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California’s 2017 wildfire season caused immense and tragic harm across the state. The latest state-issued estimates of the insurance claims have totaled nearly $12 billion, and many families and businesses are still working to recover. As we look toward how that recovery could happen, many argue that the responsibility to “fix” this disaster lies at the feet of utility companies.
Certainly, in light of Cal Fire’s recent finding that contact between power lines and trees improperly maintained by Pacific Gas & Electric was the cause of some of the fires, utilities must bear some responsibility for the disasters that resulted. It is clear, however, that much broader forces are at play in the state, with drought, heat waves, and other climate-change effects setting the stage for a perfect storm.
Furthermore, it is simply untrue that, as some have loudly argued, large companies like PG&E or another utility can foot the bill for any and all fire-related costs without harming its customers and the rest of the state.
It is critical that the state legislature take a hard look at current conditions and past experiences in order to devise a forward-thinking and constructive response to climate change and wildfires that avoids making the problem worse by pushing utilities into bankruptcy and inevitably punishing their customers in the process.
California’s new normal — and old liability structure
While the 2017 fire season was the worst in California history, there are indications that this is the new normal. As Governor Brown noted in his 2018 State of the State address, eight of California’s most destructive fires have occurred in the last five years, and in the last 40 years, California’s fire season has increased by 78 days, turning from a seasonal risk to, in many places, a year-round threat.
Nearly 70 percent of the state is in some state of drought — with 20 percent of it rated severe or exceptional — and going into California’s ever-hotter summers, this level is likely to exceed 90 percent. Projections of climate change across the state indicate that the combined impacts are likely to increase the area burned by wildfires by 20 percent or more by the end of the century.
As of late May this year, Cal Fire had already responded to 1,200 fires that had burned 8,000 acres, compared to 2017’s 1,049 fires that burned 2,200 acres by this time.
There is broad recognition that this is the “new normal” for California. The State Senate pro Tempore Toni Atkins recently told the New York Times that “massive wildland fires are now a part of our life. […] These fires are every bit the same kind of disaster as earthquakes, hurricanes and other natural disasters that confront states across the country.”
Deputy chief of Cal Fire Scott McLean has said: “It’s the reality. The fire season is expanding. The weather has changed. We don’t even consider it a fire season anymore.” Southern California Edison’s parent company CEO has said that the “fire season is all-year round and is now our ‘new normal.’”
While state policymakers, businesses and public officials are looking toward a climate-change-fueled new normal, the state’s structure for assigning liability for disasters is incongruently outmoded. The California Constitution establishes a principle of “inverse condemnation” that holds public and government entities strictly liable for damages in which their equipment is a substantial cause — even if there is no finding of negligence or wrongdoing, and even if many other factors were substantial, or larger, contributors to damages.
This framework is based on a principle of “socialization” among all taxpayers of the costs that flow from operation of infrastructure that benefits the public generally. However, California courts, unlike those in any other state, have included investor-owned utilities in the class of “public” entities to which inverse condemnation applies, assuming, incorrectly, that these investor-owned utilities have the same ability to spread costs among ratepayers as government entities do among taxpayers.
In fact, utilities do not have this ability — and experience shows just how painful trying to do so would be. And even if a utility were able to charge these costs to its customers, enormous rate increases would be required for that company’s customers, even though the underlying problem is statewide in scope.
Utility bankruptcy: We’ve seen this movie before — and don’t like the ending
If utilities are held to a strict liability standard as currently required under inverse condemnation, it is likely that they would be forced into bankruptcy.
In its most recent rate case, PG&E proposed to collect from customers just under $8.4 billion each year, compared to the $12 billion — and climbing — estimates of statewide fire damages, largely concentrated in PG&E’s service area. There is no way PG&E could pay this amount, even distributed over a long period, without suffering severe financial distress.
Even if company shareholders were forced to bear the brunt of those costs, this distress would manifest in myriad ways that would roll through to customers. As financial markets began to worry about utility losses or bankruptcy, utilities would find it harder — and more expensive — to borrow money, leading to increased power procurement costs and ultimately higher customer rates.
The utility will have a harder time maintaining and entering into new contracts for electricity deliveries and may be forced to make short-term decisions with adverse long-term rate consequences. If a utility is ultimately forced into bankruptcy, these impacts and accrual of costs will only accelerate.
A bankruptcy court would also reprioritize company activities toward restructuring and settling debts. This would decrease focus on investments necessary to achieve California’s clean energy goals and place the claims from wildfire victims at the bottom of a very large stack of creditor accounts. Finally, bankruptcy itself is a costly black hole into which tens of millions of dollars in litigation fees are thrown.
We don’t need to speculate about these impacts: This has happened before.
