nearly a week after the downgrade, PG&E notified its workforce (and the public) that it intended to file for Chapter 11 bankruptcy protection on or around January 29, 2019. The notice by the company was in compliance with a provision of SB 901, which required a minimum 15-day notice to the utility workforce of any such action. PG&E remains in bankruptcy process and is not likely to come out of bankruptcy until the company can resolve pending wildfire claims, which the company estimates to be 30 billion dollars ($30, 000, 000,000).

Governor’s Strike Force report. In April, Governor Newsom issued a report from his Strike Force regarding Wildfires and Climate Change: California’s Energy Future. The strike force report sets out steps the state must take to reduce incidence and severity of wildfires. The report was structured into five parts, including a section on responding and preventing wildfires, as well as, a section on allocating responsibility for wildfire costs, among others. As it relates to safety, the report included recommendations to bolster safety incentives, such as changes to the allowed return on equity based on wildfire performance, as well as, cost-effective financing for wildfire mitigation safety investments. In relation to allocating responsibility for wildfire costs, the report identified three concepts for allocating responsibility for wildfire costs: a liquidity-only fund coupled with modification of cost recovery standards, adopting a fault-based standard in-lieu of the strict liability standard, and creation of a catastrophic wildfire fund coupled with a revised cost recovery standard.

SB 901 Commission report. SB 901 also established a Commission on Catastrophic Wildfire Cost and Recovery and required the five-member commission to engage the public and provide recommendations to address changes to law that would ensure equitable distribution of costs among affected parties. The Commission held five public meetings this spring, including in communities affected by wildfires in recent years. The Commission issued their report in June detailing 15 recommendations, including: the strict liability interpretation of inverse condemnation should be replaced with a fault-based negligence standard, revise and clarify the prudent manager standard for utilities, consolidate and strengthen the standards for utility wildfire mitigation and response, establish a broadly sourced Wildfire Victims Fund, among other recommendations.

Comments

AB 1054. This bill encompasses some of the recommendations included in both the governor’s strike force report and the SB 901 Commission recommendations. The key provisions include: establishing a new process for electric IOUs to recover costs related to catastrophic wildfires (changes to the prudency standard), authorizes financing of specified costs (including wildfire safety mitigation), bolstering and changes to electric utility wildfire safety oversight (including a Wildfire Safety Division), and establishment of a Wildfire Fund to address the property claims stemming from utility-caused wildfires (provides for either a liquidity-only fund or broader insurance fund). Additionally, this bill includes new triggers related to change of control of an IOU as an effort to protect the existing workforce of the electric IOUs.

IOU wildfire cost recovery process. AB 1054 proposes changes to the CPUC’s current cost recovery process as explained above and only available to electric IOUs who participate in the Wildfire Fire Insurance Fund (more below). This bill would establish a new type of proceeding, known as the catastrophic wildfire proceeding and establishes specified processes for this proceeding category. This bill would recast the considerations afforded to an application for cost recovery related to wildfire expenses by an electric IOU, including explicitly stating that the costs and expenses arising from a wildfire ignited by electric utility infrastructure (covered wildfire) are just an reasonable if the conduct of the electric IOU is “consistent with actions that a reasonable utility would have undertaken in good faith under similar circumstances, at the relevant point in time.” This bill also explicitly states that costs and expenses may be recovered in full or in part with consideration for factors outside the control of the utility “including humidity, temperature, and winds.” These changes and others replace much of the 12 points of criteria established in SB 901, but fundamentally are still largely consistent with the existing requirements of Public Utilities Code §451 which afford the CPUC broad authority to determine what is just and reasonable. However, a fundamental distinction is that AB 1054 proposes new language to provide the electrical utility the presumption that they acted reasonable if they have a valid safety certification at the time period of the covered wildfire. In this respect, the burden of proof would switch to other parties in the proceeding to raise “serious doubt” as to the electric IOU’s reasonableness. The Governor’s Office notes this is a presumption with similarity to what is afforded in the Federal Energy Regulatory Commission (FERC) process. Some have expressed concerns that the change in the presumption would disadvantage ratepayers who would have the burden to demonstrate that the electric IOU was not reasonable. The authors of this bill have attempted to address those concerns by requiring that presumption to shift back to the electric IOU once serious doubt has been raised. Nonetheless, this is a new approach to address the calls for more certainty in the cost recovery process in order to restore the regulatory compact. Time will tell just how effective this new approach will perform for ratepayers and for electric IOUs.

Electric IOU wildfire safety. As noted above, AB 1054 includes several new provisions addressing electric IOU wildfire safety oversight and processes. The combination of the safety efforts attempt to mitigate the wildfire ignitions from electric utility infrastructure. The provisions include some to provide greater oversight, others to direct the utilities to make specified investments and others to bolster safety focus by the management of the utility. These include:

• Establishment of a CWSAB to provide recommendations to the Wildfire Safety Division (or, on and after July 1, 2021, the Office of Energy Infrastructure Safety, as established pursuant to AB 111 or SB 111 of the 2019–20 Regular Session). The bill requires the board to consist of seven members, five appointed by the Governor, and one each by the Speaker of the Assembly and the Senate Committee on Rules. This bill requires the advisory board to develop recommendations related to wildfire safety and mitigation performance metrics, including recommendations related to wildfire mitigation plans developed by electric utilities, including advisory opinions of each local electric POU’s wildfire mitigation plan.
• Requires the Wildfire Safety Division (or, on and after July 1, 2021, the Office of Energy Infrastructure Safety, as established pursuant to AB 111 or SB 111 of the 2019–20 Regular Session) to approve or deny each wildfire mitigation plan from the electric IOU within three months. Provides specified requirements of the Wildfire Safety Division, including working with Cal FIRE to identify a list of qualified independent evaluators with experience in assessing the safe operation of electrical infrastructure.
• This bill also prohibits a large electrical corporation from including in its equity rate base its share of the first five billion dollars ($5,000,000,000) in aggregate by large electrical corporations on fire risk mitigation capital expenditures. In doing so, the authors attempt to reduce the ratepayer costs of the return on equity (ROE) of the $5 billion dollars. Based on the estimate provided by the Governor’s strike force, the potential ratepayer benefits would be roughly two and half billion dollars ($2.5 billion) in foregone profit, assuming a 20-year depreciable life.
• AB 1054 also requires changes at the electric IOU to foster a greater safety culture by the companies. Specifically, this bill requires as a prerequisite to attaining a safety certificate: to require the electric IOU to establish a safety committee of its board of directors, implement the findings of its most recent safety culture assessment, and a compensation structure structured to promote safety, among others.

Wildfire Fund. In addition to the provisions mentioned above, AB 1054 establishes a Wildfire Fund as a mechanism to address third-party damages against an electrical corporation from wildfires ignited by the utility, the costs of which exceed the greater of one billion dollars ($1,000,000,000) or the amount of the insurance coverage required of the electric IOU. The Wildfire Fund would be overseen by an appointed administrator. The Fund would be capitalized, initially, with a loan from the state’s Surplus Money Investment Fund, requiring a minimum of two billion dollars ($2,000,000,000) of transfers in the 2019-20 fiscal year. The fund establishes two paths to address wildfire damages: a liquidity fund and an insurance fund.

