Local Government
How Do California’s Worsening Wildfires Affect the Cost of Electricity? PG&E, SCE and SDG&E’s 2020 Rate Hikes, Explained

How Do California’s Worsening Wildfires Affect the Cost of Electricity? PG&E, SCE and SDG&E’s 2020 Rate Hikes, Explained

At first glance, the destroyed campus of Paradise Elementary School and the new energy infrastructure upgrades in Ramona Unified School District seem to have little connection. The schools’ situations, however, both stem from their relationship with California’s investor-owned utilities.

 Under pressure to pay the bill for wildfire damages caused by their equipment, California’s three largest investor-owned utilities are amping up the price of power and inadvertently guiding public agencies and consumers towards energy innovations.

A Grim Forecast for California’s Firestorms:

Over the last year and a half, Californians have experienced six of the 10 most destructive fires in the state’s history. Many factors contributed to the intensity and scale of the damage, which destroyed almost 30,000 structures in those six fires alone. The number of residents living in fire-prone areas where municipalities meet nature has increased dramatically over past decades. The amount of potential fuel in California’s forests has also increased due to more extreme weather events and inadequate forest management.

Additionally, climate change is submitting California to hotter, drier weather for longer periods, which increases the chance of arid winds fanning the flames. The blazes themselves contribute to the vicious cycle: forest fires account for 15 percent of California’s 2018 emissions of carbon dioxide, one of the main greenhouse gases that contributes to climate change.

The Legal Path to Utility Liability:

Although various factors fuel the growing wildfire threat, investor-owned utility infrastructure sparks hundreds of fires every year – and state law holds the utilities accountable to foot the bill in every one of these cases. These privately-owned companies serve as public utilities. Approximately 34 million of California’s 40 million residents receive their energy from one of the state’s three largest investor-owned utilities (IOUs): Southern California Edison (SCE), Pacific Gas and Electric (PG&E) and San Diego Gas & Electric (SDG&E). California is one of two states in the nation that applies inverse condemnation to IOUs. This law holds government agencies and utilities liable for damages that occur from their equipment or actions even if the entity follows every law and code in the books and is not found negligible.

In the wake of the devastating fires of 2017 and 2018, the state legislature passed various bills to clearly define how and when IOUs must pay for wildfire damages. SB 901, a 2018 bill, mandates that shareholders must cover damage costs when the utility is found negligent. The California Public Utilities Commission (CPUC) decides if the company is negligent using the “prudent manager standard,” determining whether the utility followed all rules diligently and acted reasonably. If the company is not found negligent, it can recoup financial losses from insurance payments by increasing customer rates. 

A 2019 bill, AB 1054, subsequently established a $21-billion financial liquidity fund financed half by surcharges billed to ratepayers and half by the utility to help pay for wildfire damages when the company is not found negligent. Regulators designed this financial cushion to signal stability to investors and stave off crises in the wake of PG&E’s 2019 bankruptcy. With these clearly-defined regulations, utilities face a high level of exposure to liability.

Rate Hikes: Where Will the Money Go?

 To address the rising financial pressures associated with mitigating risk and covering insurance claims, PG&E,  SCE and SDG&E have proposed sharp increased rates for the 2020-2022 period. In its most recent general rate case application, the proposed rates that utilities submit once every three years to CPUC, SCE requested a 21 percent rate increase over three years. PG&E proposed a similar increase of nearly 22 percent, and SDG&E requested a lower, yet still significant, increase of just over 12 percent. For many California public schools and local government agencies, these increases translate to multimillion-dollar budget increases.  

The companies would funnel much of this additional funding into mitigation efforts like undergrounding lines in high-priority areas, updating infrastructure and clearing vegetation. PG&E, for example, plans to spend $607 million on vegetation management between 2020 and 2022. These initiatives would provide long-term safety benefits without many of the negative impacts created by short-term solutions like the controversial public safety power shutoffs. Additionally, utilities would use the money to increase grid reliability and to cover insurance costs for wildfires sparked by equipment when the company is not found negligible.

What Does This Mean for Public Agencies and Consumers?

These higher rates will strain public agency and consumer budgets, which are already near a breaking point in many communities across the state. Take California’s school districts. Public schools spend $700 million on energy each year–approximately the same amount they spend on school textbooks & supplies. Many districts across California already struggle to provide adequate funding, and a 20 percent increase in energy costs would further burden a school district’s ability to adequately fund their classrooms. 

