Groups representing public power and cooperative utilities are urging the state to change its strict liability rules for wildfires caused by utility infrastructure and take other steps to reduce the risks of wildfires and their financial fallout.
In recent years, California has been hit by a string of massive wildfires, which is leading to financial stress for the state’s utilities. Facing $30 billion or more in wildfire-related liabilities, Pacific Gas & Electric and its parent company PG&E Corp. in January filed for bankruptcy.
Also, in April, PG&E, along with investor-owned Southern California Edison and San Diego Gas & Electric, asked the California Public Utilities Commission (CPUC) for major increases in their returns on equity, which they say are needed in order to continue to attract capital in the face of wildfire liabilities.
PG&E asked for a 16 percent return, up from 10.5 percent, a move the utility estimated would increase its annual revenue by $1.2 billion. SCE asked for a 16.6 percent return and SDG&E is seeking a 14.3 percent ROE.
Last year, then-Gov. Jerry Brown signed a bill that directed the governor’s office to create the Commission on Catastrophic Wildfire Cost and Recovery, partly to make recommendations on legal changes to ensure wildfire costs are fairly spread among affected parties.
The commission received initial comments on April 22 from dozens of parties, including joint comments from the California Municipal Utilities Association, the Southern California Public Power Authority, the Northern California Power Agency and Golden State Power Cooperative. The groups represent 46 public power utilities and four cooperatives that serve about a quarter of California.
Like the IOUs, California’s publicly owned utilities want to see changes to California’s legal framework for assigning liability for wildfires. Under California's unique method of applying inverse condemnation, an electric utility is held strictly liable for property damages and legal fees if the utility's facilities are found to have caused a fire, even if the utility was following all safety rules and wasn’t found to be at fault.
“As increasingly devastating wildfires have begun to arise, a utility’s financial exposure under a strict liability standard can go far beyond the ability of its customers to shoulder the financial burden,” the California POU coalition said in comments with the wildfire commission. “If a utility’s insurance does not cover its liabilities, then the utility itself must pay those costs out of pocket.”
With wildfire risks growing, California’s strict liability rules are unsustainable, the utility groups said, noting their members potentially face credit rating downgrades because of the state’s liability practices – even if they haven’t had a catastrophic wildfire, which can increase borrowing costs.
The utility groups want California to switch to a fault-based liability standard that holds an electric utility liable if the utility’s conduct posed an unreasonable risk of damage to property and if the conduct was a key cause of the damage.
“Such a standard would still hold utilities accountable for their actions but would provide relief in circumstances where wildfires are started by factors outside of their control,” the utility groups said. “A ‘fault-based’ approach will provide positive incentive for utilities to aggressively implement wildfire mitigation measures.”
“When we stand back and look at this issue broadly, what we have here is a societal problem that is broken, and it’s based on state policy that does not work,” said Barry Moline, executive director of the California Municipal Utilities Association. “It calls for new thinking, and we should not be afraid to take a different path to fix it.”
“Utilities are doing everything we can to minimize ignition of wildfire and protect our communities,” continued Moline. “In this bizarre scenario, if a tree limb from outside the right of way hits a transmission line and that starts a wildfire, the utility would get blamed and have to pay for damages, even if the utility has implemented all safety measures possible. We think that’s the wrong standard for liability.”
Reforming the liability standard would also help with escalating wildfire insurance costs, according to the California utility groups.
Implementing a fault-based liability standard under inverse condemnation and taking steps to reduce wildfires overall would help ease insurance costs, according to the utility groups.
The utility groups discussed a catastrophic wildfire fund but said a state fund wouldn’t fully offset the state’s current liability rules or the growing cost of insurance.
If a fund is created, the fund should only be used to cover future wildfire costs, according to the groups. The fund must include provisions to make sure one utility with significant claims cannot “drain” the fund or make it insolvent for use by other electric utilities, the groups said.
The California Assembly’s Utilities and Energy Committee unanimously approved a bill (A.B. 235) on April 24 that would create a catastrophic wildfire fund.
California could take other steps to reduce wildfire risks, such as improving statewide coordination on wildfire efforts and strengthening coordination between transmission-owning and transmission-dependent utilities and water agencies, according to the utility groups, and requiring some sort of state-backed homeowner insurance in fire-prone areas.
The groups called for better forest and vegetation management, improved fire suppression and response, as well as changes to local planning and development policies where wildfire risks are high.
“Stopping wildfires and minimizing damages to the public are high priorities to CMUA’s members,” said Moline. “While there has been limited interaction between stakeholders, there are opportunities to collaborate more effectively. Stakeholders across the board – cities, counties, utilities, first responders, forest managers – must all communicate regularly and coordinate their actions to protect the public. CMUA is calling for enhanced coordination across the board.”
The five-member wildfire commission is set to issue a set of recommendations by July 1.
SMUD also filed comments
In its April 22 response to the wildfire commission’s request for comment, California public power utility SMUD said it supports a fault-based liability system for wildfire risks. The response was submitted by SMUD CEO and General Manager Arlen Orchard.
“The current application of inverse condemnation and strict liability is unsustainable, especially in instances in which the electric utility has met required standards for the construction, operation and maintenance of its electric transmission and distribution system,” SMUD said.
SMUD and other utilities “should remain liable for wildfire costs when we're at fault; that's only fair. However, utilities should not be held strictly liable for wildfire damages when the utility acted responsibly and reasonably and met all standards. Strict liability accruing from inverse condemnation must be changed; it should be replaced by a risk-based, fault-based system.”
Orchard went on to say that while “we must not lose sight of the personal devastation inflicted on each and every member of a community impacted by wildfire, we must also be mindful of the inequities that result from shifting these costs to utilities regardless of fault.”