• Liquidity fund. Within 14 days of the effective date of this bill, AB 1054 would require the CPUC to initiate a proceeding to collect a nonbypassable charge from ratepayers of the electric IOU to extend an existing charge. This option provides a line of credit (revolving liquidity fund) that will pay eligible claims of third-party damages from wildfires ignited by electrical IOUs. Requires the electrical IOUs in order to participate in the fund to meet specified conditions by June 30, 2020, including: the electrical IOU is not in bankruptcy or criminal probation. This bill provides that if a utility (PG&E) that has been in bankruptcy may participate in the fund if it has resolved its insolvency proceeding including settlement of pre-bankruptcy claims, a CPUC approved reorganization plan that is both consistent with the state’s climate goals and renewable portfolio standard and is determined to be neutral, on average, to the ratepayers of the electrical IOU. The liquidity fund allows the electrical IOU to receive payments from the fund for eligible claims. The electric IOU would then be allowed to recover in rates those expenses that are deemed to be just and reasonable.
• Insurance fund. Within 15 days of the effective date of this bill, each large electrical corporation not subject to insolvency (SDG&E and Southern California Edison (SCE)) notifies the CPUC of its commitment to provide the initial contribution and the annual contributions not recoverable from ratepayers ($10,500,000,000) in aggregate for all three large electrical IOUs. By participating in the fund, and have a safety certificate, the electric IOU may be afforded clearer rules for recovery of utility-caused wildfires. This bill provides that if a utility (PG&E) that has been in bankruptcy has resolved its insolvency proceeding including settlement of pre-bankruptcy claims, a CPUC approved reorganization plan that is both consistent with the state’s climate goals and renewable portfolio standard and is determined to be neutral, on average, to the ratepayers of the electrical IOU. The insurance fund would provide between $30-40 billion in claims-paying capacity for utility caused wildfires. The fund would be jointly funded by both electric IOU ratepayers (via an existing charge on utility bills) and the electric IOUs via non-ratepayers funds. The insurance fund also includes a cap on costs for participating electric IOUs. Specifically, participating electrical IOUs expenses deemed just and reasonable would be recovered from the fund, while costs not deemed just and reasonable would be capped up to an amount equivalent to a cap on 20 percent of the IOU’s transmission and distribution equity rate base over three calendar years. According to the CPUC, on average from 2016-18, 20 percent of transmission and distribution equity rate base for each large electric IOUs was approximately $2.1 billion for PG&E, $2.2 billion for SCE, and $692 million for SDG&E. The insurance fund would also limit subrogation claims from insurance companies to 40 percent, or more, should the administrator approve. According to some reports, the 40 percent may be less than the average of existing subrogation claims. However, the time value of more expeditiously receiving a payment for the claim may increase the appeal for insurance companies. In all the Insurance Fund options assumes $1 billion per utility in annual commercial insurance requirements, a capitalization from non-ratepayer funds of $7.5 billion ($7,500,000,000) in total from the three largest electric IOUs, and an additional contribution of $3 billion over ten years.

DWR charge. In the case of both approaches, liquidity fund and insurance fund, ratepayers would contribute with the extension of the existing DWR charge that is scheduled to end after 2021. The existing DWR charge is roughly $0.005 per kilowatt hour (kWh) for most customers of all three of the large electrical IOUs, except qualifying low-income customers and customers needing electricity for medical necessity are exempted. The charge adds roughly a few dollars to the average residential customer monthly utility bill. The DWR charge was adopted as part of the state’s efforts to address the energy crisis in 2000-01. DWR was used to procure electricity and a nonbypassable charge on customer’s bills was issued to collect roughly $12 billion to cover the costs of electricity purchased on behalf of electric IOU customers (plus interest). In 2019, the DWR bond surcharge is $0.00503/kWh (each year changes slightly due to sales forecast and bond service amount changes).  This bill would allow for the continued collection of the DWR charge and allows the CPUC to move the rate up in order to meet the revenue requirement, with the goal of colleting up to $10.5 billion ($10,500,000,000).

Effects on ratepayers. The current efforts to address wildfire liability from utility ignited wildfires have the potential to straddle ratepayers with billions in wildfire liability expenses. The amount of electricity a customer uses has little bearing on whether a wildfire will be ignited. On the other hand, utility management and operations can have a significant amount of influence over whether a wildfire will be ignited by the utility’s equipment. Additionally, the level of destruction of a wildfire may be the result of multiple factors including wind speeds, the volume of and location of properties to the ignition source, and others. Yet, the application of strict liability on electrical utilities could result in ratepayers bearing a significant amount of the costs. It seems any option may still impact ratepayers, as forgoing action can also increase the costs of capital which could then be passed on to ratepayers. According to an analysis by the LAO, the effects of credit downgrades of electric utilities increase the costs of borrowing by the utilities as illustrated in the table below.

The LAO used credit ratings as a proxy for perceived utility financial risk from the investment community—which can affect both interest rates for bonds and shareholder ROE. As a result, the table includes estimated costs related to debt and equity. For context, SCE is currently rated BBB- and SDG&E is rated BBB+. (PG&E is currently in bankruptcy.) In 2017, the three major utilities had credit ratings ranging from BBB+ to A.

Nonetheless, the costs to ratepayers of any option are not insignificant. However, the continued downgrade of the utilities credit ratings will likely result in increased costs to ratepayers. The credit ratings agencies have all commented on the likelihood of further downgrading the electric utilities credit ratings if no meaningful action is taken by July 12, 2019.

Durability. Any solution should be considered in terms of its durability. Unfortunately, unless the severity and frequency of wildfires, particularly those caused by utility infrastructure, are significantly reduced no solution will provide long-term durability. The Wildfire Insurance Fund itself could be exhausted rapidly if wildfires continue at their recent pace and severity. However, the increased investments in electric utility grid hardening, situational awareness, and in the near-term, the use of public safety power shutoffs, may help to significantly reduce the risk of utility-caused catastrophic wildfires. Unfortunately, none of these options come without significant costs. After destructive fires in 2003 and 2007, SDG&E ratepayers, per the direction of the utility’s management and with CPUC approval, invested about one billion dollars in grid hardening and situational awareness to better address the risk of wildfires. Although their service territory is the smallest of the three large electrical IOUs, one can expect that similar investments in SCE and PG&E service territory will likely require significantly more resources. This bill attempts to fast-track and front-load some of these investments by requiring five billion dollars in the aggregate for utility wildfire safety investments with no return on equity for the utility. Assuming these investments are targeted to the best use and greatest bang for the buck, Californians should have some reassurance that utility-ignited wildfires would be reduced.

Utility-ignited wildfires. This bill would restrict eligible claims to those stemming from fires that were found to be ignited by utility infrastructure by a fire agency (presumably Cal FIRE or another local fire investigating agency). This bill does not speak to wildfires where the courts may find the utility to be at fault or strictly liable.

Change of control. Additional provisions of this bill address the desire for protections for the existing workforce of the electric IOUs. Most significantly, the language provides additional protection should the ownership of the utility change. Specifically, the language extends by one year (to three years) the language in SB 901 that provides for a period where employees who would have qualified as covered employees had they been employed during the 90-day period immediately before a change of control and requires the successor to maintain the number and wages of covered employees. Additionally, the language includes provisions that require a change of control to be triggered by a voluntary or involuntary change in ownership of assets from and electrical or gas corporation to ownership by a public utility. It is unclear whether that language materially changes the review the CPUC would otherwise perform to approve any change in assets by the IOU.

Prior/Related Legislation

AB 111(Committee on Budget, 2019) would create the California Catastrophe Response Council, with seven members, to oversee the California Earthquake Authority (CEA) and the Wildfire Fund Administrator. The bill would also require the CPUC to establish the Wildfire Safety Division, and provide that on and after July 1, 2021, establish Office of Energy Infrastructure Safety within the Natural Resources Agency as the successor to the WSD. The bill would also appropriate $47,600,000 from the Public Utilities Commission Utilities Reimbursement Account and $2,500,000 from the Public Utilities Commission Public Advocate’s Office Account to the CPUC for the purpose of fulfilling its duties.

