California Governor’s Wildfire Plan Stops Short of Backing Utility Liability Reform

California Governor Gavin Newsom last week released a
long-awaited report on
California’s policy options to reduce the risk of utility-caused
wildfires, and wildfire-caused utility bankruptcies like Pacific
Gas & Electric’s
.

The report laid out a slew of recommendations, from massive
changes in forest management and land use to major utility
regulatory and safety reform, for state lawmakers and regulators to
consider in the crucial months before the start of the 2019 fire
season. 

But it stopped short of endorsing a step that Wall Street,
credit ratings agencies, and California utilities themselves have
been seeking — and which may be the surest path to preventing
future utility bankruptcies.

That’s changing the state’s ‘inverse condemnation’ legal
doctrine, which holds utilities liable for damages from fires
caused by their equipment, whether or not they’re negligent or at
fault. 

This doctrine not only drove PG&E into bankruptcy protection
in January, but has pushed down the credit ratings of California’s
other investor-owned utilties, Southern California Edison and San
Diego Gas & Electric. And because utilities face the immediate
pressures of these multi-billion dollar liabilities for months, if
not years, before they can hope to seek recovery through
regulator-approved rate increases, “financial experts have opined
that these utilities are likely one major fire away from
bankruptcy,” the report noted. 

But changing this unique legal doctrine to a more common
“fault-based standard,” which would only hold utilities liable
when they’re found negligent or at fault for the fire, would
require a two-thirds vote of both houses of the state legislature
and a majority vote from the state’s voters. Doing so would relax
a framework that’s seen by many as holding
utilities like PG&E responsible
 for years of lax safety
management. 

Doing away with inverse condemnation is also unpopular with
insurance companies and the attorneys of victims of the devastating
wildfires of 2017 and 2018, which doomed
efforts
 to include it in last year’s legislative wildfire
package SB 901

That may be why, despite citing the need for dramatic reform on
how to allocate “responsibility for wildfire costs” to avoid
crippling the state’s utilities, Gov. Newsom stopped short of
endorsing inverse condemnation reform in a Friday
speech
 introducing the report. 

Instead, the report lists changing to a “fault-based
standard” as one option between two others seen as more
politically likely in the months ahead – creating some kind
of fund
to cover utility wildfire costs
.

The multi-billion dollar question

The report cites two fund concepts, each with accompanying
changes in state utility regulatory structure. The first, a
catastrophic wildfire fund, has already been proposed in
legislation introduced last year, and is currently being worked on
for this year’s legislative session.

The second, dubbed a “liquidity-only fund,” shares many of
the catastrophic wildfire fund’s core characteristics. 

In simple terms, both funds would raise money from utility
shareholders and ratepayers (i.e., from the corporation’s bottom
line and from increasing customer rates), as well as from
stakeholders across the process including insurers, homeowners,
state agencies and taxpayers. The money would be made available to
utilities when they’re hit with massive wildfire liability
claims. 

This could help solve a key problem for Wall Street, and one
that SB 901’s various measures failed to solve – paying today
for wildfire liabilities that utilities might require years to get
approved by the California Public Utilities Commission
(CPUC). The CPUC cost recovery process can take 18 months to two
years — but in the case of San Diego Gas & Electric’s
massive wildfires of 2007, which led the utility to implement what
are considered some of the country’s most effective utility
fire-prevention capabilities, the CPUC process took more than seven
years, the report noted.

While SB 901 does give the CPUC tools to shelter utilities from
wildfire liabilities that would cripple their ability to safely,
reliably and affordably serve their customers, those tools would
likely take as long to give utilities a shot at recovering those
costs.

One of the reasons that SB 901 failed
to ease the credit downgrades
 from Moody’s, Standard &
Poor’s and Fitch that helped push PG&E into bankruptcy is
because it “did not address the significant time period between
the occurrence of a catastrophic wildfire, the payment of damages
arising from that wildfire, and the CPUC’s final determination of
whether those payments can be recovered in rates,” the report
noted. 

Many challenges remain to creating a working model for these
funds, most notably raising enough capital to cover the uncertain
future costs of wildfires. And because utilities still have to face
consequences for failure to maintain safety, the CPUC will have to
examine each fire covered by the fund, and assign penalties
including forcing the utility to pay back what they took from the
fund if they’re found at fault.

There’s also the key challenge of getting buy-in from
insurance companies, which would be asked to accept a cap on their
“subrogation claims,” or claims made under the assumption of
utility guilt implied under the inverse condemnation doctrine.
“If the wildfire fund is not sufficiently capitalized and/or the
other stakeholders are not willing to compromise their claims, then
the wildfire fund will be exhausted more quickly and ratepayers
will be responsible for costs thereafter,” the report
noted. 

No easy answers

Major questions remain over how California’s current policies
and legal doctrines will affect PG&E as it simultaneously moves
through bankruptcy reorganization and struggles to improve safety
to prevent
another catastrophic wildfire
 this season. 

Earlier this year, PG&E was cleared of starting the 2017
Tubbs Fire, which carried an estimated $15 billion in damages,
after state investigators found the fire was started by a
privately-owned electrical system, thus clearing the utility of
fault even under the inverse condemnation standard. 

But PG&E has conceded that one of its transmission lines
was almost
certainly the cause
 of the November 2018 Camp Fire, which
replaced the Tubbs Fire as the state’s deadliest and most
destructive, making it likely it will face liability for its costs,
even if state investigators find the utility did nothing wrong.
PG&E took a $10.5 billion charge in the fourth quarter for
claims connected to the Camp Fire, and insurers have estimated the
total losses could exceed $16 billion. 

This chart from the report highlights the dramatic rise in the
destructiveness of the last two wildfire seasons in California. One
key unknown is whether or not this trend represents a permanent
shift for years to come, or if the state’s fire prevention
efforts can bring it back down.

But “as long as electrical lines run through tinder-dry
forests, California can mitigate but not eliminate utility-sparked
fires,” the report noted. If the state does nothing to change its
inverse condemnation doctrine, it’s highly likely that utilities
will continue to bear the vast majority of these wildfire costs,
putting them and the state that relies on them in an untenable
situation. 

Newsom’s strike force report punted any final decision on how
to address these cost-allocation conundrums to the
five-member Commission on Catastrophic Wildfire Cost and Recovery
established by SB 901, which is set to release its findings in
June, as well as to the state legislature, where bills to address a
handful of the report’s issues have emerged. 

But it’s unclear if Friday’s report release has shifted the
view of credit ratings agencies. After all, under the current
inverse condemnation standard, investor-owned utilities
face limitless liability for wildfires, even if the conditions
that are leading to their increase —including the climate change
they’re being asked to combat by investing in clean energy —
are out of their control. 

Toby Shea, vice president at Moody’s Investors Service, wrote
in a Friday note that the report “represents concrete progress
toward options for managing wildfire risk — a
credit positive,” with a combination of strategies that “start
to exhibit more promise.”

But he also noted that “none of the proposed concepts will
alone mitigate the risk for California’s utilities,” and that
the “credit impact won’t become clear until legislative details
addressing liquidity and cost recovery are finalized.”

Source: FS – GreenTech Media
California Governor’s Wildfire Plan Stops Short of Backing Utility Liability Reform