From 2019 to 2024, Pacific Gas & Electric’s (PG&E) electricity rates rose by 80% and Southern California Edison’s (SCE) by 71%—more than three times the rate of inflation over the same period. The primary cause of this remarkable increase was wildfire: the cost of vegetation management, grid hardening, liability insurance, and contributions to the state Wildfire Fund that California utilities pass through to their customers. PG&E customers now pay an extra $300 to $500 a year for wildfire mitigation.
Last month, Governor Gavin Newsom put forward a package to the Legislature that would have shifted some of that burden from ratepayers to property owners in high-risk areas. Those high-risk homeowners have long paid below-market insurance premiums for two reasons: Proposition 103, the 1988 ballot measure that subjected insurance rate increases to the approval of an elected official; and the right of insurers to recoup uncapped damages from utilities in a process known as subrogation. Newsom’s proposal would have eliminated subrogation for utilities, bringing electricity customers relief and insurance premiums closer to market rate.
Instead of finally requiring homeowners in high-risk areas to pay what it actually costs to insure their homes, Democratic lawmakers rejected Newsom’s proposal to eliminate insurer subrogation under the banner of “preserving utility accountability” and opted for the status quo. In other words, ratepayers will continue subsidizing property insurance for residents of California’s most fire prone areas. Many of these residents are extremely wealthy: a recent Bloomberg analysis finds six of California’s ten highest fire liability zipcodes as determined by FAIR plan exposure are in wealthy enclaves and high-end resort communities including Beverly Hills, Malibu and Lake Tahoe.
California’s next governor should pick up where Newsom left off and continue attempting to shift some of the wildfire burden from ratepayers to high-risk property owners. There are two important reasons for this.
First, the status quo is unfair to ratepayers. Only 10% of PG&E customers live in what the utility has designated as high fire threat districts—and yet the other 90% pay hundreds of dollars per year to subsidize mitigation and insurance for that small fraction of people. Many of the customers paying this subsidy are low-income households in California’s hot Central Valley, who need lots of air conditioning and are therefore seriously burdened by high electricity rates. A state bullish on affordability and social justice should not be compelling renters in Fresno to subsidize the wildfire risk of wealthy homeowners in Malibu.
Populist utility critics have argued that potential ratepayer burden is not a problem because utilities can simply get their shareholders to pay out damages instead. But that is not how utilities work. Utilities are among the most capital-intensive businesses in the economy and finance their infrastructure with borrowed money. When wildfire liability grows, investors demand higher returns to hold utility debt and equity—and that borrowing premium gets passed on to ratepayers. There is no free lunch.
Second, and perhaps even more importantly, parking wildfire liability on utilities is not a cost-effective way to reduce wildfire risk.
Growing wildfire risk in California is the product of many factors aside from ignitions, including climate change, vegetation buildup from poor fuels management, and expansion into the wildland-urban interface (WUI) encouraged by the state’s restrictive urban land use policies and price controls on home insurance under Proposition 103.
Utilities control only one of these factors: ignitions.
While utilities have made great progress in recent years at reducing ignitions, these efforts can only buy so much wildfire risk reduction. For one, utilities do not start most wildfires in California. CalFire data show they start only 6% of all wildfires in the state, and only 30% of the state’s most catastrophic ones.
There are also diminishing marginal returns to utility wildfire mitigation investment. An analysis by the Breakthrough Institute estimates it is about forty times more expensive to reduce utility ignitions by 95% than to reduce them by 80%. This is because the first 80% of ignitions can be eliminated by cheap operational measures like turning off power lines, while the “last mile” of risk can only be eliminated through the extremely expensive process of burying overhead transmission lines. Yet because of the existential implications of the current wildfire liability architecture, utilities are pursuing this expensive last mile, spending about 8 billion dollars a year on these efforts—a cost that is passed on to ratepayers.
California could be buying a lot more risk reduction for that money. Unlike utility ignition prevention, wildfire mitigation measures like forest management, home hardening, and community fuel breaks all reduce wildfire risk regardless of ignition source. Yet under the current paradigm, these investments are unlikely. When ratepayers underwrite utility mitigation, and insurers cover fire losses without pricing the risk into premiums, the property owners and local governments best positioned to reduce that risk have no market signal telling them to.
Utilities should still be responsible for their negligence—when a utility acts carelessly, its shareholders should pay. But shifting the residual risk of building in fire-prone areas onto ratepayers a hundred miles away is neither fair nor efficient. Newsom was right. His successor should finish the job.
