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California Passes Bill to Rescue Utility Facing Fire Costs

California lawmakers approved legislation late Friday night to rescue the state’s largest utility by letting it bill ratepayers for some of the billions in liability it faces following 2017’s catastrophic wildfires.

The legislation, opposed by some consumer advocates, would give

PG&E
Corp.

a path to securitize the potential billions of dollars in legal damages and other costs stemming from the deadly blazes that swept California’s wine country last October, killing more than 40, and destroying or damaging around 21,000 homes and 2,800 businesses.

State investigators have concluded that equipment from PG&E’s Pacific Gas & Electric Co. unit caused 16 of those blazes so far, and the utility has said it expects to incur losses related to at least 14 of them.

PG&E faces at least 780 civil lawsuits brought by individuals, municipalities and insurance companies alleging that it was negligent and seeking to recoup money for fire-related damage and deaths. The liability exposure has raised concerns among analysts and others that PG&E may be forced to file for bankruptcy.

California Gov. Jerry Brown is expected to sign the bill, a measure addressing a broad array of wildfire-related issues. It cleared both houses of the California legislature in the final hours of its regular session Friday night, passing the Assembly on a 45-11 vote, and the Senate on a 29-4 vote.

Sen. Bill Dodd, a Democrat from Napa who authored the bill, argued that it would shield utility ratepayers from potentially higher costs that could come if a utility declares bankruptcy.

“If we do not provide a debt stabilizing mechanism for the utility, in this case PG&E, the corporation will certainly face higher borrowing costs which will translate into significantly higher rates; or this company may very well face bankruptcy,” he told fellow lawmakers during the floor debate on the bill.

Sen. Jerry Hill, a Democrat from San Mateo, disagreed, saying ratepayers should not be charged extra for what he saw as mismanagement by PG&E.

“Why are we rushing to bail out PG&E with its history of cutting safety as a business decision?” he said. “Did taxpayers bail out BP after the Gulf oil spill? No.”

PG&E earlier this week applauded the cost-recovery provisions, saying, “this issue is critical to our customers, the state and PG&E.”

Critics decried the rescue language, saying ratepayers shouldn’t be made to cover wildfire damages, especially if a utility’s equipment is shown to have sparked that fire as a result of improper maintenance.

“It’s a straight up bailout to the utilities, specifically a bailout to PG&E rewarding bad behavior,” said Mark Toney, executive director of the Utility Reform Network, a consumer advocacy organization.

The bill stopped short of proposing a change to a state liability rule that allows compensation for property damage caused by government entities or state actors. The provision in California’s constitution, known as inverse condemnation, puts PG&E on the hook for fires sparked by its equipment.

But the bill gives utilities a clearer path to recover wildfire-related costs by issuing bonds paid off by customer surcharges—provided that state regulators determine the companies acted reasonably in maintaining and operating their equipment and mitigating fire risks.

PG&E estimates an average residential customer would pay around $5 a year for every $1 billion in bond debt.

Specific to the 2017 fires, the bill requires regulators to come up with a stress test to determine the maximum amount a utility could pay “without harming ratepayers or materially impacting its ability to provide for adequate and safe service.” Any additional amount above that number could be passed to customers.

Addressing the problem of more frequent and devastating wildfires was a priority for many California legislators following one of the worst fire seasons in the state’s history. But the wide number of issues under discussion—including vegetation management and wildfire mitigation—complicated the task. The bill allocates $1 billion over five years from a state fund to go toward forest-management programs to help reduce wildfire fuel.

In seeking legislative relief, PG&E focused on changing how inverse condemnation applied to investor-owned utilities. Consumer advocates and insurance companies lobbied to keep the rule intact.

Assembly Republican Leader Brian Dahle, who was on the committee that fashioned a compromise earlier this week, said legislators wanted to ensure the utilities paid a fair share for wildfire damages but wouldn’t be financially devastated by that obligation.

PG&E has cut its dividend, and took a $2.5 billion charge in the second quarter related to claims made against the utility in connection with the wildfires.

S&P Global Ratings has said continued liability concerns related to the wildfires could push PG&E and its peers in California below investment grade.

“If you do nothing, they will go bankrupt,” Mr. Dahle said. “If you do something to keep them from that, it’s a step in the right direction.”

Write to Erin Ailworth at Erin.Ailworth@wsj.com and Sara Randazzo at sara.randazzo@wsj.com

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