California lawmakers punt on chances to deal with utility bill crisis

California’s power system is in a difficult spot — and so are the utility customers stuck paying for it.

The state’s utilities have to expand their power grids to support the shift to carbon-free electricity, and they must harden those grids to reduce the risk that they’ll cause deadly wildfires. But these costly projects are the main driver of California’s sky-high and still-rising electricity rates, which have sparked an affordability crisis that threatens to derail the state’s energy transition.

The situation is unsustainable. That’s why in recent months California lawmakers and Governor Gavin Newsom (D) have promised to hash out a way to contain grid costs without sacrificing clean energy goals or wildfire mitigation work.

Even so, the state’s regular legislative session ended on Saturday with little to show for it, according to environmental and consumer advocates.

“We’re concerned that time is running out for the policymakers to do something,” said Mark Toney, executive director of The Utility Reform Network (TURN), a ratepayer advocacy group.

He was referring to two key concepts proposed as part of an electricity affordability package that failed to make it through the final weeks of a frenzied legislative session.

The first concept — securitization, or financing some portion of utility capital spending through debt to reduce the costs borne by utility customers — was stripped from the six-bill legislative package submitted to lawmakers in the final days of the session.

The second concept — taking action to increase state agency oversight and authority over utility wildfire mitigation investments — was the goal of SB 1003, which failed to pass before the session ended late Saturday night.

Heading into the session, advocates pushed for an affordability package they said would achieve an estimated $1 billion in first-year cost reductions for customers of Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric. These two policies — securitization and wildfire mitigation oversight — accounted for roughly half of the expected savings, according to news reports citing anonymous sources close to the negotiations.

And unlike a controversial proposal to shift roughly $500 million from existing programs to provide one-time rebates to customers — the goal of AB 3121, a bill that also failed to pass in the session’s final days — securitization and wildfire mitigation oversight represented an opportunity for long-term cost savings, Toney said.

“The short-term stuff was small potatoes, let’s be honest,” he said, referring to AB 3121. The potential payoff from tackling wildfire mitigation and grid costs, on the other hand, ​“was big.”

These policies faced a major obstacle, however: They would reduce profits for the state’s politically influential utilities.

In order to lower ratepayer bills, securitization would remove some grid investments from the pool of capital assets upon which utilities earn a guaranteed rate of return, cutting directly into their bottom lines. And increased oversight of wildfire mitigation grid investments could lead to state agencies determining that utilities should pursue lower-cost alternatives to the most expensive method of wildfire mitigation — burying power lines underground.

In a Sunday statement, Toney accused the utilities of using their lobbying might to prevent securitization from making its way into law. 

There is ​“overwhelming public support for reducing customer bills, holding utilities accountable for getting the most wildfire safety at the least cost to ratepayers, and making utility investors pay for overspending,” Toney told Canary Media, citing polling conducted by TURN.

But on their current trajectory, monthly costs for customers of the state’s three big utilities are set to increase dramatically over the next four years, as shown in this chart from a July report from the California Public Utilities Commission (CPUC).

Some laws taking on rising rates were passed and sent to Newsom for signature. Those include SB 1142, which will prevent power shutoffs for ratepayers with payment plans to cover unpaid utility bills, and AB 3264, which will require the CPUC to assess total annual energy costs for residential customers, with the goal of finding ways to shift some costs from ratepayers.

Newsom has called on the legislature to hold a special session that could extend the time to negotiate and pass broader energy legislation until the end of November. But it’s far from certain that the special session will yield progress on these fronts.

Managing massive — and growing — wildfire costs 

Over the past decade, utility power lines have been responsible for starting some of California’s most destructive wildfires. Hardening the state’s grid to try to prevent such disasters is crucial, especially as climate change makes its landscape even more fire-prone.

But wildfire mitigation is also one of the main things sending power bills through the roof in California. The state’s big three utilities are spending tens of billions of dollars to bury power lines, trim trees, clear brush, and install sensors and grid protection gear.

TURN’s polling indicates that 86 percent of Californians want policymakers to ​“require utilities to pursue the safest and most cost-effective wildfire mitigation strategies, instead of those that earn the most profit.” But for utilities and regulators, balancing the risk of not spending enough to prevent wildfires against the risk of spending money inefficiently is a devilishly difficult — and fraught — calculus.

