California’s Historic Wildfire Season Puts Financial Squeeze On The State’s Utilities

Flames flare up next to electric poles from the Blue Cut wildfire near Cajon Pass, north of San Bernardino, California on August 16, 2016. A rapidly spreading fire raging east of Los Angeles forced the evacuation of more than 82,000 people on August 16 as the governor of California declared a state of emergency. Despite the efforts of 1,250 firefighters with more on the way, none of the inferno was contained as of late on August 16 , state firefighting agency Cal Fire spokeswoman Lynne Tolmachoff told AFP. The wildfire poses "imminent threat to public safety, rail traffic and structures," according to the website, which said 82,640 people fell under an evacuation warning. / AFP / RINGO CHIU (Photo credit should read RINGO CHIU/AFP/Getty Images)

Extreme heat and years of ongoing drought — both linked to climate change — are increasing wildfire risk throughout California. If the state’s fire liability rules don’t change, California’s destructive wildfires of 2017 could land a devastating blow to the finances of the state’s electric utilities, leaving the companies on the hook for billions of dollars in damages.

During their recent 2017 earnings conference calls, California’s three largest electric utilities — Pacific Gas and Electric, Southern California Edison, and San Diego Gas and Electric — emphasized they agree with Gov. Jerry Brown’s (D) conclusion that the state has entered a “new normal” with regard to how climate change is worsening wildfires in the state.

The staggering cost of natural disasters — something which is likely only to get more costly as temperatures continue to rise — means the question of where the money will come from to cover the damages is at the forefront of California’s mind.

Local officials say the utilities may have been negligent in clearing trees and brush near power lines and should thus be held financially responsible for the overwhelming cost of the damage.

But the utilities hope the “new normal” brought on by climate change doesn’t mean their shareholders will be forced to shoulder the majority of wildfire costs.

The largest of the three investor-owned utilities, PG&E, is going to court in mid-April to appeal a ruling against the company in a 2015 wildfire case. The court’s decision in that legal proceeding, the Butte Fire case, could determine whether the shareholders of PG&E and the state’s other electric utilities will be held financially responsible for the wildfires that occurred during the unprecedented 2017 season.

In the wake of 2007 fires in the San Diego area where wind-toppled electrical lines ignited ferocious fires, state officials began working on tightening regulations for utilities. According to utility companies, though, policymakers and the courts are still placing too much of the financial responsibility on them, even if the utilities managed to take steps to fortify their systems from wildfires.

A California lawmaker, Assemblyman Jim Patterson (R), vice chairman of the Utilities and Energy Committee, warned last month at an informational hearing that the state’s electric utilities could be headed toward bankruptcy as a result of the potential financial exposure to wildfire costs.

Property owners and even county governments affected by the fire are already suing for damages. They claim that the burden should not fall on customers if the utility failed to meet safety standards. “In no way should people who have had their houses burned down or who have had neighbors lose lives pay increased rates because of the negligence of utilities,” Marc Levine, a state assemblyman from the Bay Area, told Marketplace.

Costs of climate change

Electric utilities have been citing climate change, not faulty utility practices, as the reason for an increase in wildfires in the state. In some areas of Califronia, the wildfire season is now lasting two months longer due to the dry conditions and the severity of the fires is intensifying. Seven of California’s 10 largest modern wildfires occurred in the last 15 years.

In 2017, the state faced about 9,000 wildfires that burned more than 1 million acres and were responsible for the deaths of 46 people. The largest of the wildfires, the Thomas Fire, started in early December in Southern California Edison’s service territory and wasn’t fully contained until January 12. As a result, the utility is facing scores of lawsuits. In the northern part of the state, PG&E could potentially pay billions of dollars if investigators conclude the utility was responsible for a series of wildfires in Northern California in October that killed dozens of people and destroyed 8,900 buildings.

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By the end of December 2017 — only halfway through the state’s fiscal year — the California Department of Forestry and Fire Protection (Cal-Fire) had already spent$699 million on fighting fires. Over the previous four years, Cal Fire’s wildfire spending costs totaled $534 million in 2016-2017, $608 million in 2015-2016, $402 million in 2014-2015, and $242 million in 2013-2014.

The causes of the most destructive wildfires of 2017, including the Napa Valley firein PG&E’s service territory, remain under investigation by Cal-Fire. There’s no set timeline for completing the investigations, Cal-Fire spokesperson Heather Williams said. The investigation into the 2015 Valley Fire took a year to finish, she said. The fire, which killed four people and destroyed nearly 2,000 buildings, was blamed on faulty wiring in a hot tub installation.

Local fire officials are conducting their own investigations into the wildfires. Fire investigators for the city of Santa Rosa, California, determined that PG&E power lines that were hit by heavy winds in October ignited at least two small fires in city neighborhoods.

“What the California utilities are facing is that large wildfires can bankrupt them if they can’t pass on the cost, if the size of potential liabilities exceed the value of the companies,” Lucas Davis, a professor of economic analysis and policy at University of California at Berkeley’s Haas School of Business, told Climate Liability News.

But, as the Climate Liability News article published on March 12 reported, California officials and consumer advocates say the utilities’ attempt to blame climate change is distracting from the companies’ failure to secure and maintain their equipment to limit fire risk.

