It's Wildfire Season in California, and Utilities Want to Tamp Down Their Liability

Stateline Article June 7, 2018

By: Sophie Quinton Topics: Economy & Energy and Environment Read time: 5 min

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Fire crews battle an October wildfire in Santa Rosa, California. Pacific Gas & Electric has been sued some hundred times by victims of the wildfires that coursed through wine country last fall. Marcio Jose Sanchez/AP

California utilities might have to pay billions of dollars in damage if state investigators find their power lines sparked last year's devastating wildfires. And they'll face similar bills in the future, whenever a tree falls across a power line and sparks a fire that reduces homes, hotels and schools to ashes.

To head off financial disaster, the companies and the electrical workers" union are frantically lobbying Golden State officials for relief from a system that the utilities say is unfair: They're liable when their equipment ignites a fire, but they can't automatically pass on the costs to consumers.

"Our employers are now at financial risk, because the damage associated with these fires is literally billions and billions of dollars," said Hunter Stern, a business representative for the International Brotherhood of Electrical Workers Local 1245, which represents 20,000 workers in California and Nevada.

But advocates for ratepayers and wildfire victims say the current system works just fine, and that it gives utilities an incentive to trim nearby trees and invest in their infrastructure.

"They should not get a Get Out of Jail Free card," said state Sen. Jerry Hill. The Democrat has been a vocal critic of investor-owned utilities since 2010, when a Pacific Gas & Electric pipeline exploded in his Bay Area district, killing eight people.

No other state has both California's utility policies and history of massive, destructive fires, so utilities in other states don't face the same challenge. But as climate change fuels more powerful natural disasters and more people move to flood- and fire-prone areas, policymakers nationwide are grappling with who should pay for the damage.

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Spot fires burn near power lines in Santa Barbara, California, in December. Wildfires in Ventura and Santa Barbara counties torched over 280,000 acres and over a thousand buildings. Mike Eliason/Santa Barbara County Fire Department via AP

The National Flood Insurance Program, for instance, has been struggling financially for years, in part because of political pressure to keep premiums low even in places that repeatedly flood, such as the hurricane-prone Gulf Coast and the beach towns of Long Island.

"What this is really about is how risks are allocated and who pays for them," said Michael Wara, a research fellow at the Steyer-Taylor Center for Energy Policy and Finance at Stanford University.

The California Department of Insurance has recorded 45,000 insurance claims worth almost $12 billion from the October and December wildfires. Investigations of the blazes" causes continue, but power lines likely played a role in many of the fires. Pacific Gas & Electric the dominant utility in Northern California already faces more than a hundred lawsuits.

State investigators recently found that four wildfires that broke out north of Sacramento last year were caused by contact between trees and Pacific Gas & Electric power lines. They also found in three of the investigations that the power company hadn't kept enough distance between trees and its equipment.

The company said it looked forward to reviewing the findings. "Based on the information we have so far, we believe our overall programs met our state's high standards," the utility said in a statement at the time.

The Fire This Time

Five wildfires that blazed through California last year ranked among the most destructive in state history. Wildfires flattened neighborhoods in Northern California's wine country and in the hills northwest of Los Angeles. During what state officials call the "October fire siege," over 170 fires broke out in Northern California, killing 44 people.

Patrick McCallum and his wife, Judy, woke in their Sonoma County home at 4 a.m. Oct. 9 to blaring fire alarms. They ran downstairs, Patrick in his underwear, Judy in her robe. "When we opened the door, we opened to an inferno," McCallum said. The porch was on fire. The trees were on fire. The ground was on fire.

"We both thought we were going to die," McCallum recalled. The couple didn't even try to get in their car. They just ran, choking on smoke, until they reached two firefighters who saved their lives. Their house was destroyed.

McCallum, a longtime higher education lobbyist, is now advocating on behalf of attorneys who represent fire victims and want to make sure utilities don't avoid responsibility for paying for wildfire damage.

Power lines are a leading cause of those wildfires that can be traced to a single source in California. Fires typically start when trees or other objects such as errant balloons fall across lines, or some component of the power line equipment fails.

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Among California's investor-owned electric utilities, Pacific Gas & Electric's equipment starts the most fires, according to the California Public Utility Commission. It covers the most territory some 70,000 square miles, or roughly 43 percent of the state and relies more heavily than other utilities on overhead wires rather than underground ones.

For the past 20 years, California courts have found utilities liable for damage caused by their equipment, even if the equipment was well managed and nearby trees were properly trimmed. Utilities can't pass on the cost of damage to ratepayers without permission from the state utility commission.

And the commission is reluctant to pass on costs if it finds a utility to have been negligent. Last year, the commission denied San Diego Gas & Electric's request to pass on the cost of 2007 wildfires to ratepayers $379 million the company still owed that wasn't covered by its $1.1 billion liability insurance and other recoveries, such as settlement payments from third parties. The commission argued that the utility had improperly operated and managed its equipment.

McCallum and Hill, the state legislator, say the current system works and prevents ratepayers having to bail out negligent utilities.

The "New Normal"

Lobbyists, lawyers and other representatives for the major utilities say the current legal standard holding utilities liable is no longer workable, because climate change has created a "new normal" that has dramatically raised the potential costs of a wildfire.

The way courts assess liability doesn't consider extreme weather or the fact that utilities can't automatically spread the costs among ratepayers, Pacific Gas & Electric spokeswoman Ari Vanrenen said in an emailed statement.

She said that under the changes the company is seeking, customers would still be able to sue, but "a jury should decide whether the company was negligent."

If nothing changes, she wrote, customers and communities will suffer, and utilities won't be able to continue investing in clean energy infrastructure.

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Pacific Gas & Electric and the parent companies of Southern California Edison and San Diego Gas & Electric spent over $1.2 million on various lobbying activities during the first three months of 2018, according to state reports.

Democratic Gov. Jerry Brown and the leaders in the state Legislature are listening. In March, the state's top lawmakers announced plans to work together to make California more resilient against natural disasters. They"re considering updating liability rules and regulations for utilities to reflect the increased risk of severe weather.

Nothing has come of those efforts yet, however, and no bill pending in the Legislature would achieve all the reforms utilities would like to see, according to Vanrenen and Stern, with the electrical workers union.

Experts who watch the energy industry say utilities have good reason to call for change. "The current legal regime, I believe, is unsustainable," Stanford's Wara said. He said PG&E can probably manage to pay for this year's fire damage, assuming the company settles for less than the $15 billion it's possibly liable for. But the next destructive fire could bankrupt the company, which reported $17 billion in revenue last year.

That's a huge risk for their investors, he said. "That's like a coin toss with your money."

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PG&E's stock price tanked when the wine country fires began and never recovered. Between October and January, the company lost 37 percent of its market value, or $13 billion, according to Lucas Davis, an associate economics professor at the University of California, Berkeley, Haas School of Business. The stock price dropped from $69 Oct. 10 to $42 June 5.

Davis said policymakers should try to spread the risk across all entities that can work to prevent fires, including utilities, homeowners and local governments.

"Part of the problem," he said, "is so much of new California housing is going into places that are high fire risk."

Wara said that holding utilities liable only for damage caused by their mistakes is a reasonable reform. But changing liability standards for utilities could drive up insurance premiums for homeowners, transforming a crisis for utilities into a crisis for homeowners, he said. Politically, that's not an appealing solution.

He said he's concerned that lawmakers will struggle to solve the problem during an election year. They likely won't want to risk a vote on a bailout for PG&E. "Not making a decision here is a decision," he said.

And peak fire season is right around the corner.