The November 2018 Camp Fire, the state’s most deadly and destructive wildfire, was caused by a PG&E power line that failed in high winds due to improper maintenance. PG&E pleaded guilty to 84 felony counts of involuntary manslaughter for the deaths caused by the fire, and was driven into bankruptcy in early 2019 in the face of tens of billions of dollars in damages.

PG&E is still issuing bonds to cover wildfire-mitigation costs four years after it emerged from Chapter 11 protection. California lawmakers in 2019 passed a wildfire bill that set up a $21 billion fund to support wildfire mitigation investments for the state’s other utilities and to protect them from the risk of future wildfire liabilities causing financial crises of their own — and also required the utilities to submit regular wildfire mitigation plans to the state Office of Energy Infrastructure Safety as well as to the CPUC.

The costs cited in these plans are growing, with no end in sight. The CPUC noted in its July report that these expenses ​“are projected to continue their upward trend due to climate-change-induced risks.” All told, the state’s three big utilities expect to spend $26.2 billion from 2023 to 2025 on wildfire mitigation, compared with $20.7 billion from 2020 to 2022.

SB 1003 took aim at tightening the risk and cost calculations in wildfire mitigation plans. But more critically, Toney said, the bill would have shifted approval of the plans from the Office of Energy Infrastructure Safety to the CPUC, which is required to scrutinize and manage utility spending.

“That’s important, because the Office of Energy Infrastructure Safety approved those plans without any consideration of cost,” he explained. Once those plans are green-lighted and sent to the CPUC, ​“they’re kind of stuck.”

SB 1003 would have also limited utilities’ ability to spend on wildfire mitigation outside regulator-approved limits via ​“memorandum accounts,” Toney said. From 2020 to 2023, PG&E nearly doubled its authorized spending of $4.7 billion on vegetation management to $9 billion through the use of those accounts, he said.

Without these kinds of safeguards, ​“it’s hard to imagine that the utilities are going to exercise the fiscal restraint needed to moderate skyrocketing increases,” Toney said.

PG&E’s costs in particular are spiking, owing to the scale of its grid compared with its Southern California counterparts’ and the costly nature of its methods. The utility engaged in a $2.5 billion ​“enhanced vegetation management” program in the wake of the Camp Fire to trim trees and clear brush in a wide path along high-risk power lines, only to shift away from that strategy after finding that the wildfire mitigation benefits were outweighed by the costs, The Wall Street Journal reported last year.

And PG&E’s ongoing work on a plan to trench and bury about 10,000 miles of its 25,000 miles of wires in fire-prone areas — a 10-year program expected to cost about $20 billion — was scaled back by a CPUC decision in November because of concerns about its cost and PG&E’s ability to complete the work on time.

Buried power lines can’t start fires, but putting them underground is time-consuming and far more expensive than all other mitigation options, at more than $3.4 million per mile for PG&E, according to CPUC data. That money may be better spent on other options that could deliver results sooner, Toney said.

“The most effective wildfire mitigation is insulating the overhead lines instead of burying them,” he argued, referring to protective ​“covered conductor” sheaths that shield power lines when they contact nearby tree limbs or are struck by windblown debris. PG&E has argued that covered conductors cannot eliminate the risk of power lines being damaged and sparking fires, however. 

Another option that better balances risks and rewards is deploying ​“fast-trip” equipment that can de-energize power lines in the moments they are damaged and at risk of sparking fires — a technology that PG&E has prioritized since it shifted from focusing on tree-trimming.

This method is a better deal for ratepayers and is better for combating wildfire risks, according to analysis from the Energy Institute at the University of California, Berkeley’s Haas School of Business. The analysis found that fast-trip settings ​“deliver ignition reductions” more cost-effectively than undergrounding.

To be clear, undergrounding may well be the best solution for the highest-risk lines, Meredith Fowlie, faculty director at the Energy Institute, wrote in an August blog post on the findings. But that doesn’t mean it’s the best option in all cases.

