California Utilities, Climate Change and Wildfires: A Liability Quagmire

California’s rampant wildfires have ignited legal questions as the state begins to deal with the question of who’s at fault and who pays for the escalating damages.

Caught squarely in the middle are the state’s electric companies, several of whom have been found liable for huge settlements when their equipment or negligence in maintaining it were blamed for costly fires. That has driven them to use a new tactic: blaming climate change.

The three biggest utilities are linking climate change to wildfires in a bid to persuade the Public Utilities Commission to let them pass on some of the ballooning firefighting and legal costs to their customers.

The utilities say a constitutional doctrine called inverse condemnation has compelled them to settle lawsuits from property owners, firefighting agencies and local governments. They believe the doctrine entitles them to recoup some of the expenses by raising rates. The commission disagrees.

The stakes of this debate are high. San Diego Gas & Electric faced more than 2,500 lawsuits and paid $2.4 billion in settlements for its role in three fires in 2007 that burned 1,738 homes, killed two people and scorched 368,316 acres in San Diego County.

Fourteen of the 20 largest wildfires in California since 1932 took place within the past two decades. The biggest one, the Thomas Fire, took place last December and lawsuits are piling up against Southern California Edison. Up north, Pacific Gas & Electric could potentially pay billions of dollars for its role in a series of wildfires in Northern California last October that killed 44 people and destroyed 8,900 buildings. Investigators haven’t pinpointed the causes of these recent firestorms.

Yet the stocks of both companies tumbled after the fires, leading to $20 billion in combined market value losses.

“What the California utilities are facing is that large wildfires can bankrupt them if they can’t pass on the cost, if the size of potential liabilities exceed the value of the companies,” said Lucas Davis, a professor of economic analysis and policy at UC Berkeley’s Haas School of Business.

The Legal Options

Science has concluded that climate change contributes to drier conditions, exacerbates drought and leads to a greater number of and more intense wildfires. The three utilities say that warming trend is a problem shared by all Californians, who should then share the fire costs.

The problem may be shared by all, but the blame for causing it is where the utilities run into a legal tangle. If climate change is to blame for the wildfires, the utilities could turn and sue the fossil fuel industry whose products have been overwhelmingly linked to rising global temperatures. But that won’t necessarily play well in the courts,  said Sean Hecht, an environmental law professor at the UCLA School of Law.

“Utilities use gas for power plants, and that doesn’t make them the most sympathetic plaintiffs,” Hecht said.

The utilities’ other options, Hecht said, are raising rates or lobbying for legislation that limits their liability in homeowner lawsuits.

California officials and consumer advocates say the utilities’ attempt to blame climate change is distracting from their responsibility to secure and maintain their equipment to limit fire risk.  

“I’m finding that utilities are trying to confuse the issue,” said state Sen. Jerry Hill, who chairs the subcommittee on gas, electricity and transportation safety. “Climate change might have spread the fires more quickly, but it didn’t start the fires.”

Hill introduced legislation, SB 819, in January that would prohibit utilities from raising rates to recover costs if they were found negligent in a fire.

The bill is a reaction to a debate over whether San Diego Gas & Electric could pass on the $379 million from the 2007 fires that it couldn’t cover through insurance. The commission denied the utility’s request last November because it said the company caused the fire with improper maintenance of power lines. The commission also said it wouldn’t automatically deny rate increases in future cases in which the utilities were at fault.

San Diego Gas & Electric is appealing the decision, arguing that it wasn’t at fault. The company said the fires were caused by “hurricane-force winds,” high heat and low humidity. Its two fellow utilities are lobbying the commission to change its mind as well.

The central issue in the appeal, however, is all about inverse condemnation, which is based on the California and U.S. Constitution and says government should compensate property owners for the damage it caused. California courts have applied that doctrine to private utilities as well since the same liability exists for government-owned electric service providers.

Inverse doctrine holds that utilities could be liable even if they weren’t negligent. That means power companies could be required to compensate property owners even though they followed safety rules.

“The theory behind it is to create an incentive for utilities to take even stronger actions to make sure it doesn’t happen again,” Hecht said.

That nudge has worked, Hill said, pointing out that the 2007 fires prompted the San Diego utility to improve fire prevention practices, including replacing wooden poles with steel ones, employing meteorologists and paying for firefighting aircraft.

The courts have applied inverse condemnation with the understanding that the cost of the damage would be shared by many, said Robert H. Thomas, an attorney who chairs the state and local government law section at the American Bar Association.

California judges have rejected the argument that private utilities should be exempt from inverse condemnation because they lack the authority of public utilities to spread the financial responsibility by taxing their customers. In Pacific Bell Phone v. Southern California Edison, the appellate court said the electric utility, Edison, “has not pointed to any evidence to support its implication that the commission would not allow Edison adjustments to pass on damages liability during its periodic reviews.”

Looming Court Fights

Pacific Gas & Electric said if the commission doesn’t resolve how it would apply inverse condemnation, then it’s creating “essentially unlimited liabilities” for utilities.

“Private utilities, including PG&E, have challenged the application of inverse condemnation on various grounds. While in the past those challenges have generally been unsuccessful, these [and other] issues ultimately will need to be resolved by the California Supreme Court and Federal courts,” said Ari Vanrenen, a company spokesman, in an email.

Utilities could request rate increases to pay for greater insurance coverage instead of legal fees. But that could send the wrong message.

“If a utility is completely covered, then it doesn’t have an incentive to be careful,” Davis said. “What’s really important is for the state of California to get the incentives right for utilities, homeowners and landowners to avoid fires in the future.”

The blame game, inevitably, isn’t going to reflect well on utilities, regardless of how the courts ultimately rule.

“It appeals to a lot of people even if legally, you would ask, wait a minute, what does that have to do with the causation and what happened on your lines?” Thomas said. “In a way, a lot of these [questions] will be decided not so much by legal cases but by politics. The public will say, why should I pay for it when PG&E screws up?”