Item 8.01 Other Events.
Assembly Bill ("AB") 1054 and the companion bill AB 111 (collectively, the
"Wildfire Legislation") were approved by the California Legislature on July 11,
2019. The Wildfire Legislation will be sent to Governor Newsom and he is
expected to sign the Wildfire Legislation into law in the near future. The
Wildfire Legislation will take effect immediately following the Governor's
signature. The Wildfire Legislation addresses certain important issues related
to catastrophic wildfires in the State of California and their impact on
investor-owned electric utilities ("IOUs"). Investor-owned gas distribution
utilities such as Southern California Gas Company, a subsidiary of Sempra
Energy, are not covered by this legislation. The issues addressed include cost
recovery standards and requirements, wildfire mitigation, a wildfire recovery
fund, a cap on liability, and the establishment of a wildfire safety board.
There are two alternative wildfire recovery funds that may be selected by the
IOUs and the availability of certain features of this legislation depends on
which fund is selected. The summary of the Wildfire Legislation below is not
complete and is subject to, and qualified in its entirety by, the Wildfire
REQUIRED FEATURES OF THE WILDFIRE LEGISLATION
The Wildfire Legislation has a number of significant reforms relative to IOUs,
including San Diego Gas and Electric Company ("SDG&E"), a subsidiary of Sempra
Energy. Those material features include the following:
? Creation of a Wildfire Safety Division and its advisory board, initially
within the California Public Utilities Commission ("CPUC"), to review and
approve or deny the Wildfire Mitigation Plans ("WMPs") of the IOUs.
? Creation of a Liquidity Fund administered by the state - The fund would
provide liquidity to pay IOU wildfire-related claims, subject to review by
the fund administrator, within 45 days of the fund administrator's approval.
? $5 billion of capital investment by IOUs to support wildfire mitigation -
The IOUs will (i) make these capital investments, which will be included in
their WMPs, and (ii) recover their securitized financing costs without
return on equity, with SDG&E's share expected to be $215 million, or 4.3% of
the $5 billion capital investment.
? Annual Safety Certification ("ASC") - The IOUs, subject to meeting various
requirements, will receive an ASC from the CPUC.
? Retained Insured Exposures - The IOUs will continue to procure reasonable
amounts of insurance or amounts determined by the fund administrator. Only
claims in excess of the greater of $1 billion or the amount of insurance
coverage required by the fund administrator are eligible for coverage by the
The Liquidity Fund will be initially capitalized by a loan of up to $10.5
billion from California'sSurplus Money Investment Fund ("SMIF"). The SMIF loan
will be repaid with proceeds anticipated to be received from the issuance of new
California Department of Water Resources' ("DWR") bonds. Reimbursement of the
Liquidity Fund would be by ratepayers or IOU shareholders, depending on the
outcome of a CPUC prudency review, which would be conducted under pre-existing
standards pursuant to Section 451 of the California Public Utilities Code.
OPTIONAL FEATURES OF THE WILDFIRE LEGISLATION
The Wildfire Legislation also includes features that are available at the IOUs'
option. IOUs not subject to an insolvency proceeding, which are SDG&E and
Southern California Edison Company ("Edison"), may collectively notify the CPUC
of their commitment to provide shareholder contributions as described below.
This option will not be available unless both SDG&E and Edison commit to
participate. Subject to making this commitment and the initial shareholder
contributions, the Liquidity Fund described above will be used to help fund the
Wildfire Fund described below, the other required features described above will
still apply, and the following additional material features become operative:
? Creation of a Wildfire Fund - The fund would be initially established using
the SMIF loan described above, with a similar repayment arrangement using
proceeds anticipated from the issuance of new DWR bonds. The Wildfire Fund
would provide liquidity to the participating IOUs to pay wildfire-related
claims, subject to review by the fund administrator.
? IOU Shareholder Liability Cap and Obligation to Reimburse - The Wildfire
Fund provides clarified standards for the CPUC to apply in its prudency
review, described below, in the event of wildfire losses. To the extent the
IOU losses are found to be prudently incurred, the Wildfire Fund would
absorb those losses. To the extent the IOU losses are found to be
imprudently incurred, IOU shareholders would reimburse such losses to the
Wildfire Fund, subject to a Liability Cap described below.
? Liability Cap - Subject to the IOU holding a valid ASC, a shareholder
liability cap would limit the amount shareholders must pay for losses found
to be imprudently incurred to 20% of the IOU's Transmission and Distribution
Equity Rate Base on a rolling three-year basis. These payments would be used
to reimburse the Wildfire Fund.
? Prudency Standard of Review - The prudency standard of review would be
modified to require that, when reviewing wildfire liability losses paid, the
CPUC apply clear standards, similar to the Federal Energy Regulatory
Commission standard, when determining the reasonableness of a utility's
conduct related to an ignition. Under this standard, an IOU's conduct will
also be deemed reasonable if a valid ASC is in place, unless a serious doubt
is raised, in which case the utility must dispel it.
? Insurance Subrogation Claim Limit - The fund administrator will generally
limit payments of subrogation claims to 40% of the claim value.