Utilities, however, ​“have an incentive to favor undergrounding” over lower-cost alternatives, because it is more capital intensive and therefore can earn them a greater profit.

“In the public conversation around wildfire risk mitigation, there’s a sense that we should stop at nothing to keep our communities safe,” Fowlie wrote. ​“But living in California means living with some wildfire risk. As we prepare to spend billions and billions of ratepayer dollars to underground power lines, a careful weighing of costs, benefits, alternative strategies, and acceptable levels of risk is imperative.”

California’s three big utilities issued a ​“floor alert” to the state assembly opposing SB 1003, citing unspecified flaws in what they described as a ​“massive re-write of an important policy governing wildfire mitigation plans for utilities.” The utilities called on lawmakers to bring the bill up for further debate in 2025.

Finding another way to pay for grid costs

Toney highlighted another option to contain utility rates, which lawmakers failed to adopt in the just-concluded session: financing some major expenditures via securitization. The approach could apply to not just wildfire mitigation spending but also to the tens of billions of dollars utilities expect to spend to expand their power grids to meet clean energy and electrification goals.

In this context, securitization is the process of a utility issuing bonds backed by the steady stream of payments its customers make on their bills. ​“You end up saving money, because you’re basically getting the public borrowing interest rate, which is far lower than the utility interest rate — and there are no profits in it” for the utility, Toney said.

For decades, utilities and regulators have structured securitizations to pay for unexpected costs such as repairing damage from major storms — or wildfire mitigation costs, as is the case in California. In recent years, the concept has been put forward as a way to reduce the cost of retiring polluting coal plants before utilities have been able to fully recover the cost of building them.

Cottie Petrie-Norris, chair of the Assembly Committee on Utility and Energy, highlighted the potential for ratepayer savings that could come from securitization in a Friday interview with ABC 10 News. ​“One economist shared with us: If we did nothing else but substitute the borrowing costs of the state of California for the borrowing costs of one of our IOUs, we would be saving 33 percent of project costs,” she said.

But utilities have largely fought against using securitization to fund capital investments on which they could otherwise earn guaranteed profits, whether those investments be power lines to accommodate new solar installations or grid-hardening outlays, Toney noted.

“When it’s public financing, nobody’s earning a margin,” he said. ​“You have to pay for the financing cost and the interest cost. But you don’t pay for that third category, which is a shareholder return.”

At the same time, utilities have supported laws and regulator decisions that have allowed them to securitize other costs for which they aren’t guaranteed a rate of return, such as operational expenses or, in the case of PG&E, refinancing its post-bankruptcy wildfire liabilities.

As an example, Toney pointed to AB 3263, a bill that passed in the final hours of the legislative session. AB 3263 authorizes the CPUC to work with the state’s utilities to securitize the cost of annual operational expenses related to wildfire mitigation, such as vegetation management.

TURN has opposed the use of securitization to pay for operational expenses, he said. ​“It is just a bad idea to incur long-term debt for an annually recurring expense. When you put your day-to-day finances on a credit card, you’re going to pay more.”

At the same time, ​“there is a precedent of utilities taking a piece of capital and not earning a return on it,” he said. AB 1054, the $21 billion wildfire bill passed in 2019, disallowed utilities from recovering a return on $5 billion in investments in wildfire mitigation capital costs like installing covered conductors and fast-trip equipment, he noted, a step the CPUC has estimated will save ratepayers as much as $2 billion over the lifetime of those assets.

“That was a response to a wildfire crisis,” Toney said. ​“We thought an appropriate response to an affordability crisis would be to take, let’s say, $10 billion, and make it so that utilities can’t get a return on it — especially now that they’re recording record-breaking shareholder profits in 2023.”

But crafting a plan to securitize the costs of expanding the power grid for clean energy and electrification goals and hardening the grid against wildfires will require significant collaboration with utilities and regulators, said Merrian Borgeson, policy director for California climate and energy at the Natural Resources Defense Council.

“We’ve securitized other things, so people are familiar with the concept,” she said, but how it might work for broader power grid investments across a utility’s service territory ​“needs to be carefully considered so we don’t discourage utilities from making investments in vital grid infrastructure.”