California Enacts Solution to Fund Utility Wildfire Liabilities
| Publication year | 2020 |
| Author | Allan Marks |
Allan Marks
Allan Marks is a Global Project, Energy & Infrastructure Finance partner in Milbank's Los Angeles office. Allan advises clients on the development, financing, and acquisition of energy, transportation, water, and other infrastructure projects globally. He is also a lecturer at UC Berkeley's law and business schools.
Marking a significant commitment by the state to shore up the financial position of its major investor-owned utilities, California Governor Gavin Newsom signed Assembly Bill 10541 (AB 1054) into law on July 12, 2019. Because the law passed as an "urgency bill" with a more than two-thirds majority in each chamber, AB 1054 took immediate effect. Enacted on a bipartisan basis, the law creates a pool of liquidity to cover future wildfire claims, creates incentives to increase the safety of electric utility infrastructure, and indirectly backstops utility credit. The law thus should have a significant impact: funding for recovery from future wildfires, reduced wildfire risks, and lower utility borrowing costs.
AB 1054 establishes a wildfire fund (the "Wildfire Fund") to provide liquidity for utilities to cover eligible, uninsured third-party damage claims resulting from future catastrophic wildfires. The law also introduces a new framework to encourage and certify utility safety practices, intended to reduce the risk of wildfires ignited by power infrastructure.
The Wildfire Fund is necessitated in part by California's "inverse condemnation" doctrine. That rule, in effect, makes public utilities strictly liable for damages from fires sparked by utility-owned facilities or equipment, regardless of fault. As catastrophic wildfire risks rise with climate change and increased residential development in fire-prone areas, the utilities' potential liability to pay wildfire claims can exceed their capacity to pay. The new fund provides a reserve to bridge that gap.
Without this reserve, placing the cost of widespread wildfire liabilities on utilities raises the challenge of how utilities can recover those costs. Passing the costs through to ratepayers by raising retail power rates creates challenges of affordability and fairness. Trying to pass the costs entirely on to utility shareholders has economic limits and, since fault is not required, is also unfair. Having taxpayers bear the costs spreads them more widely than having ratepayers bear the burden but again, raises issues of fairness and is deeply unpopular.
The new law solves this puzzle by allowing utilities to access a pool of capital that they will fund over time at affordable levels. The law provides for funding, in part by amounts collected from ratepayers and in part by amounts borne (indirectly) by utility shareholders. Additionally, penalties will be incurred by any utility that fails to make investments and operational improvements to prevent future fires or that is shown to act unsafely. To make funding immediately available, the state will provide upfront funding to be repaid by the utility contributions. Thus, future wildfire victims can recover on their claims, ratepayers are protected from exorbitant rate increases, utility investors bear the risk of how the utility manages fire safety, and the risk of future fires is reduced. Further, utility credit is protected, keeping wholesale power costs stable while preserving both grid stability and the state's renewable energy procurement goals.
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The Wildfire Fund created by AB 1054 essentially acts as a supplemental line of credit for private utilities, beyond what is covered by their insurance, to pay for adjudicated, covered third party-claims arising from catastrophic wildfires ignited by utility-owned equipment. The Wildfire Fund will create a state-backed pool of capital of at least $21 billion.
Ratepayers will ultimately fund $10.5...
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