SB 111 (Committee on Budget and Fiscal Review, 2019) is duplicative of AB 111, except the bill would repeal Section 326.1 of the Public Utilities Code as added by AB 1054 of the 2019–20 Regular Session. The bill would become operative only if AB 1054 of the 2019–20 Regular Session becomes effective before January 1, 2020.

AB 235 (Mayes, 2019) would authorize the CPUC, when determining recovery by an electrical corporation for costs and expenses arising from a catastrophic wildfire, occurring on or after January 1, 2019, to consider the IOU's financial status and determine the maximum amount the IOU can pay without harming ratepayers or materially impacting the IOU's ability to provide adequate and safe service.

AB 740 (Burke, 2019) would have created a catastrophic wildfire cost sharing mechanism that will reimburse wildfire victims, as defined, for losses related to utility caused wildfires. The bill has been amended to remove the provisions related to a catastrophic wildfire fund.

SB 901 (Dodd, Chapter 626, Statutes of 2018) addressed numerous issues concerning wildfire prevention, response and recovery, including funding for mutual aid, fuel reduction and forestry policies, wildfire mitigation plans by electric utilities, and cost recovery by electric corporations of wildfire-related damages.

SB 1028 (Hill, Chapter 598, Statutes of 2016) requires IOU electric utilities to file annual wildfire mitigation plans and requires the CPUC to review and comment on those plans. The bill also requires POU and electrical cooperatives to determine their risk of catastrophic wildfire that can be caused by their electric lines and equipment and, if a risk exists, submit wildfire mitigation plans to their governing board for its approval.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT:

California State Association of Counties

Engineers and Scientists of California, Local 20 IFPTE AFL-CIO

Natural Resources Defense Counsel

Up from the Ashes – a Coalition of Wildfire Victims

OPPOSITION:

Desert Water Agency (*)

El Dorado Irrigation District (*)

Palmdale Water District (*)

Rowland Water District (*)

Valley County Water District (*)

Walnut Valley Water District (*)

Individuals

(*) previous version of the bill

ARGUMENTS IN SUPPORT: According to the author:

This bill is the culmination of extensive hearings, reports and debates over the last year and a half including the Governor’s Strike Force Report and the recent 901 Commission Report. All efforts conclude that we must take the necessary steps to ensure that we have fiscally stable electric utilities in this state which can keep the lights on in order to protect ratepayers and our economy. We must have them; they are the backbone of our economy and the backbone of our daily lives. Unfortunately climate change has created a new reality in California – wildfires are increasingly more dangerous and destructive. In many instances the utilities have failed to act responsibly in maintaining their infrastructure; in other instances the utility is responsible for the damage caused by the infrastructure under inverse condemnation even if they did nothing wrong.

The two factors though have caused the credit rating agencies to downgrade our utilities; one went to junk bond status and then bankruptcy; another faces the same plight this summer if we do nothing. Other utilities – public and private will likely be close behind as the market actions have a cascading effect. The consequence of those market actions is that the utility costs of borrowing will increase to such a degree that they cannot operate without billions of dollars in rate increases to cover increased borrowing costs, or not operate at all and go into bankruptcy.

We have no good choices but this bill presents a unique opportunity to get our utilities back to investment grade status, with no increase in electric rates. This bill will also double-down on safety by establishing a new comprehensive oversight division and advisory council for all utilities in the state – investor and publicly owned. The investor owned utilities will also be held to account by tying executive compensation to safety; investing a minimum of $5 billion in their lines and poles, without profit; complying with wildfire mitigation plans; and pass a safety culture assessment; all as conditions of participating in the insurance fund established by this bill.

ARGUMENTS IN OPPOSITION: The water districts listed in opposition to this bill raise concerns about language that was in the previous version of this bill which has since been removed, concerning oversight of water district’s wildfire mitigation efforts. It is unclear if the water districts remain opposed in light of the new amendments.

Some of the individuals that submitted comments opposed to this bill, include two attorneys representing ratepayers in court cases dealing with IOU recovery of wildfire-related expenses from ratepayers. They raise multiple concerns with the bill, including: the change in the burden of proof for cost recovery which they believe would make it difficult for ratepayers to prevent IOUs from passing unjust and unreasonable wildfire costs. They also take issues with the use of a revenues bonds funded by ratepayers, concerns about access to public records and public meetings, and changes to the development of IOU wildfire mitigation plans from every year to every three years.

-- END --

 THIRD READING  

Bill No: AB 1054

Author: Holden (D), Burke (D) and Mayes (R), et al.

Amended: 7/5/19 in Senate

Vote: 27 - Urgency

SENATE ENERGY, U. & C. COMMITTEE: 9-2, 7/8/19

AYES: Hueso, Bradford, Dodd, Hertzberg, Hill, McGuire, Rubio, Skinner, Stern

NOES: Stone, Wiener

NO VOTE RECORDED: Moorlach, Chang

SENATE APPROPRIATIONS COMMITTEE: 5-1, 7/8/19

AYES: Portantino, Bradford, Durazo, Hill, Wieckowski

NOES: Jones

NO VOTE RECORDED: Bates

ASSEMBLY FLOOR: 77-0, 5/22/19 (Consent) - See last page for vote

SUBJECT: Public utilities: wildfires and employee protection

SOURCE: Author

DIGEST:

This bill includes numerous provisions related to addressing wildfires caused by electric utility infrastructure, including: bolstering safety oversight and processes, recasting recovery of costs from damages to third-parties, including the authorization for an electrical corporation and ratepayer jointly funded Wildfire Fund to address future damages, and changes to provisions concerning the workforce of a change of ownership of a full or portion of an electrical or gas corporation.

ANALYSIS:

Existing law:

1. Establishes that private property may be taken or damaged for a public use

only when just compensation, ascertained by a jury unless waived, has first been paid to, or into court for, the owner. (California Constitution, Article I § 19) This section includes requirements for the exercise of eminent domain; the taking of private property for public use. This section has been held by the California Supreme Court to require just compensation when a property has been damaged by a public improvement project, known as inverse condemnation. (Reardon v. San Francisco (1885) 66 Cal. 492, 501). The courts have further held that the section is applicable to privately-owned public utilities (Gay Law Students Association v. Pacific Telephone & Telegraph Co. (1979) 23 Cal.3d 458, 469), and (Barham v. Southern California Edison Company (1999) 74 Cal. App 4th 744).