In late August, 2005, Hurricane Katrina ripped through New Orleans and the surrounding area, displacing hundreds of thousands of residents, killing more than 1,800, and causing more than $125 billion in damages. Entergy New Orleans, the electric and gas utility serving around 190,000 customers in the New Orleans area, absorbed between $325 million to $475 million of this damage through downed power and gas lines, flooded substations, and destruction of other infrastructure.
Even with a loan from its much larger parent company, Entergy Corporation, the receipt of nearly $200 million in Community Development Block Grants from the City of New Orleans, and significant insurance payouts, the utility was unable to recover these costs. ENO filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code on September 23, 2005, not emerging until May 9, 2007.
The impacts to customers due to this bankruptcy were severe. Customer rates increased: Some estimates put the increase at nearly 30 percent for the first year after Katrina, though by two years out rates were still about 8-10 percent higher than before the hurricane. This was in part because of increased procurement costs.
In order to stay afloat after declaring bankruptcy, ENO was forced to sell its low-cost nuclear facilities to get cash, and later had to replace this generation with higher-cost energy to serve customers. ENO also lost two low-cost fuel contracts in the turmoil. It was unable to replace that power at a reasonable rate because companies were skittish about doing business with a bankrupt company.
During its bankruptcy proceedings, ENO was also forced to refocus on restructuring, rather than continue efforts to support its service area community. For example, ENO had to stop contributing a joint ENO/City Council of New Orleans economic development program. The City Council noted that these funds would have otherwise been used to aid small businesses recovering in the aftermath of Hurricane Katrina. Unfortunately, bankruptcy served as yet another obstacle in the New Orleans community’s path to recovering from this heartbreaking natural disaster.
Though not related to natural disasters, we in California also have direct experience with the consequences of utility bankruptcy. And customers also paid the price here.
In April 2001, the California energy crisis caused PG&E to enter the Chapter 11 bankruptcy restructuring process. PG&E had incurred more than $9 billion in energy crisis power costs that it was not authorized to recover in rates due to a legislated rate freeze. This triggered a crisis due to the shortfall between the rates that PG&E was authorized to charge its customers and its electricity procurement costs, forcing a downgrade of PG&E’s credit rating and leading suppliers of power to refuse to sell to PG&E.
California, through the Department of Water Resources, had to step into the role of power purchaser for PG&E’s customers, buying absurdly expensive spot market power from Enron and others, and eventually entering into a portfolio of power-purchase agreements exceeding $42 billion. The extreme costs of this fiasco are still being paid by utility customers across the state today.
The bankruptcy process itself was also lengthy and expensive for PG&E, the state and impacted businesses, with total costs of the bankruptcy proceedings alone running into the hundreds of millions of dollars.
At the same time, creditors in the bankruptcy proceedings seized the dedicated funding for energy efficiency, renewables, low-income services, and other community and clean energy investments, stopping payments to these vendors and businesses. While the Natural Resources Defense Council and PG&E were eventually able to convince the bankruptcy judge to restore the funding, there is no assurance that such a seizure couldn’t happen again — and this time remain permanent.
In total, according to the Los Angeles Times, PG&E’s electric customers were expected to pay $6.2 billion to $8.2 billion in higher electricity costs as a result of the energy crisis after PG&E’s exit from bankruptcy — well over a thousand dollars per customer.
California’s path for 2018: Learning from past mistakes
There are already indications that California is setting itself on a path to repeat the experience of Entergy New Orleans and PG&E. The credit ratings of PG&E and Southern California Edison have already been downgraded and are on negative ratings watch. Both companies have lost significant market value since the fires, reflecting noteworthy investor concern.
Impacts have already started to pass through to PG&E’s partners: In March of this year, the Topaz solar PV project, a 500-megawatt operating plant owned by Berkshire Hathaway Energy, was targeted for a potential credit-rating downgrade due to investor concerns with its contract purchaser, PG&E. Unless something is done, and quickly, adverse rate impacts are fast approaching.
Instead, California needs to develop a framework for addressing and mitigating the harm from the 2017 wildfires that focuses on actually protecting customers. The state should take prompt action:
- “No fault” utility liability should be eliminated in favor of traditional negligence principles.
- The California legislature should immediately convene a working conference to explore options for 2017 wildfire recovery that takes into account the necessity of healthy utilities and consumers across the state, while supporting recovery and fair reimbursement for victims of the fires.
- Utility risk planning, and Public Utilities Commission approval of those plans, must account for climate change-magnified risks.
- Looking forward, the state should undertake an assessment of insurance requirements and standards for California residents, ensuring that increasing climate risks are accounted for and that there is a proper balance of accountability among the insurance industry, the state (e.g., though a state-sponsored program), and other stakeholders.
Following these principles would leave California with a variety of potential viable solutions — but bankrupting the utilities (and eventually impacting their customers) is not one of them.
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Mike Florio is a former Commissioner of the California Public Utilities Commission, a former Senior Attorney for The Utility Reform Network and a former member of the board of governors of the California Independent System Operator.