Some customers, in the face of these increasing power costs and the inconvenience of more frequent public safety power shutoffs, are developing a mitigation plan of their own. Consumers and agencies will pursue two main routes: (1) moving towards energy independence from IOUs by investing in locally-controlled microgrids, local power authorities and self-generation; and (2) harnessing innovations in building efficiency and energy-saving technology to reduce electricity consumption. 

Energy Independence:

As public safety power shutoffs become more frequent, energy independence initiatives are emerging as a powerful tool to provide more reliable, cheaper energy for individual consumers and public agencies. In the wake of public outrage over extended blackouts in the 2019 wildfire season, cities like San Jose are considering investing in or expanding microgrids. These local grids are connected to the larger IOU grid and can be turned on to provide power during outages or stormsAdditionally, these structures allow municipalities to cut costs by using a less reliable or smaller local energy source to provide some of their own electricity, all while maintaining the IOU’s energy as a backstop against power shortages. A microgrid is an effective way to reduce reliance on IOUs without taking on the burden of operating a municipal power utility, a task that only cities like San Francisco can reasonably shoulder. 

Alternatively, increased costs and frequent blackouts may push more cities to consider leaving IOU-generated power altogether and joining the growing community choice aggregation (CCA) movement. CCAs allow city governments to purchase energy directly from suppliers, providing residents with cheaper, cleaner energy. IOUs still operate the power lines and manage distribution in these communities, but the utilities are required by state law to deliver CCA-purchased energy to consumers. In addition to these municipal-level changes, residents may view the rising costs of SCE, PG&E & SDG&E power as the tipping point in their decision to install solar panels on their homes and generate substantial portions of their own electricity.

As CCAs and self-generation comprise an increasingly large sector of California’s power, IOUs may decide to become a “wires-only” service that solely provides the infrastructure to deliver electricity. SDG&E, faced with losing 80 percent of its customers following the City of San Diego’s decision to establish a regional network of CCAs, is currently considering a wires-only approach. 

Energy Efficiency Upgrades:

Whether public agencies and consumers choose to stick with the IOU status quo, develop microgrids or transition towards locally-sourced power, energy efficiency innovations are essential complements to their chosen strategy. Due to increased rates from IOUs and pressure to meet the State’s ambitious energy reduction targets, saving a kilowatt hour of energy expenses will be more important than ever for cash-strapped customers. These residents and agencies will benefit from modernizing aging infrastructure and investing in efficient and energy-optimized buildings that rely on natural and LED light, high efficiency heating & cooling equipment, high-quality insulation, smart building automation systems and other energy-efficient innovations to cut down their power bills. 

Officials in Sacramento and city halls across the state, recognizing the importance of these efficiency projects, have made funding available for public agencies to invest in energy efficiency. Cities and schools can obtain grants, utility incentives, and low-interest private sector capital funds to pursue energy efficiency projects in a way that is budget-neutral. These programs lead to long-term financial and environmental benefits for communities without straining the general fund budget or requiring capital contributions. 

In the Los Angeles area, for example, the City of Duarte worked with Climatec in 2019 to comprehensively modernize the city’s energy and water infrastructure. Climatec helped the city discover grants and low-interest private sector capital that allowed Duarte to install new smart building operation and street lighting control systems, solar arrays and high-efficiency heating and cooling units, among other projects. These upgrades will save Duarte approximately $6 million over the next 15 years.

Up in the Bay Area, the City of San Leandro pursued a similar project in 2016. Taking advantage of Climatec’s guaranteed savings, which covered 100 percent of the costs of the improvements and related debt services, the city installed $5.2 million of energy-and water-saving equipment, including 4,730 LED smart streetlights and a wireless mesh network that enables remote management of the lights and other smart city services. These upgrades reduce greenhouse gas emissions by 1,390 metric tons annually and will save the city $8 million over 15 years. 

In Ramona Unified School District (RUSD), a rural district in eastern San Diego County, Climatec guided the district through planning the funding and implementation process of a large-scale energy conservation project. These upgrades, which will cost the district approximately $12 million, are financed by a low-interest loan from Banc of America Public Capital. Climatec will continue work throughout 2020 on these upgrades, which include LED lighting installation, adding solar arrays to ten schools, revitalizing windows, replacing hundreds of HVAC units and repaving the high school’s parking lot. These upgrades will save RUSD over $34 million in operating and capital expenditures over the next 30 years.

In Ramona and beyond, as investor-owned power becomes more expensive and less reliable, agencies can invest in innovations that will reap millions of dollars in budget savings while dramatically improving California’s infrastructure.

Written by Ashley Cascio, Climatec Director of Energy Services

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