1. Establishes the California Public Utilities Commission (CPUC) and authorizes the CPUC to exercise ratemaking and rulemaking authority over all public utilities, as defined, subject to control by the Legislature. (California Constitution, Article XII §§1,2, 3, 5,6)
2. Authorizes, via the Public Utilities Act, the CPUC to supervise and regulate every public utility, including electrical corporations, and to do all things that are necessary and convenient in the exercise of such power and jurisdiction. (Public Utilities Code §701)
3. Authorizes the CPUC to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable. (Public Utilities Code §451)
4. Requires each electrical corporation to annually prepare and submit a wildfire mitigation plan to the CPUC for review and approval and requires the CPUC to consider whether the cost of implementing an electrical corporation’s plan is just and reasonable in the electrical corporation’s general rate case. (Public Utilities Code §8386)
5. Requires each local publicly owned electric utility (electric POU) and electrical cooperative, by January 1, 2020, and annually thereafter, to prepare a wildfire mitigation plan. (Public Utilities Code §8387)
6. Prohibits a person or corporation from merging, acquiring, or controlling, either directly or indirectly, any public utility organized and doing business in this state without first securing authorization to do so from the CPUC. (Public Utilities Code §851)
7. Authorizes, until January 1, 2003, the Department of Water Resources (DWR) to enter into contracts for the purchase of electric power. Authorizes the DWR to sell power to retail end use customers and local electric POU under certain circumstances. Authorizes DWR to issue revenue bonds and entitles the department to recover, as a revenue requirement, amounts necessary to enable it to finance the bonds and purchase electric power pursuant to these provisions. (Water Code §§80000, et seq., 80100, et seq., 80130, et seq., 80200, 80260)

This bill:

1. Establishes the California Wildfire Safety Advisory Board (CWSAB) consisting of seven members appointed by the Governor, Speaker of the Assembly, and Senate Committee on Rules, as provided, who would serve four-year staggered terms. Requires the board, among other actions, to advise and make recommendations related to wildfire safety to the Wildfire Safety Division (or, on and after July 1, 2021, the Office of Energy Infrastructure Safety, as established pursuant to AB 111 or SB 111 of the 2019–20 Regular Session).
2. Requires the CPUC, when determining an application by an electrical corporation to recover costs and expenses arising from a covered wildfire, as defined, to allow cost recovery if the costs and expenses are determined just and reasonable based on reasonable conduct by the electrical corporation.
3. Authorizes an electrical corporation to file an application requesting the CPUC to issue a financing order to authorize the recovery of costs and expenses related to catastrophic wildfires under specified conditions, including fire risk mitigation capital expenditures associated with the electrical corporation’s proportionate share of the five billion dollars of safety improvements in aggregate by all three of the state’s largest electrical corporations, through the issuance of bonds that are secured by a rate component.
4. Expands the definition of “change of control” for purposes of this bill: (a) the sale of all or a material portion of the assets of the electrical corporation or gas corporation, its parent company, or its holding company, or any merger, consolidation, or acquisition of the electrical corporation or gas corporation, its parent company, or its holding company with, by, or into another corporation, entity, or person, (b) the voluntary or involuntary change in ownership in assets of an electrical or gas corporation to ownership by a public entity, or (c) in the case of a combined electrical and gas corporation, the change in ownership of all or a substantial portion of either the gas or electric line of business of the combined corporation.
5. Establishes the Wildfire Fund to pay eligible claims arising from a covered wildfire, as provided. Continuously appropriates moneys in the fund to the Wildfire Fund Administrator for that purpose, thereby making an appropriation. Establishes a Wildfire Fund allocation metric as the calculation involving the land area of the electrical corporation in the high fire-threat district, and the electrical corporation’s line miles of transmission and distribution lines in the high fire-threat districts as a proportion of all large electrical corporations’ line miles, adjusted to account for risk mitigation efforts. States the expectation that the allocation metric is 64.2 percent for Pacific Gas & Electric (PG&E), 31.5 percent for Southern California Edison (SCE), and 4.3 percent for San Diego Gas & Electric (SDG&E). Requires of a participating large electrical corporation, an initial contribution of an amount equal to 7.5 billion dollars ($7,500,000,000) multiplied by the Wildfire Fund allocation metric and an annual contribution of 300 million dollars ($300,000,000) multiplied by the Wildfire Fund allocation metric.
6. Requires the CPUC to initiate a rulemaking proceeding to consider using its existing authority to require large electrical corporations to collect a nonbypassable charge from its ratepayers to support the Wildfire Fund, and would require the CPUC to direct each electrical corporation to collect that charge if the CPUC determines that the imposition of the charge is just and reasonable and that it is an appropriate exercise of its authority, as specified.
7. Specifies the funding sources for the insurance fund, which include, among other sources, joint funding from contributions from electrical corporations (not from ratepayers) and revenues generated from the extension of the existing DWR charge on ratepayers. Makes changes to cost recovery process for electrical corporations that both participate in the wildfire insurance fund and have a safety certification, as specified, the electrical corporation is deemed to have been reasonable, unless a party creates a serious doubt. Requires that once serious doubt has been raised, the electrical corporation has the burden of proving the conduct was reasonable.
8. Requires the electrical corporation’s wildfire mitigation plan, in calendar year 2020 and thereafter, to cover at least a three-year period. Authorizes the division to allow the annual submissions to be updates to the plan but would require the submission of a comprehensive wildfire mitigation plan at least once every three years. Requires the executive director of the CPUC to issue a safety certification to an electrical corporation if it meets certain requirements.
9. Requires, after January 1, 2020, that each local publicly owned electric utility or electrical cooperative submit, by July 1st of each year, its wildfire mitigation plan to the CWSAB for review and comment, and to comprehensively revise its wildfire mitigation plan at least once every three years. Requires the CWSAB to provide comments and an advisory opinion to each local publicly owned electric utility or electrical cooperative regarding the content and sufficiency of its plan and to make recommendations on how to mitigate wildfire risks.
10. Authorizes DWR to issue revenue bonds, on and after either the date on which DWR legally defeases all of its remaining bonds under the provisions stemming from the bonds issued during the 2000-2001 energy crisis, or the date on which it pays those obligations in full at maturity, whichever is earlier. Authorizes the DWR to recover, as a revenue requirement, amounts necessary to enable it to finance those bonds. Requires the bond proceeds and revenues received by DWR to be deposited in the DWR Charge Fund, which this bill would establish. Continuously appropriates the moneys in the DWR Charge Fund to the DWR for specified purposes, including transfers to the Wildfire Fund and repayment of the bonds.
11. Transfers nine million dollars ($9,000,000) from the General Fund to the DWR Charge Fund, thereby making an appropriation.
12. States the bill becomes operative only if AB 111 or SB 111 is enacted during the 2019–20 Regular Session and becomes effective before January 1, 2020.
13. Declares that it is to take effect immediately as an urgency statute.

Background

Wildfires in 2017 and 2018. In the two most recent years, 2017 and 2018, there were particularly destructive wildfires which took 139 lives and destroyed communities in both Northern and Southern California. According to the California Department of Forestry and Fire Protection, 15 of the 20 largest California wildfires, as well as, fifteen of the twenty most destructive have occurred since 2000. About 10 percent of fires are started by electric utility equipment, with many of those fires resulting in little or no property damage. However, some of the most damaging fires are ignited by utility infrastructure. According to an analysis by the Legislative Analyst’s Office, electric utility powerlines caused at least eight of the 20 most destructive fires in California’s history.

Impacts of inverse condemnation. The California Constitution provides the basis for recovery against government entities and public utilities via the theory of inverse condemnation. Section 19 of Article 12, requires that just compensation be paid when private property is taken for public use. This is commonly understood as eminent domain. In the case where a property is damaged by a public improvement project, the application is known as inverse condemnation, unlike in cases of negligence, the responsible entity is held strictly liable where a public improvement causes property damage. The California Supreme Court and appellate courts have held that inverse condemnation is applicable to privately-owned public utilities (Gay Law Students Association v. Pacific Telephone & Telegraph Co. (1979) 23 Cal.3d 458, 469), and (Barham v. Southern California Edison Company (1999) 74 Cal. App 4th 744).

