If PG&E Wants Newsom's Fire Aid, Here's What It Has to Do

(Bloomberg) -- It’s no secret that California Governor Gavin Newsom wants to create a fund that the state’s electric utilities can tap to cover the costs of catastrophic wildfires.

Now, the utilities know what he wants in return.

Based on a proposal released by Newsom’s office Friday, PG&E Corp., Edison International and Sempra Energy would have to spend $3 billion on safety measures; earn an annual certificate by tying executive compensation to safety performance; and pass a “safety culture assessment,” among other things. On top of that, PG&E -- which filed for Chapter 11 in January amid an estimated $30 billion in damages from blazes that its equipment caused -- would have to emerge from bankruptcy by June 30, 2020, and resolve all existing fire claims to tap the fund.

The idea of a fund has been floated for months as the solution to utilities’ mounting wildfire liabilities in California -- liabilities that have already taken down the state’s largest electric company and threaten the credit ratings of two others, Edison International’s Southern California Edison and Sempra Energy’s San Diego Gas & Electric. The plan the Newsom Administration laid out Friday is the first to detail the size of a fund, how it would be financed and what power companies would have to do to tap it.

The governor is proposing two possible models for a fund: a $10.5 billion liquidity fund that would serve as a line of credit for utilities. The state would fund it by extending a charge on utility bills and securitizing the revenue through state-issued bonds, aides to the governor said in a phone briefing. The other option is a $21 billion fund where utilities could kick in $10.5 billion more of their own money to form an even bigger insurance-like pool, they said. PG&E would would have to shell out the most because of its higher fire risk.

Edison and Sempra get to decide which option they would prefer and PG&E would be bound by the decision.

‘Mandates’ Safety

The proposal “maximizes shareholder contributions to a solution, minimizes ratepayer exposure to sticker shock rate increases, and mandates a culture of safety in our utilities to prevent wildfires,” Newsom said in a statement.

Less than an hour before Newsom released his proposal, PG&E was said to be floating a restructuring plan that would have the company emerge from bankruptcy in March. The utility is recommending a fund similar to the one the governor outlined, but it’s counting on about $14 billion from Department of Water Resources bonds and $3 billion from other utilities, according to a document reviewed by Bloomberg. PG&E itself would contribute only $3 billion, it shows.

The governor has been pressing lawmakers to act since PG&E collapsed under the weight of crippling wildfire liabilities. Its equipment sparked the deadliest fire in state history in November, killing 85 people and destroying the Northern California town of Paradise. Newsom said he’ll work with lawmakers to turn his plan into a package of bills with a goal of passing them by July 12. His administration said it expects legislation to be introduced next week.

Newsom’s plan also calls for changing the standard that regulators use to decide whether a power company should charge customers for its wildfire liabilities. Utilities would be assumed to have acted prudently, unless proven otherwise, if they complied with new safety requirements. That would make it easier for them to recover expenses, raise capital and reduce ratepayers' financing costs, according to a report from the state's nonpartisan Legislative Analyst’s Office, which advises the legislature. The report didn’t review Newsom’s proposal.

Here are the other key takeaways from Newsom’s proposal:

• The state’s share would come from Department of Water Resources bonds and would be backed by a charge that utility customers have been paying since the 2000-2001 energy crisis.
• Edison’s Southern California Edison and Sempra’s San Diego Gas & Electric utility would have 15 days after the legislation takes effect to decide whether they want to contribute to a larger insurance fund.
• PG&E wouldn’t be allowed to access the fund until it resolves wildfire claims from the past two years and exits bankruptcy within 18 months of its January filing with a plan that’s “neutral” to ratepayers to access the wildfire fund, according to the administration.
• Utilities would have to spend $3 billion on fire safety measures -- investments that they wouldn’t be allowed to recover from ratepayers, the administration said. PG&E would have to spend the most.
• A state agency would serve as a backstop to utilities in signing power purchase contracts.

--With assistance from Romy Varghese.

To contact the reporter on this story: Mark Chediak in San Francisco at mchediak@bloomberg.net

To contact the editors responsible for this story: Lynn Doan at ldoan6@bloomberg.net, Will Wade

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