During her company’s 2017 earnings call last month, PG&E chief executive Geisha Williams emphasized that lawmakers and regulators need to take action now before the state experiences another fire season. “Over the long term, not addressing this issue has grave implications to the industry’s financial health and our ability to attract affordable capital needed not only for California to meet its clean energy goals but for us to continue to deliver on our priorities of safe, reliable, affordable and clean energy for our customers,” Williams said.

Last month, Fitch Ratings downgraded its ratings of PG&E’s stock to reflect the company’s potential exposure to massive liabilities associated with the “unprecedented 2017 wildfires across large swaths of the utility’s service territory and seemingly absent legislative support for recovery of such costs.”

Who pays?

California’s courts have held utilities liable regardless of fault by applying “inverse condemnation” — a principle typically applied to governments, not to private entities. Under inverse condemnation, the order of parties is reversed, as compared to the usual procedure in direct condemnation where the government is the plaintiff who sues a defendant to take his or her property.

If land has been acquired by the government without following the proper procedures, the landowner has the right to file an inverse condemnation claim against the government to recover compensation for the property taken.

Inverse condemnation is not limited to the physical taking of property. Rather, it can include a temporary taking such as by flooding and wildfires — the cause of which in some instances can be tied to government. Under an inverse condemnation scenario, the government has failed to pay just compensation for the private property rights that have been taken — whether physically or by disaster events that could have been mitigated.

The landowner has the right to file a suit against the government in order to receive just compensation for the “seized” property. The government can then pass along these costs and risks incurred for the public good onto the taxpayer.

Like a government entity, the same logic has been applied to utilities that have millions of customers — electric utilities can “socialize,” or spread, wildfire costs among their customers in the form of rates.

Last summer, a California Superior Court Judge ruled PG&E liable for all damages from the 2015 Butte wildfire under the inverse condemnation doctrine. As a result, property owners are eligible to recover damages for loss of both real and personal property. A hearing in PG&E’s appeal of the ruling is scheduled for mid-April.

Under the judge’s ruling, inverse condemnation will come into play because homeowners and other people affected by the Butte wildfire will be able to sue PG&E in a bid to recover their loses from the wildfire. In a traditional condemnation case, PG&E, as a regulated public utility, would serve as the plaintiff when it is seeking to condemn — or take — someone’s property for a purpose that the utility deems is “public use.”

PG&E and the other utilities say inverse condemnation has forced them to settle lawsuits from property owners, firefighting agencies, and local governments. And now they are trying to convince policymakers that they should be able to recoup the settlement expenses from their customers.

At a time when California is asking privately owned utilities to invest billions of dollars to meet the state’s greenhouse gas reduction goals, wildfire liability risks pose real consequences for the state’s environment, economy, and communities, PG&E spokesman Ari Vanrenen told ThinkProgress.

Source: California Department of Forestry and Fire Protection
SOURCE: CALIFORNIA DEPARTMENT OF FORESTRY AND FIRE PROTECTION

“Allowing essentially unlimited liability undermines the financial health of the state’s utilities, discourages investment in California, and has the potential to materially impact the ability of utilities to access the capital markets to fund utility operations. All of these are bad for customers and bad for the state of California,” Vanrenen said.

In her testimony in the Butte wildfire case, Williams said PG&E aspires “to having absolutely no wildfires, obviously, at all, or especially any wildfires that are somehow caused or somehow as a result of operations in forests or everything else.” The company said it checks all of its power lines each year and some more than once.

California’s utilities were dealt a blow in late 2017 when the California Public Utilities Commission (CPUC) denied San Diego Gas & Electric’s (SDG&E) application for cost recovery of about $380 million of costs above their insurance coverage for a 2007 wildfire. That meant SDG&E’s shareholders, not its customers, were responsible for covering the cost of the wildfire damage. SDG&E is a subsidiary of Sempra Energy.

Sempra Energy chief executive Debra Reed said her company is requesting legislative action to clarify who is responsible for wildfire costs. On her company’s February 27 earnings call, Reed noted that SDG&E has filed an appeal with the CPUC in the 2007 wildfire proceeding. She described the commission’s decision to prohibit SDG&E from charging customers to pay for the 2007 wildfire as “a terribly flawed decision that has created much of the confusion and uncertainty that exists today.”

‘Broader reforms’ needed

Officials from Southern California Edison, which serves a large area of southern and central California, believe the state will ultimately address the risks and issues surrounding wildfires and other climate change impacts. Under current law, an electric utility can do everything right in the operation and maintenance of its equipment but still be on the hook for wildfire costs, Pedro Pizarro, chief executive of Edison International, the parent company of Southern California Edison, said last month on the company’s 2017 earnings call.

Consumer advocates, however, are hoping the CPUC continues to block utilities from charging ratepayers for wildfire costs when the utility’s infrastructure is found to have caused the fire.

Mindy Spatt, a spokesperson for The Utility Reform Network, a nonprofit consumer advocacy group, said state law allows utilities to recover costs from customers only if they act in a “prudent” manner. Consumers should not be forced to pay for a utility’s “mistakes” if investigators determine that a company’s power line caused a wildfire, Spatt told ThinkProgress.

Utilities, however, are hoping for a broader approach to tackling the issue. “While there has been no determination on the causes of the Northern California wildfires that took place in October,” PG&E’s Vanrenen said, “it is clear that California needs much broader reforms that recognize the mutual interests of customers, utilities, investors, insurers and others as we work together to address the impacts of climate change including more frequent and more damaging wildfires.”