Cost recovery by IOUs. CPUC-regulated utilities, including electric IOUs, routinely submit requests for cost recovery related to their operations, including expanding their infrastructure, paying for operation expenses, etc. As required by statute in Public Utilities Code §451, the CPUC may only approve a utility’s request for cost recovery that is deemed just and reasonable. Review of utility expenses to ensure they are just and reasonable is the primary purpose for the CPUC’s existence and the main task of the agency as an economic regulator. Expenses related to wildfire damages, just as other expenses related to the operation of a utility, must be reviewed by the CPUC to ensure they meet the requirements that they are just and reasonable. Generally, the utility submits an application for cost recovery, and the burden of proof is on the utility to demonstrate it has behaved reasonably.

San Diego wildfires in 2007. With the backdrop of the deadly North Bay Fires (including Nunns, Atlas, and Tubbs Fires), in the fall of 2017, the CPUC adopted a decision denying a request by SDG&E for cost recovery from ratepayers for $379 million of uninsured expenses related to the 2007 San Diego wildfires – arising from the Witch, Guejito and Rice wildfires which were ignited by utility infrastructure.

Electric IOU credit ratings downgraded. Rate-regulated utilities generally enjoy high investment grade credit ratings which all the utility to access less expensive capital in the financial market than might otherwise be the case. The utilities’ business model is heavily dependent on access to capital in order to finance its operations. Generally, more affordable costs for capital also benefit ratepayers who pay operation of the utility through rates. However, the combination of increasing severity and frequency of wildfires, the application of inverse condemnation, and the CPUC decision denying SDG&E’s application for cost recovery, resulted in declining credit ratings for all three of the state’s largest electrical utilities and impacts to the ratings of smaller IOUs and also electric POUs.

SB 901 (Dodd, Chapter 626, Statutes of 2018). In 2018, the Legislature and Governor responded to the threat of wildfires with the passage of several bills to reduce the risk of wildfires, including SB 901. The bill addressed numerous issues concerning wildfire prevention, response and recovery, including funding for mutual aid, fuel reduction and forestry policies, bolstered the requirements of wildfire mitigation plans by electric utilities, and cost recovery by electric corporations of wildfire-related damages.

PG&E bankruptcy. Earlier this year, PG&E’s credit ratings were further downgraded by the credit ratings agencies to a point characterized as “junk status.” The credit ratings downgrade occurred following information that the CPUC was investigating PG&E concerning gas safety reporting violations, on the heels of the Camp Fire which was speculated (and since found to have been) caused by PG&E electric infrastructure, and in the midst of a criminal probation stemming from the San Bruno gas pipeline explosion. Nearly a week after the downgrade, PG&E notified its workforce (and the public) that it intended to file for Chapter 11 bankruptcy protection on or around January 29, 2019. PG&E remains in bankruptcy process and is not likely to come out of bankruptcy until the company can resolve pending wildfire claims, which the company estimates to be 30 billion dollars.

Governor’s Strike Force report. In April, Governor Newsom issued a report from his Strike Force regarding Wildfires and Climate Change: California’s Energy Future. The strike force report sets out steps the state must take to reduce incidence and severity of wildfires. The report was structured into five parts, including a section on responding and preventing wildfires, as well as, a section on allocating responsibility for wildfire costs, among others.

SB 901 Commission report. SB 901 also established a Commission on Catastrophic Wildfire Cost and Recovery and required the five-member commission to engage the public and provide recommendations to address changes to law that would ensure equitable distribution of costs among affected parties. The Commission held five public meetings this spring, including in communities affected by wildfires in recent years. The Commission issued their report in June detailing 15 recommendations.

Comments

AB 1054. This bill encompasses some of the recommendations included in both the governor’s strike force report and the SB 901 Commission recommendations. The key provisions include: establishing a new process for electric IOUs to recover costs related to catastrophic wildfires (changes to the prudency standard), authorizes financing of specified costs (including wildfire safety mitigation), bolstering and changes to electric utility wildfire safety oversight (including a Wildfire Safety Division), and establishment of a Wildfire Fund to address the property claims stemming from utility-caused wildfires (provides for either a liquidity-only fund or broader insurance fund). Additionally, this bill includes new triggers related to change of control of an IOU as an effort to protect the existing workforce of the electric IOUs.

IOU wildfire cost recovery process. AB 1054 proposes changes to the CPUC’s current cost recovery process as explained above and only available to electric IOUs who participate in the Wildfire Fire Insurance Fund (more below). This bill would establish a new type of proceeding, known as the catastrophic wildfire proceeding with specified processes. This bill recasts the considerations afforded to an application for cost recovery related to wildfire expenses by an electric IOU, including explicitly stating that the costs and expenses arising from a wildfire ignited by electric utility infrastructure (covered wildfire) are just and reasonable if the conduct of the electric IOU is “consistent with actions that a reasonable utility would have undertaken in good faith under similar circumstances, at the relevant point in time.” These changes and others replace much of the 12 points of criteria established in SB 901, but fundamentally are still largely consistent with the existing requirements of Public Utilities Code §451 which afford the CPUC broad authority to determine what is just and reasonable. However, a fundamental distinction is that AB 1054 proposes new language to provide the electrical utility the presumption that they acted reasonable if they have a valid safety certification at the time period of the covered wildfire and participate in the insurance fund. In this respect, the burden of proof would fall on other parties in the proceeding to raise “serious doubt” as to the electric IOU’s reasonableness. The Governor’s Office notes this is a presumption with similarity to what is afforded in the Federal Energy Regulatory Commission process. Some have expressed concerns that the change in the presumption would disadvantage ratepayers who would have the burden to demonstrate that the electric IOU was not reasonable. The authors of this bill have attempted to address those concerns by requiring that presumption to shift back to the electric IOU once serious doubt has been raised.

Electric IOU wildfire safety. AB 1054 also includes several new provisions addressing electric IOU wildfire safety oversight and processes. The combination of the safety efforts attempt to mitigate the wildfire ignitions from electric utility infrastructure. The provisions include efforts to provide greater oversight, others to direct the utilities to make specified investments, and others to bolster safety focus by the management of the utility.

• Establishment of a CWSAB to provide recommendations to the Wildfire Safety Division (or, on and after July 1, 2021, the Office of Energy Infrastructure Safety, as established pursuant to AB 111 or SB 111 of the 2019–20 Regular Session). This bill requires the advisory board to develop recommendations related to wildfire safety and mitigation performance metrics, including recommendations related to wildfire mitigation plans developed by electric utilities, including advisory opinions of each local electric POU’s wildfire mitigation plan.
• Requires the Wildfire Safety Division (or, on and after July 1, 2021, the Office of Energy Infrastructure Safety, as established pursuant to AB 111 or SB 111 of the 2019–20 Regular Session) to approve or deny each wildfire mitigation plan from the electric IOU within three months.
• This bill also prohibits a large electrical corporation from including in its equity rate base its share of the first five billion dollars in aggregate by large electrical corporations on fire risk mitigation capital expenditures. In doing so, the authors attempt to reduce the ratepayer costs of the return on equity (ROE) of the five billion dollars. Based on the estimate provided by the Governor’s strike force, the potential ratepayer benefits would be roughly 2.5 billion dollars in foregone profit, assuming a 20-year depreciable life.
• AB 1054 also requires changes at the electric IOU to foster a greater safety culture by the companies. Specifically, this bill requires as a prerequisite to attaining a safety certificate: to require the electric IOU to establish a safety committee of its board of directors, implement the findings of its most recent safety culture assessment, and a compensation structure structured to promote safety, among others.

