There are two seasons for electric utilities in the western United States: Wildfire Season, and Wildfire-Prep Season. Previously viewed as singular disasters, wildfires are now considered chronic inevitabilities to be anticipated, mitigated, and regulated.

Wildfire Risks, Current Mitigation Efforts, and Notable Cases

Wildfires pose unique risks for electric utilities since their above ground transmission and distribution systems can both ignite and exacerbate wildfires if not properly maintained and operated. Furthermore, the settlement costs for damages of at-fault wildfires can quickly surpass insurance thresholds, causing significant financial burden for the utility and future uncertainty as insurance companies continue to reduce coverage.

Notable Wildfire Costs (in Millions)
Company	Incident	Costs
Hawaiian Electric	Maui Fire (2023)	$1,910 in Liability Claims
PG&E	North Bay Fires (2017 & 2018)	$25,500 to exit bankruptcy
Xcel Energy	Smokehouse Creek Fire (2024)	$215 in estimated accrued liabilities*
Xcel Energy	Marshall Fire (2021)	$2,000 in estimated property damage*

Note: *Liability outcomes are still pending. Estimated numbers may be subject to change

Source: Company SEC Filings, Company Reports, Company Earnings Calls

As record-breaking temperatures, drought conditions, and aging infrastructure intensify ignition conditions, electric utilities are taking a proactive approach to mitigating wildfire risk. In some states, like California and Oregon, legislation establishes minimum requirements for Wildfire Mitigation Plans (WMPs). In other states, where wildfire regulation is just beginning to bud, such as Washington and Idaho, public utilities commissions (PUCs) are requesting WMPs before legislative mandates are in place. California is largely seen as the benchmark for utility wildfire mitigation, and its approach is being used as a template for many new WMPs.

The California Way

In July 2019, California Governor Gavin Newsom signed Assembly Bill 1054, which created the California Wildfire Fund. This fund provides investor-owned electric utilities $21 billion in insurance protection and protects utilities from bankruptcy by helping to pay for wildfire damages exceeding $1 billion. Each company initially contributed to the fund a scaled amount based on size and customer base of the utility. These amounts are not recoverable and must come from utility shareholders and debt financing, not customers.

Wildfire Fund Contributions (in Millions)
Company	Initial Contribution	Ten Annual Contributions
PG&E	$4,800	$193
SCE	$2,400	$95
SDG&E	$323	$12.9

Source: Company Reports

Ratepayers also contribute to the fund and will be charged an approximate $2.50 monthly surcharge through 2036 to help the fund achieve its $21-billion goal. As the money is dispersed for qualifying wildfire claims, replenishment is achieved through various contributions from participating electric utilities, bonds issued by the state, general tax revenues, and utility rates.

The California Wildfire Fund incentivizes utilities to invest in safety and safety culture, limit wildfire risks, and ultimately reduce costs. Before AB 1054, wildfire regulation was reactionary with utilities being required to prove they acted responsibly after the occurrence of a disaster. Under this system, utilities, insurance companies, and ratepayers were subjected to significant financial risk. While most utilities had mechanisms in place to recover some wildfire mitigation costs, such as those associated with vegetation management or undergrounding of overhead lines, there were no protections against liability claims in the event of a wildfire disaster. Post AB 1054, wildfire regulations proactively certify utilities by reviewing their WMPs annually and awarding safety certificates to those that meet the criteria. Utilities with a valid safety certificate are presumed to have acted responsibly and are granted access to the California Wildfire Fund.

Having an approved WMP is a crucial requirement to obtaining a safety certificate. WMPs are massive documents that describe every aspect of a utility's wildfire mitigation efforts. PG&E's approved 2023-2025 WMP is over 1,600 pages long and includes forecasts of weather and wildfire fuel, identifies at-risk assets, details vegetation management programs, introduces risk models that utilize outage and ignition data to determine ignition probability, and introduces proposed budgets. The WMP also contains a lessons-learned section for continued improvement in wildfire management and explores new technologies to aid in segmenting the grid by circuit and de-energizing immediately during dangerous conditions through a process known as a Public Safety Power Shutoff (PSPS).

The Rest of the West

The PUCs of California, Washington, and Oregon now hold annual meetings with investor-owned electric utilities to discuss PSPS considerations. Utilities are required to present to the Commission and the public regarding their lessons learned from PSPS events during the previous year as well as their preparedness for the following year. They describe their coordination with public safety partners, the risk assessment of their system, and their ability to forecast and model wildfires. Generally, the presentation is semi-formal and intended to encourage a dialogue that offers transparency to the utility's actions regarding wildfire mitigation and preparedness. These sessions are recorded and available to the public on the Commission website.

A utility's ability to recover costs associated with their WMP varies between states. In recent years, California has spearheaded this effort and currently provides the most protection for electric utilities. PG&E's WMP lists seven cost-recovery mechanisms in addition to their General Rate Case. Other states, such as Texas, New Mexico, Arizona, Idaho, Montana, Utah, and Wyoming, have no cost-recovery mechanisms available to utilities outside of a General Rate Case proceeding. This is of special concern for Xcel Energy after its facilities in Texas were deemed to be involved with the ignition of the Smokehouse Creek fire in February 2024. Regardless, several multistate utilities with WMP cost recovery in one but not all jurisdictions have been seen to extend their required WMP processes to states without wildfire regulation. For instance, Idaho Power and PacifiCorp both utilize their WMP process in their Idaho service territory and continue to push for cost recovery where available. PacifiCorp has also proposed a Catastrophic Fire Fund (CFF) in Idaho to address wildfire liability risk in excess of insurance coverage with a dedicated surcharge to support funding of the CFF, and their current rate case (PAC-E-24-04) also requests an increase in operations & maintenance to fund the execution of their WMP.

Key Takeaways

Generally, utilities are now recognizing the importance of planning for wildfire events. The obvious dangers wildfires pose to customers are an easy justification for investments in safety and reliability, and protecting the utility from those financial burdens seems preferable as well. However, affordability is a major issue, especially in states like California, Washington, and Oregon. Ratepayer bills continue to rise as preparedness costs increase, and a collaborative effort between legislators, regulators, and utility workers will be necessary to devise a just, reasonable, and affordable solution.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

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