It may be the toughest question the California Legislature takes up this year: Who should pay the bill for massive wildfires?
Today, California utilities could be on the hook for billions of dollars in damages if investigators connect their equipment to what became the largest and most destructive wildfires in state history.
But the companies led by PG&E are making a case at the Capitol to reduce their property damage liability. With help from labor, they’re arguing the fatal wildfire season the state experienced last year was a sign of climate change-fueled “new normal.”
If the utilities prevail, the insurance industry anticipates raising premiums on homeowners and declining coverage in some neighborhoods altogether. With no change, your gas and electric bills could shoot up.
“When those fires happened and they burned down all of those houses, costs went up for Californians,” said Michael Wara, a research scholar focused on climate and energy policy at Stanford University Law School.
“The only question is: Should that be a cost that all Californians bear no matter where they live or only Californians who choose to live in areas that are particularly risky?”
State laws and regulations grant utility companies the same power as government entities to exercise eminent domain on your property. Under “strict liability” and a wonky term called “inverse condemnation,” the utilities are also responsible for providing compensation if your property is damaged by their equipment, even if investigators fail to prove the utility behaved negligently to cause the fires.
The law means that Pacific Gas & Electric Co. shareholders or customers could be liable for the property damage from a series of wildfires in Napa, Sonoma and Solano counties in October. The California Department of Insurance reports that the fires destroyed more than 14,700 homes and 728 businesses. Wall Street estimates that PG&E could be on the hook for as much as $15 billion in all. Already, people have filed $9 billion in insurance claims related to the fires.
PG&E, which spent $4 million to lobby officials and influence campaigns last year, can ask the California Public Utilities Commission to allow it to pass off those costs to customers through higher monthly charges, a request typically approved if the utility can show it operated its system consistent with best practices. If the company failed to cut back its trees, for example, those costs could shift to shareholders.
PG&E says the devastating fires last year were part of the new normal in California and the current model is unsustainable. The company wants clearer standards for work it must complete to mitigate the possibility of fires and avoid negligent behavior.
The utility company’s chief executive officer, Geisha Williams, called inverse condemnation “simply bad public policy” in a February earnings call. She blamed the law for PG&E’s dwindling stock price – down one-third in a year – and for the decision to suspend cash dividends to shareholders in December.
Williams plans to aggressively challenge the law, including framing the issue to California lawmakers as a climate change problem that must be addressed.
“In the short term, action is needed now before we experience another fire season,” Williams said on a call with stock analysts.
She said not addressing the problem has “grave implications to the industry’s financial health” and PG&E’s ability to deliver energy to its customers.
PG&E lobbyists are looking at ways to craft legislation that would exempt it and other utilities from inverse condemnation. So far, no lawmakers have introduced a bill to tackle the issue.
PG&E and the International Brotherhood of Electrical Workers, which represents the utility’s workers, are asking the California Labor Federation to join the fight, creating a potentially powerful coalition in a Capitol dominated by union-backed Democrats and a minority party of pro-business Republicans.
“My concern is that he with the biggest dollars and lobbying skills will take over the discussion about what is in the best interest for the public,” said state Sen. Hannah-Beth Jackson, a Santa Barbara Democrat whose district experienced the largest wildfire in state history last year.
The company’s work in Sacramento already paid off last month.
Gov. Jerry Brown and legislative leaders publicly released a statement articulating the state’s commitment to “update liability rules and regulations for utility services in light of changing climate and the increased severity and frequency of weather events.”
The March 13 press release sent a not-so-subtle message to investors that lawmakers were open to hearing PG&E’s arguments. PG&E stock climbed 6.3 percent in one day.
State Sen. Jerry Hill, D-San Mateo, calls any action to let PG&E “off the hook” premature until investigations determine the cause of the fires.
“What they are arguing is that they need immunity for the fires last year because without it and based on strict liability in the current law they will be held responsible and that would force them into bankruptcy,” Hill said. “What we know as fact is that the current system works perfectly in allocating costs and responsibility.”
Hill, a thorn in PG&E’s side since the company’s pipeline burst and killed eight people in his district in 2010, argues that alleviating utilities of liability takes away incentives for companies to proactively mitigate the potential for destructive fires.
Hill said any change would make it harder for homeowners to recoup their losses, especially for uninsured or underinsured properties, and potentially create problems for cities and counties that receive reimbursement for emergency services.
Tom Long, the legal director for the ratepayer advocacy nonprofit The Utility Reform Network, said the current system isn’t working for utility customers, who won’t be able to keep the lights on if PG&E and other companies are allowed to continue to raise their monthly electricity bills. Now ratepayers can absorb the costs of a utility’s work to prevent fires, to insure against liability and to cover leftover damages after catastrophe strikes.
He pointed to CPUC data that show more than 885,000 utility customers, or 5.3 percent of all accounts in the state, were disconnected last year.
“It’s a very regressive way to fund these property damage claims because you’re threatening the ability of people to lose essential service,” Long said. “When that happens people’s lives start to spiral out of control. They’re making choices between their rent and their utility bills.”
Now homeowners insurance companies pay out claims and then sue utilities for the losses. But if utilities are not responsible for property damages, insurance companies could get stuck with the financial burden.
Rex Frazier, president of the Personal Insurance Federation of California, said insurance companies would move to raise prices for premiums in risky areas or decline to provide coverage if utilities were no longer responsible for compensating homeowners.
The California Department of Insurance reports that 3.6 million homes, or 26.8 percent of the houses in the state, are in risky areas, described as regions with dense wildland vegetation. Complaints over renewals or skyrocketing premiums have more than tripled in areas at the greatest risk of wildfire in the last six years, according to the agency.
“There aren’t going to be easy answers here,” said Long of TURN. “You can’t get blood from a stone.”