Wildfire Fund. In addition to the provisions mentioned above, AB 1054 establishes a Wildfire Fund as a mechanism to address third-party damages against an electrical corporation from wildfires ignited by the utility, the costs of which exceed the greater of one billion dollars or the amount of the insurance coverage required of the electric IOU. The Wildfire Fund would be overseen by an appointed administrator. The Fund would be capitalized, initially, with a loan from the state’s Surplus Money Investment Fund. The fund establishes two paths to address wildfire damages: a liquidity fund and an insurance fund.

• Liquidity fund. Within 14 days of the effective date of this bill, AB 1054 would require the CPUC to initiate a proceeding to collect a nonbypassable charge from ratepayers of the electric IOU to extend an existing charge – the DWR charge. This option provides a line of credit (revolving liquidity fund) that will pay eligible claims of third-party damages from wildfires ignited by electrical IOUs. Requires the electrical IOUs in order to participate in the fund to meet specified conditions by June 30, 2020, including: the electrical IOU is not in bankruptcy or criminal probation. The bill would use the prudency review in existence prior to the passage of SB 901 (Dodd, 2018).
• Insurance fund. Within 15 days of the effective date of this bill, each large electrical corporation not subject to insolvency (SDG&E and Southern California Edison (SCE)) notifies the CPUC of its commitment to provide the initial contribution and the annual contributions not recoverable from ratepayers ($10,500,000,000) in aggregate for all three large electrical IOUs. By participating in the fund, and have a safety certificate, the electric IOU may be afforded more certainty for recovery of utility-caused wildfires. The fund would be jointly funded by both electric IOU ratepayers (via an existing charge on utility bills – the DWR charge) and the electric IOUs via non-ratepayers funds. The insurance fund also includes a cap on costs for participating electric IOUs whereby expenses deemed just and reasonable would be recovered from the fund, while costs not deemed just and reasonable would be capped up to an amount equivalent to a cap on 20 percent of the IOU’s transmission and distribution equity rate base over three calendar years. According to the CPUC, on average from 2016-18, 20 percent of transmission and distribution equity rate base for each large electric IOUs was approximately $2.1 billion for PG&E, $2.2 billion for SCE, and $692 million for SDG&E. The insurance fund would also limit subrogation claims from insurance companies to 40 percent, or more, should the administrator approve. According to some reports, the 40 percent may be less than the average of existing subrogation claims. However, the time value of more expeditiously receiving a payment for the claim may increase the appeal for insurance companies. In all the Insurance Fund options assumes $1 billion per utility in annual commercial insurance requirements, a capitalization from non-ratepayer funds of $7.5 billion ($7,500,000,000) in total from the three largest electric IOUs, and an additional contribution of $3 billion over ten years. According to the Governor’s Office, the capitalization of the insurance fund, along purchase of reinsurance and other related projects, would provide between $30-40 billion in claims-paying capacity for utility caused wildfires.

PG&E bankruptcy. This bill provides that if a utility (PG&E) that has been in bankruptcy has resolved its insolvency proceeding including settlement of pre-bankruptcy claims, a CPUC approved reorganization plan that is both consistent with the state’s climate goals and renewable portfolio standard and is determined to be neutral, on average, to the ratepayers of the electrical IOU.

DWR charge. In the case of both approaches, liquidity fund and insurance fund, ratepayers would contribute with the extension of the existing DWR charge that is scheduled to end after 2021. The existing DWR charge is roughly $0.005 per kilowatt hour for most customers of all three of the large electrical IOUs, except qualifying low-income customers and customers needing electricity for medical necessity are currently exempted. The charge adds roughly a few dollars to the average residential customer monthly utility bill. This bill would allow for the continued collection of the DWR charge and allows the CPUC to move the rate up in order to meet the revenue requirement, with the goal of colleting up to $10.5 billion ($10,500,000,000).

Effects on ratepayers. The current efforts to address wildfire liability from utility ignited wildfires have the potential to straddle ratepayers with billions in wildfire liability expenses. The amount of electricity a customer uses has little bearing on whether a wildfire will be ignited. On the other hand, utility management and operations can have a significant amount of influence over whether a wildfire will be ignited by the utility’s equipment. Additionally, the level of destruction of a wildfire may be the result of multiple factors including wind speeds, the volume of and location of properties to the ignition source, and others. Yet, the application of strict liability on electrical utilities could result in ratepayers bearing a significant amount of the costs. It seems any option to address the challenges may still impact ratepayers, as forgoing action can also increase the costs of the utility’s access to capital which could then be passed on to ratepayers. Nonetheless, the costs to ratepayers of any option are not insignificant. However, the continued downgrade of the utilities’ credit ratings will likely result in increased costs to ratepayers. The credit ratings agencies have all commented on the likelihood of further downgrading the electric utilities’ credit ratings if no meaningful action is taken by the legislature and governor by July 12, 2019.

Durability. Any solution to address wildfire liability should be considered in terms of its durability. Unfortunately, unless the severity and frequency of wildfires, particularly those caused by utility infrastructure, are significantly reduced, no solution will provide long-term durability. The Wildfire Insurance Fund itself could be exhausted rapidly if wildfires continue at their recent pace and severity. However, the increased investments in electric utility grid hardening, situational awareness, and in the near-term, the use of public safety power shutoffs, may help to significantly reduce the risk of utility-caused catastrophic wildfires. Unfortunately, none of these options come without significant costs. This bill attempts to fast-track and front-load some of these investments by requiring five billion dollars in the aggregate for utility wildfire safety investments with no return on equity for the utility. Assuming these investments are targeted to the best use and greatest bang for the buck, Californians should have some assurance that the risk of utility-ignited wildfires would be reduced.

Change of control. Additional provisions of this bill address the desire for protections for the existing workforce of the electric IOUs. Most significantly, the language provides additional protection should the ownership of the utility change. Specifically, the language extends by one year (to three years) the language in SB 901 that provides for a period where employees who would have qualified as covered employees had they been employed during the 90-day period immediately before a change of control and requires the successor to maintain the number and wages of covered employees. Additionally, the language includes provisions that require a change of control to be triggered by a voluntary or involuntary change in ownership of assets from and electrical or gas corporation to ownership by a public utility. It is unclear whether that language materially changes the review the CPUC would otherwise perform to approve any change in assets by the IOU.

Related/Prior Legislation

AB 111(Committee on Budget, 2019) creates the California Catastrophe Response Council to oversee the California Earthquake Authority (CEA) and the Wildfire Fund Administrator. The bill also requires the CPUC to establish the Wildfire Safety Division, and provide that on and after July 1, 2021, establish Office of Energy Infrastructure Safety within the Natural Resources Agency as the successor to the WSD. The bill also appropriates $47,600,000 from the Public Utilities Commission Utilities Reimbursement Account. The bill also repeals Section 326.1 of the Public Utilities Code as added by AB 1054 of the 2019–20 Regular Session.

SB 111 (Committee on Budget and Fiscal Review, 2019) is duplicative of AB 111.

AB 235 (Mayes, 2019) authorizes the CPUC, when determining recovery by an electrical corporation for costs and expenses arising from a catastrophic wildfire, occurring on or after January 1, 2019, to consider the IOU's financial status and determine the maximum amount the IOU can pay without harming ratepayers or materially impacting the IOU's ability to provide adequate and safe service.

AB 740 (Burke, 2019) would have created a catastrophic wildfire cost sharing mechanism that will reimburse wildfire victims, as defined, for losses related to utility caused wildfires. The bill has been amended to remove the provisions related to a catastrophic wildfire fund.