If Pacific Gas & Electric Company ("PG&E"), Edison and SDG&E participate in the
fund, shareholder contributions would initially be $7.5 billion with additional
annual contributions of $300 million a year over ten years for a total
shareholder contribution of $10.5 billion. These shareholder contributions would
be combined with the Liquidity Fund proceeds, for a total of $21 billion. PG&E's
participation in the fund is subject to specific conditions. If PG&E does not
participate in the fund, the total amount in the fund would be materially less.
SDG&E's portion of the shareholder contribution, whether or not PG&E
participates, is expected to be approximately $450 million, with approximately
$325 million paid within 60 days after the Wildfire Legislation is signed into
The Liability Cap for SDG&E would be approximately $825 million based on its
2018 rate base and would adjust on a rolling three-year basis. The Liability Cap
would apply so long as the fund has not been terminated, which could occur if
funds are exhausted.
SDG&E is evaluating the alternative features available under the Wildfire
Legislation, and anticipates a decision on whether to participate in the
Wildfire Fund within 15 days following the effective date of the Wildfire
Legislation, as required by such legislation.
Information Regarding Forward-Looking Statements
We make statements in this report that are not historical fact and constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are based upon
assumptions with respect to the future, involve risks and uncertainties, and are
not guarantees of performance. These forward-looking statements represent our
estimates and assumptions only as of the filing date of this report. We assume
no obligation to update or revise any forward-looking statement as a result of
new information, future events or other factors.
In this report, when we use words such as "believes," "expects," "anticipates,"
"plans," "estimates," "projects," "forecasts," "contemplates," "assumes,"
"depends," "should," "could," "would," "will," "confident," "may," "can,"
"potential," "possible," "proposed," "target," "pursue," "outlook," "maintain,"
or similar expressions, or when we discuss our guidance, strategy, plans, goals,
vision, mission, opportunities, projections, initiatives, objectives or
intentions, we are making forward-looking statements.
Factors, among others, that could cause our actual results and future actions to
differ materially from those described in any forward-looking statements include
risks and uncertainties relating to: the greater degree and prevalence of
wildfires in California in recent years and the risk that we may be found liable
for damages regardless of fault, such as where inverse condemnation applies, and
risk that we may not be able to recover any such costs in rates from customers
in California; actions and the timing of actions, including decisions, new
regulations and issuances of authorizations by the California Public Utilities
Commission, U.S. Department of Energy, California Department of Conservation's
Division of Oil, Gas, and Geothermal Resources, U.S. Environmental Protection
Agency, Federal Energy Regulatory Commission, Pipeline and Hazardous Materials
Safety Administration, states, cities and counties, and other regulatory and
governmental bodies in the U.S.; the success of business development efforts and
construction projects, including risks in (i) obtaining or maintaining
authorizations; (ii) completing construction projects on schedule and budget;
(iii) counterparties' ability to fulfill contractual commitments; (iv) winning
competitively bid infrastructure projects; and (v) the ability to realize
anticipated benefits from any of these efforts once completed; the resolution of
civil and criminal litigation and regulatory investigations and proceedings;
actions by credit rating agencies to downgrade our credit ratings or to place
those ratings on negative outlook and our ability to borrow at favorable
interest rates; deviations from regulatory precedent or practice that result in
a reallocation of benefits or burdens among shareholders and ratepayers; denial
of approvals of proposed settlements; delays in, or denial of, regulatory agency
authorizations to recover costs in rates from customers or regulatory agency
approval for projects required to enhance safety and reliability; moves to
reduce or eliminate reliance on natural gas; the availability of electric power
and natural gas and natural gas storage capacity, including disruptions caused
by failures in the transmission grid, limitations on the withdrawal or injection
of natural gas from or into storage facilities, and equipment failures; weather
disasters, accidents, equipment failures, computer system outages, explosions,
terrorist attacks and other events that disrupt our operations, damage our
facilities and systems, cause the release of harmful materials, cause fires and
subject us to third-party liability for property damage or personal injuries,
fines and penalties, some of which may not be covered by insurance (including
costs in excess of applicable policy limits), may be disputed by insurers or may
otherwise not be recoverable through regulatory mechanisms or may impact our
ability to obtain satisfactory levels of affordable insurance; cybersecurity
threats to the energy grid, storage and pipeline infrastructure, the information
and systems used to operate our businesses and the confidentiality of our
proprietary information and the personal information of our customers and
employees; changes in capital markets, energy markets and economic conditions,
including the availability of credit; and volatility in interest and inflation
rates and commodity prices and our ability to effectively hedge the risk of such
volatility; the impact of federal or state tax reform and our ability to
mitigate adverse impacts; the impact on competitive customer rates and
reliability of electric transmission and distribution systems due to the growth
in distributed and local power generation and from possible departing retail
load resulting from customers transferring to Direct Access and Community Choice
Aggregation or other forms of distributed and local power generation and the
potential risk of nonrecovery for stranded assets and contractual obligations;
and other uncertainties, some of which may be difficult to predict and are
beyond our control.
We caution you not to rely unduly on any forward-looking statements. You should
review and consider carefully the risks, uncertainties and other factors that
affect our business as described herein and in our most recent Annual Report on
Form 10-K and other reports that we file with the U.S. Securities and Exchange
© Edgar Online, source Glimpses