He noted that publicly owned utilities like SMUD, “which don't have shareholders to bear the costs of the damages inflicted by a catastrophic fire, have only one recourse to fund any wildfire liability — to collect from our customers. These inevitable rate impacts cannot avoid having a disproportionate impact on our most vulnerable populations that are least likely to afford it, including low-income customers, the elderly, and renters.” A major wildfire, like recent catastrophic fires elsewhere in California, “could cause SMUD's electric rates to jump by upwards of 25 percent.”
S&P weighs in on report issued by California governor’s “strike force”
In his February 2019 State of the State address, California Gov. Gavin Newsom called for the creation of a strike force to develop a comprehensive strategy, within 60 days, to address the destabilizing effect of catastrophic wildfires on the state’s electric utilities. A report by the strike force was published on April 12.
The report sets out steps that the administration, the CPUC, local communities, and utilities should take to reduce the incidence and severity of wildfires and to step up both community resilience and the state’s response capabilities.
In an April 17 report, S&P Global Ratings said that from a credit perspective, it views the strike force report as a positive first step that signals the state’s “awareness and willingness to address the financial exposures facing electric utilities in California.”
At the same time, the rating agency views the report as preliminary. “Beyond disclosing the state’s commitment to spend $1 billion over five years for forest management and fire crews, the report lacks definitive solutions for shielding electric utilities from onerous financial liabilities,” the rating agency said.
S&P noted that the report identifies California’s application of the inverse condemnation doctrine as a threat to the financial viability of all utilities. As a response, the report recommends that the state’s Commission on Catastrophic Wildfire Cost and Recovery evaluate concepts for equitably allocating wildfire liability costs among ratepayers, utilities and insurers. “We expect that political wrangling over this could continue for some time before stakeholders coalesce around a solution,” S&P said.
The rating agency believes that an initiative to alter California’s approach to the doctrine of inverse condemnation, “as interpreted and applied by state courts, is complicated.”
S&P pointed out that the doctrine derives from the state’s constitutional requirement that property owners be justly compensated when their private property is taken. “Therefore, we believe the state faces formidable challenges if it plans to pursue legislative changes to its constitution in addressing electric utilities’ exposure to inverse condemnation claims.”
“While we agree that changes to inverse condemnation won’t be easy, the interpretation of the law can be changed by the legislature,” said CMUA’s Moline. “As it’s applied, the current standard is based on two court decisions. We believe that clear legislative language would set a different path forward to apply the liability standard more reasonably. We believe it’s the right thing to do and we’re standing up for better public policy.”
Although S&P analysts view all of the state’s electric utilities as exposed to climate change and inverse condemnation risks, “we believe public power utilities are relatively better positioned on this front than their investor-owned counterparts.”
The rating agency sees “significant distinctions between California’s IOUs and public power utilities because they operate under different regulatory frameworks for recovering costs, including for liability.”
It views the autonomous rate-setting authority available to public power utilities “as providing latitude, within limits, to recover liability costs from their ratepayers and socialize damage assessments among those ratepayers.”
S&P considers public power utilities as better able to recover liability costs than IOUs because IOUs lack autonomous ratemaking authority and are subject to regulatory oversight. This oversight has led to disallowances for IOUs, S&P noted. “The strike force report recognizes the regulatory hurdles facing IOUs and lays out proposals for improving the regulatory process.”
S&P noted that while it considers the state’s public power utilities better able to respond to wildfire claims than IOUs, “we do not view public power utilities’ autonomous ratemaking authority as an absolute shield.”
In a report issued earlier this year, “California Public Power Utilities Are Better Able To Temper Wildfire Related Liability Exposures Than IOU Counterparts,” S&P said that it believes that regulatory and operational factors “temper the exposure of California’s public power utilities to potential wildfire-related liabilities.”
The rating agency said that overall, it believes these characteristics distinguish the state’s rated public power utilities from the downward rating pressure S&P has identified for California’s IOUs. “Consequently, we do not see the same downward rating pressure on California’s public power utilities because of wildfire-related liabilities,” it said in the Feb. 28 report.
Meanwhile, the California Public Utilities Commission is also taking actions to address wildfires and the state’s utility sector.
The CPUC on April 29 issued a series of Proposed Decisions on the 2019 wildfire mitigation plans of PG&E, Southern California Edison and SDG&E, three small and multijurisdictional utilities, and two independent transmission owners.
In the proposed decisions, the CPUC determined that the plans filed by the three IOUs, as well as Liberty Utilities/CalPeco Electric, Bear Valley Electric Service, Pacific Power, Trans Bay Cable LLC and NextEra Energy Transmission West, LLC, contain the elements required under Senate Bill 901.
Enacted last year, S.B. 901 requires electric utilities to prepare and submit wildfire mitigation plans that describe the companies’ plans to prevent, combat, and respond to catastrophic wildfires affecting their service territories.
The proposed decisions “direct electrical corporations to track data and assess outcomes so that future plans reflect this year’s lessons,” the CPUC said in a news release. The proposed decisions also require reporting this year on 2019 wildfire mitigation plan achievements.
Also, they require electric companies to take formal actions and file reports to the CPUC if the companies have concerns about the effectiveness of any program in their individual wildfire mitigation plans. “The reports must clearly describe the concern and contain a specific proposal for action, including, if applicable, a recommendation to reduce or end the specific mitigation identified,” the PUC said.
The proposed decisions are set for CPUC Commissioner consideration on May 30.
In late December, the PUC began a proceeding that, among other things, will look into the possibility that some or all of Pacific Gas and Electric could be reconstituted as a publicly-owned utility or utilities.
The investigation will examine several corporate business and governance model options, with an emphasis on drastically improving public safety.