When electric utility equipment contributes to deadly and damaging wildfires, California law makes the utility pay all the damages, even if the damages were not the utility’s fault and even if the utility was not a major cause of the damage. In this era of ever more harmful climate-driven fires, this unique California approach poses unintended risk to utility customers and to environmental goals.
The exact causes of most of last year’s record fires haven’t been determined yet, but the damages are in the tens of billions of dollars. California must decide how to apportion wildfire costs so as to compensate victims, improve fire protection, protect customers and assure reliable electric service from innovative utilities.
Making a utility pay regardless of fault has an appealing simplicity. But this approach can shift unmanageable liabilities onto even the largest utilities.
A utility company must pay for damages resulting from its negligence. Such liability compels the utility workforce to follow laws, regulations and safe practices. However, few states other than California apply to private utilities the concept of “inverse condemnation” – making entities pay for property damage even without a finding of negligence or full causation.
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Making a utility pay regardless of fault has an appealing simplicity. The company has much more money than the disaster victims, and the electric current that contributed to the fire was flowing to the entire community. But this approach can shift unmanageable liabilities onto even the largest utilities.
While inverse condemnation makes a utility pay for property “taken” by fire, it does not determine whether the money comes from customers or investors. That decision is made by the California Public Utilities Commission.
The commission must assure that customers pay only prudently incurred costs and that utilities can attract capital on reasonable terms. Utility investors can shift their money from one company to another if they feel it is being confiscated. Consequently, regulators allow the costs of societal objectives such as environmental protection or low-income assistance to be charged to customers. Otherwise the risk of unrecoverable expenses leads to lowered ratings and higher borrowing costs.
The same risk applies when inverse condemnation makes investor-owned utilities pay for fire damage for which the utility is not at fault. Rating agencies, worried that regulators will not be able to assure full recovery, have already warned of potential fire-driven bankruptcy for Pacific Gas and Electric. PG&E has eliminated its dividend, a rare and drastic measure for utilities and one which causes investors to put their money elsewhere.
If California utilities are forced into bankruptcy, they will be unable to attract significant capital for a time, like PG&E after the 2001 energy crisis. Bankruptcy is sometimes essential in situations of extreme utility imprudence. However, utility bankruptcy due to inverse condemnation without such imprudence could jeopardize California’s utility-financed progress against the climate change that is exacerbating the fires.
California has two ways to assure that this does not happen. If it is to continue its unique inverse condemnation approach, it must assure full recovery of non-negligent costs in rates. The utilities could be permitted to self-insure in part by prefunding reserve accounts as is done in some oil spill legislation or in nuclear power plant decommissioning. Such reserves can be backstopped by a limit on liability for non-fault damages.
Of course, California could also limit utility liability to the damages fully ascribable to utility fault and/or utility facilities. This preserves the utilities’ formidable ability to devote capital and attention to reliable and universal electric service while investing in the many innovations needed to reduce climate change.
Better to task the utilities with reducing the risk of fires while fire fighters and first responders fight the fires themselves.
Peter Bradford is the former chair of both the New York and Maine utility regulatory commissions, a former member of the U.S. Nuclear Regulatory Commission, and a former adjunct professor at Vermont Law School. Reach him at firstname.lastname@example.org.