California regulators reject PG&E bid to exclude $2.6 billion in wildfire costs from rates
California regulators refused to exclude $2.6 billion in wildfire and water authority loan costs from PG&E's capital structure, forcing the utility to raise more expensive equity or reduce spending.
Pacific Gas and Electric Company sought to exclude $2.6 billion in wildfire costs and a state water authority loan from the financial calculations regulators use to set utility rates. California's Public Utilities Commission refused the request, rejecting it on grounds that it does not serve the public interest and does not qualify for regulatory relief. The application was listed on the commission's September 3, 2026 voting meeting agenda; a trade publication separately reported the decision was issued August 13, 2026. The decision forces PG&E to either raise capital through expensive equity issuance, reduce investment in grid improvements, or absorb the costs in ways that flow to customer rates.
The ruling reflects a hardening regulatory stance on how utilities bear the financial weight of catastrophic wildfires. By declining to treat these liabilities as exceptional items that can be separated from normal capital structure calculations, California regulators signal that utilities must plan their finances around the reality of large-scale fire losses as an ongoing operational reality, not a one-time adjustment.
What PG&E requested and why
PG&E's capital structure—the mix of debt and equity a company uses to finance operations—directly determines how much it costs to raise new money for infrastructure spending. When a utility's debt-to-equity ratio rises, lenders and equity investors demand higher returns to compensate for increased financial risk. PG&E sought to exclude $2.6 billion in costs from this calculation: $277 million related to the 2021 Dixie Fire, approximately $1.2 billion for the 2019 Kincade Fire, and $1.4 billion owed on a Department of Water Resources loan.
By removing these liabilities from the debt-to-equity calculation, PG&E would have maintained its authorized capital structure without needing to raise additional equity capital. Equity is more expensive than debt—equity investors require returns that compensate for higher risk—so excluding these costs would have avoided the need for costly new stock issuance. The company argued the request qualified for relief under the CPUC's Affiliate Transaction Rule.
The CPUC's decision and reasoning
The commission found two fatal flaws with PG&E's request. First, the costs do not qualify for relief under the Affiliate Transaction Rule. Second, granting the exclusion would not be in the public interest, given PG&E's recently adopted capital rate structure.
President Reynolds issued an alternate proposal that would have taken a middle path: exempting the DWR loan from the capital structure calculation while requiring PG&E to provide additional information in future rate filings about any equity surplus created by keeping wildfire costs in the calculation, and the status of any DWR loan forgiveness efforts. This alternative was not adopted as the final decision, however. The commission's majority position was to deny all requested relief.
What this means for rates and capital spending
The denial creates immediate pressure on three fronts. With the $2.6 billion in wildfire and loan costs included in capital structure calculations, PG&E's debt-to-equity ratio moves further from its authorized equity share. PG&E faces a choice: issue equity at current market prices and rates, reduce planned capital expenditures, or absorb the burden through other financial maneuvers. Each path has rate implications. Issuing equity requires paying dividends and bearing the cost of underwriting fees; reducing capital spending slows grid improvements and wildfire mitigation work; absorbing costs in other ways typically flows through to rates.
The timing matters. PG&E is simultaneously negotiating long-term contracts with major data center operators that require hundreds of megawatts of reliable power. These contracts demand substantial capital investment in grid infrastructure. The company must now finance both these growth investments and the $2.6 billion wildfire liability burden within an unchanged capital structure, creating competing pressures on spending decisions and rates.
“The ruling forces PG&E to either raise capital through expensive equity issuance, reduce investment in grid improvements, or absorb the costs in ways that flow to customer rates.”
What the decision signals about utility liability treatment
The CPUC's decision reflects a regulatory philosophy that treats major wildfire losses not as exceptional events deserving special accounting treatment, but as costs that utilities must plan to absorb as part of ordinary operations in a high-fire-risk state. Rather than allowing utilities to exclude such costs and shift the financial burden elsewhere, California regulators are requiring that catastrophic fire losses be reflected in the capital structure decisions that drive financing costs and rates.
This approach differs from treating wildfire costs as one-time charges that can be recovered through separate rate mechanisms. By insisting these costs stay in the capital structure calculation, regulators are signaling that utilities must maintain capital structures robust enough to weather large fire-related expenses without requesting relief. The decision is not about whether PG&E can recover wildfire costs, which it is permitted to seek through insurance, the Wildfire Fund, and rate recovery mechanisms, but rather about ensuring those recovery pathways do not distort the underlying financial calculations that set the cost of capital.
The DWR loan question and future rate proceedings
The one element where the CPUC signaled possible flexibility was the $1.4 billion DWR loan, which PG&E took in October 2022 to support the extension of Diablo Canyon Power Plant operations. President Reynolds's alternate proposal suggested this loan might warrant different treatment than the wildfire costs. That proposal was not the final decision, but it indicates a possible opening for future negotiation of DWR loan treatment.
President Reynolds's alternate proposal would also have required PG&E to provide additional information in its next rate application about whether excluding these costs created any artificial equity surplus, and about the status of potential DWR loan forgiveness. Though that proposal was not adopted, it suggests future rate proceedings may revisit the treatment of the DWR loan.
Related coverage: Why California utilities spend so much on wildfire mitigation.