SB 901 (Dodd, Chapter 626, Statutes of 2018) addressed numerous issues concerning wildfire prevention, response and recovery, including funding for mutual aid, fuel reduction and forestry policies, wildfire mitigation plans by electric utilities, and cost recovery by electric corporations of wildfire-related damages.

SB 1028 (Hill, Chapter 598, Statutes of 2016) required IOU electric utilities to file annual wildfire mitigation plans and required the CPUC to review and comment on those plans.

FISCAL EFFECT: Appropriation: Yes Fiscal Com.: Yes Local: Yes

According to the Senate Appropriations Committee:

• One-time cost of $2 billion (Surplus Money Investment Fund [SMIF]) in 2019-20 for an initial loan to capitalize the Wildfire Fund, with a total loan authorization of up to $10.5 billion as needed from the SMIF, upon a determination by the Department of Finance to cover claims payable from the Wildfire Fund. These transfers would be a short-term loan repaid from proceeds of specified ratepayer charges or bonds within a fiscal year.
  
• At the time of this analysis, the Department of Water Resources (DWR) initially estimated administrative costs of $10 million to $13 million annually (DWR Charge Fund) to administer the surcharge and issue bonds as necessary. First-year administrative costs would be covered by a one-time $9 million loan from the General Fund to the DWR Charge Fund. This loan would be repaid from the DWR Charge Fund “at the earliest possible time.”
  
• Unknown significant CPUC costs. A CPUC cost estimate was unavailable at the time of this analysis. Staff assumes the CPUC would incur administrative costs in the low millions annually that are not funded by the CPUC appropriation in AB 111 or SB 111 (see related legislation below). Specifically, the CPUC would incur costs related to the activities of the new California Wildfire Safety Advisory Board, for staff time related to surcharge rate setting proceedings and catastrophic wildfire cost recovery proceedings, and for administrative duties related to the issuance of specified safety certificates. (Public Utilities Reimbursement Account and Public Advocates Office Account)
  
• Both costs and savings to the state as a utility ratepayer.
  • Unknown potential costs due to changes in proof of liability for wildfire costs.
  • Costs of roughly $5 million to $10 million annually (General Fund and special funds) due to continuation of the DWR bond surcharge on ratepayers that would have otherwise phased out, likely in 2022.
  • Costs in the low tens of millions annually (General Fund and special funds) for increased wildfire safety spending by utilities.
  • To the extent this bill improves utility credit ratings from what they would be absent this bill, unknown savings due to lower utility borrowing costs.
    
• To the extent the bill encourages increased wildfire safety spending and higher utility safety standards that reduce the occurrence of catastrophic wildfires from what otherwise would have occurred, this bill would result in unknown potential savings for reduced fire suppression (General Fund).
  
• Any costs to the Department of Finance, the California Catastrophe Response Council, the Wildfire Fund Administrator, and the Wildfire Safety Division for duties specified in this bill are expected to be covered by the appropriations in AB 111 or SB 111, and SB 110..

SUPPORT: (Verified 7/8/19)

California State Association of Counties

Engineers and Scientists of California, Local 20 IFPTE AFL-CIO

Natural Resources Defense Council

Southern California Public Power Authority

Up from the Ashes – a Coalition of Wildfire Victims

OPPOSITION: (Verified 7/8/19)

Californians for Energy Choice

Five individuals

ARGUMENTS IN SUPPORT: According to the author:

This bill is the culmination of extensive hearings, reports and debates over the last year and a half including the Governor’s Strike Force Report and the recent 901 Commission Report. All efforts conclude that we must take the necessary steps to ensure that we have fiscally stable electric utilities in this state which can keep the lights on in order to protect ratepayers and our economy. We must have them; they are the backbone of our economy and the backbone of our daily lives. Unfortunately climate change has created a new reality in California – wildfires are increasingly more dangerous and destructive. In many instances the utilities have failed to act responsibly in maintaining their infrastructure; in other instances the utility is responsible for the damage caused by the infrastructure under inverse condemnation even if they did nothing wrong.

We have no good choices but this bill presents a unique opportunity to get our utilities back to investment grade status, with no increase in electric rates. This bill will also double-down on safety by establishing a new comprehensive oversight division and advisory council for all utilities in the state – investor and publicly owned. The investor owned utilities will also be held to account by tying executive compensation to safety; investing a minimum of $5 billion in their lines and poles, without profit; complying with wildfire mitigation plans; and pass a safety culture assessment; all as conditions of participating in the insurance fund established by this bill.

ARGUMENTS IN OPPOSITION: Some of the individuals that submitted comments opposed to this bill, include two attorneys representing ratepayers in court cases dealing with IOU recovery of wildfire-related expenses from ratepayers. They raise multiple concerns with the bill, including: the change in the burden of proof for cost recovery which they believe would make it difficult for ratepayers to prevent IOUs from passing unjust and unreasonable wildfire costs. They also take issues with the use of revenues bonds funded by ratepayers, concerns about access to public records and public meetings, and changes to the development of IOU wildfire mitigation plans from every year to every three years.

ASSEMBLY FLOOR: 77-0, 5/22/19

AYES: Aguiar-Curry, Arambula, Bauer-Kahan, Berman, Bigelow, Bloom, Boerner Horvath, Bonta, Brough, Burke, Calderon, Carrillo, Cervantes, Chau, Chen, Chiu, Choi, Chu, Cooper, Cunningham, Dahle, Daly, Diep, Eggman, Flora, Fong, Frazier, Friedman, Gabriel, Gallagher, Cristina Garcia, Gipson, Gloria, Gonzalez, Gray, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Petrie-Norris, Quirk, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Voepel, Waldron, Weber, Wicks, Wood, Rendon

NO VOTE RECORDED: Cooley, Eduardo Garcia, Mullin

Prepared by: Nidia Bautista / E., U., & C. / (916) 651-4107

7/8/19 18:04:14

**** END ****

Date of Hearing: May 15, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 1054

Author:(Holden) – As Introduced Ver:February 21, 2019

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill adds specific qualifications—namely, expertise in accounting, risk management and information technology, and familiarity with industry best practices—that must be possessed by the chief internal auditor of the California Public Utilities Commission (CPUC).

FISCAL EFFECT:

Negligible state costs, if any.

COMMENTS:

Background and Purpose. The CPUC is the five-member commission, established in the state constitution, that, primarily, regulates the state’s investor-owned utilities that provide electricity, natural gas and water service to much of California. The CPUC has been criticized, by this body and by others, as being too slow, too bureaucratic, unresponsive to market and regulatory needs and too close to regulated entities. Not surprisingly, there have been a number of legislative efforts over recent years to reform the CPUC.

One such effort was SB 19 (Hill), Chapter 421, Statutes of 2017. Also known as The California Public Utilities Commission Governance, Accountability, Training and Transportation Oversight Act of 2017. SB 19 the legislation made a number of changes to CPUC jurisdiction, procedure and operations. Among those changes was creation, in statute, of the position of chief internal auditor, who serves at the pleasure of the CPUC. Currently, the position is held by Virginia (Ginny) Veneracion-Alunan, an experienced auditor who seems to possess the experience and expertise required by this bill.

Conceivably, the CPUC could appoint a chief internal auditor who does not have expertise in accounting, risk management and information technology, and familiarity with industry best practices. This bill might not be necessary, especially if the Legislature continues to assert active oversight of CPUC operations. Still, it is not unusual to specify the needed qualifications of those who would hold positions created in statute. Certainly, there is no harm in doing in this instance.

Analysis Prepared by: Jay Dickenson / APPR. / (916) 319-2081

Date of Hearing: April 3, 2019

ASSEMBLY COMMITTEE ON UTILITIES AND ENERGY

Chris Holden, Chair

ABPCA Bill Id:AB 1054 (

Author:Holden) – As Introduced Ver:February 21, 2019

SUBJECT: Public Utilities Commission: chief internal auditor

SUMMARY: This measure mandates the minimum qualifications which the Chief Internal Auditor of the California Public Utilities Commission must possess. Specifically, the individual must have expertise in accounting, risk management, information technology, and familiarity with best industry practices.

EXISTING LAW:

1. Establishes the California Public Utilities Commission (CPUC) with jurisdiction over all public utilities and grants the CPUC certain general powers over all public utilities and common carriers, subject to control by the Legislature. (California Constitution, Article 12);
2. Requires the CPUC to regulate utilities, establish just and reasonable rates for service, and establishes a division of the CPUC responsible for consumer protection and safety. (Public Utilities Code §451 and §309.7);
3. Establishes the CPUC’s authority to regulate, require license or permit to operate, require insurance and workers compensation, take appropriate enforcement action and other provisions related to passenger stage corporations (Public Utilities Code §§226 and 1031 et seq.) and transportation charter-party carriers. (Public Utilities Code §5351);
4. Mandates the CPUC adopt an updated Conflict of Interest Code and Statement of Incompatible Activities by February 28, 1998. (Public Utilities Code §303);
5. Mandates the CPUC to appoint a Chief Internal Auditor who is responsible for oversight of the internal audit unit. The Chief Internal Auditor is responsible for planning, initiating, and performing audits of key financial, management, operational, and information technology functions within the CPUC. The Chief Internal Auditor reports their findings and recommendations directly to an audit subcommittee of the CPUC. (Public Utilities Code § 307.6).

FISCAL EFFECT: Unknown

BACKGROUND:

Area of Responsibilities - According to the CPUC, the Chief Internal Auditor reports directly to the Commissioners through an audit subcommittee of Finance and Administration and under the general direction of the President of the CPUC. Additionally, the Chief Internal Auditor may serve on the CPUC’s Director-level Executive Safety Council that oversees the development and implementation of safety policies that are the agency’s highest priority. This individual also serves as the principal for evaluating organizational risks and assessing the effectiveness of managerial controls across the breadth of the agency including the following:

• Responsible for planning, organizing, and directing the work of the department’s Internal Audit Unit in conducting the sensitive, complex and technical management, operational, information technology, and financial audits.
• Provides technical advice on effective risk management, sound business processes and internal controls.

For almost 100 years, the CPUC has been tasked with protecting consumers and ensuring provision of safe, reliable service, infrastructure and protecting ratepayers. California’s economy depends on the CPUC safeguarding the infrastructure and utilities that are vital to the state.

The Institute of Internal Auditors defines internal auditing as: “The internal audit activity helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.”

COMMENTS:

1) Author’s Supporting Statement: The CPUC regulates the electric, natural gas, telecommunications, water, railroad, rail transit, and passenger transportation companies. These entities provide essential services, protects consumers, safeguards the environment, and assures Californians' access to safe and reliable utility infrastructure and services. Given the enormity of the CPUC’s regulatory authority and responsibilities, it is important for the Chief Internal Auditor to possess the education, experience and expertise which will enable them to successfully carry out the responsibilities of the position. This measure establishes minimum requirements for the position including expertise in accounting, risk management, information technology and familiarity with best industry practices.

2) Need for Expertise: By establishing minimum qualifications (expertise in accounting, risk management, information technology and familiarity with best industry practices) there is greater certainty that the Chief Internal Auditor will be positioned to successfully carry out the responsibilities associated with the position. The position is key to objectively identifying areas which are in need of improvement, providing recommendations and strategies to mitigate issues and following-up to ensure the Commission has successfully implemented measures that address areas of concern.

3) Objective Evaluation: An internal auditor is an employee of a company or in this case a governmental agency that provides independent and objective evaluations of a company’s operations. The following are a list of the examples of audits performed by an internal auditor:

• Information Technology Audits: Evaluate information systems to ensure that sensitive data is protected, accurate and the system operates securely.
• Operation Audits: Assess whether internal controls are sufficient and working as intended, and operating procedures are efficient and complete,
• Financial Audits: Determine the fairness of the presentation of financial data.
• Performance Audits: Determine whether an organization is meeting the goals and objectives defined by senior leadership or Commissioners.

Previous Related Legislation

AB 2903 (Gatto, 2016) would have provided a suite of reforms of the operations of the CPUC, including clarifying the responsibilities and oversight of various positions; improvements to ethics practices; reports related to telecommunications services and CPUC staffing; stating the intent of the Legislature to transfer most non-rail, for-hire transportation services to the STA; and others. Status: Held in the Senate Energy, Utilities, and Communications Committee.

ACA 11 (Gatto, 2016) would have proposed a measure on the ballot to authorize the Legislature to reallocate or reassign all or a portion of the functions of the CPUC to other state agencies, departments, boards, or other entities, consistent with specified purposes and proposed to repeal the provisions of the California Constitution pertaining to the CPUC effective January 1, 2019. Status: Held in the Senate Energy, Utilities, and Communications Committee.

SB 215 (Leno/Hueso) Proposed a suite of reforms of the rules, operations and procedures of the CPUC pertaining to the laws and rules related to ex parte communications and criteria and process for disqualification of commissioners to a proceeding. Status: Chapter 807, Statutes of 2016

SB 512 (Hill) Proposed a suite of reforms of the operations and governance of the CPUC, including allowing intervener compensation for certain local governments, requiring specified information is available to the public, requiring specified reporting of the CPUC regarding the timeliness of proceedings, applying the Code of Ethics from the APA to ALJs, and others. Status: Chapter 808, Statutes of 2016.

AB 825 (Rendon, 2015) would have proposed a package of reforms of the CPUC largely directed at increased transparency of the activities of the agency, including requiring the California State Auditor's Office to appoint an Inspector General within its office for the CPUC, expanding the roles and responsibilities of the CPUC public advisor, specifying additional requirements of commissioners, and increased transparency of electric utilities' procurement, among others. Status: Vetoed.

SB 48 (Hill, 2015) would have proposed a suite of reforms of the governance and operations of the CPUC, including, among others, requiring sessions in Sacramento, applying the Code of Ethics from the Administrative Procedures Act (APA) to ALJ, clarifying and augmenting the information the CPUC must provide the Legislature in its annual report, and others. Status: Vetoed.

SB 660 (Leno/Hueso, 2015) would have proposed a suite of reforms of the governance, rules, operations and procedures of the CPUC, including reforming laws and rules related to ex parte communications, criteria and process for disqualification of commissions to a proceeding, and authorizing the CPUC to appoint the chief administrative law judge. Status: Vetoed.

SB 19 (Hill) The California Public Utilities Commission Governance, Accountability, Training and Transportation Oversight Act of 2017 provided a suite of reforms of the operations of the California Public Utilities Commission (CPUC), including: the transfer, by July 1 2018, of four transportation-related functions from the CPUC to other agencies or jurisdictions: clarifies and, in some cases, codifies the responsibilities and oversight of various positions; clarifies CPUC notification requirements for contracting of outside legal services; and others. The measure also created the position of Chief Internal Auditor who serves at the pleasure of the CPUC. Status: Chapter 421 of 2017

REGISTERED SUPPORT / OPPOSITION:

Support

None

Opposition

None

Analysis Prepared by: Mary McDonald / U. & E. /