Utilities may face large damage awards and no relief following blazes

A state regulatory agency’s recent decision to reject a San Diego utility’s request to pass on the costs from three deadly wildfires that blazed through Southern California 10 years ago is an ominous warning for Pacific Gas & Electic Co., which faces billions of dollars in claims due to the Wine Country fires last fall.

San Diego Gas & Electric Co. argued that the legal doctrine keeping it accountable for damages, inverse condemnation, unfairly holds the utility to an unreasonable standard.

SDG&E was forced to settle for $2 billion nearly 2,600 lawsuits spawned by three deadly 2007 blazes because of the legal theory.

PG&E could face similar liability for the same reason.

The Department of Forestry and Fire Protection has not completed its investigation into the cause of the fires yet.

“I think that there is a high likelihood PG&E will have to pay out,” said Gerald Singleton of Singleton Law Firm APC. “It’s hard for me to envision how they will escape liability. Once we show the fires were a result of the power lines, for inverse condemnation at least, that pretty much resolves the issue.”

Under inverse condemnation, utilities are liable for all resulting property damages when their facilities cause a wildfire, whether or not the utility was negligent or engaged in any wrongful conduct.

A December report by the California Department of Insurance estimated the destruction by the North Bay fires at more than $8 billion in Napa, Mendocino and Napa counties.

Southern California Edison also faces claims of liability for upwards of $2 billion in damages for the Thomas fire, which is already the largest wildfire in California history. Multiple lawsuits have been filed against the utility, claiming that construction crews working on a campground ignited dry vegetation and sparked the massive wildfire.

“You do not need to prove negligence and you don’t have to prove a breach in the standard of care. The test is whether there’s injury or harm to property caused by a public improvement as deliberately designed,” said Frank Pitre of Cotchett, Pitre & McCarthy LLP, an attorney representing a plaintiffs’ group of Northern California wildfire survivors.

“It’s a question of causation, not fault,” Pitre added.

SDG&E asked the California Public Utilities Commission to shift the $379 million not covered by its insurance from the three fires to its ratepayers.

The utility insisted that it responsibly managed its service territory while maintaining that the conditions leading up to the wildfires in October 2007 were unprecedented — reasons why SDG&E should be able to pass an additional $1.67 per month to its customers over a six-year period.

PG&E and Southern California Edison jumped into the case just prior to the North Bay wildfires to support SDG&E’s proposal. They said the case highlights the larger question of how to fairly allocate costs from wildfires.

“The [proposed decision] commits legal error by imposing a ‘prudence’ condition on the recovery of reasonably incurred settlement and defense costs arising from inverse condemnation claims, which arbitrarily and disproportionately shifts the entire risk of any uninsured costs arising from a wildfire to the utility,” wrote PG&E senior counsel Michael Klotz in the utilities’ joint comments to the commission.

The utilities said administrative law judges Pat Tsen and Sasha Goldberg, who wrote the proposed decision that the public utilities commission unanimously voted to accept, failed to account for the fact that applying inverse condemnation in fire liability cases presumes utilities will be able to spread costs by raising rates on consumers.

These costs, the utilities said, should include the recovery of the full costs of settlements and legal defense incurred by SDG&E resulting from inverse condemnation claims without having to conduct a prudence review.

But the utilities commission decided in a 5-0 vote on Nov. 30 that SDG&E did not act as a prudent manager in the wildfires that destroyed more than 1,300 homes and killed two people.

“There’s no dispute that each of the fires were caused by SDG&E’s facilities and in each instance we find that SDG&E did not meet its burden to prove that it acted as a prudent manager,” said Commissioner Liane Randolph.

Although commission President Michael Picker said that the SDG&E decision “may or may not have any precedent for any future fires that come before us,” it does not bode well for PG&E, which already said it would seek to recover costs if found liable for the Wine Country fires.

PG&E has been watching the outcome of this decision particularly closely after state investigators said they were probing whether the utility’s electrical equipment sparked the North Bay fires, which killed 44 people and destroyed more than 8,900 homes.

Hundreds of survivors have filed dozens of suits against PG&E, claiming the utility is liable for damages under inverse condemnation but also that it was negligent in the operation of its facilities.

The increasing risk of insuring PG&E has led to inflated premiums for the utility imposed by its various insurers.

In a 2017 report to the utilities commission, which forecasts expenses for the next three years, PG&E predicted its companywide administrative and general expenses to be $11 million more than a year before — primarily because of an “increase in forecast insurance premiums and the purchase of additional insurance.”

The utility cautioned shareholders that it may not be able to find sufficient insurance coverage because of the strict liability standard applied to wildfires under inverse condemnation.

“As a result of recent losses recorded by insurance companies, the risk of increase of wildfires, including as a result of the ongoing drought, … the Utility may not be able to obtain sufficient insurance coverage in the future at comparable cost and terms as the utility’s current insurance coverage, or at all,” PG&E wrote in its 2016 annual report.

Southern California Edison spokesman Brian Leventhal also said coverage has been increasingly difficult to find at comparable prices.

Leventhal said the availability and cost of insurance is dependent on historical wildfire losses, forecasted weather conditions and an assessment of the utility’s risk the carriers perform themselves.

“Given the wildfire history in CA over the last several years, the application of strict liability to investor owned utilities, and current drought conditions, wildfire insurance has become increasingly expensive and capacity has diminished,” Leventhal said in an email. “We expect this trend will continue until conditions change.”

Conditions are not expected to get any more favorable to utilities as California state Senators Jerry Hill, Mike McGuire and Scott Wiener said they will introduce legislation later this month prohibiting utilities found at fault in wildfires from passing costs onto customers.

Utilities Commissioner Cliff Rechtschaffen said he does not hold utilities to a standard of perfection but added that the burden of proof is on them to prove that they responsibly manage their facilities.

“We can’t apply a standard that provides an incentive for utilities to act imprudently or unreasonably,” Rechtschaffen said.

“If we ruled that recovery is possible with less than prudent management, then that would send the wrong signal,” he said.

If PG&E were found to be liable for all costs in connection to the North Bay fires, including damages to commercial and residential structures as well as fire suppression costs, it’s unknown Whether the commission would allow the utility to recover costs from its ratepayers.

If the cause of the North Bay fire were found to be attributable to the utility, PG&E would have to prove that it responsibly managed its service territory before the commission considered allowing it to pass on uninsured costs to ratepayers. The utility was insured for $800 million, while attorneys for plaintiffs who are suing PG&E claim it is liable for billions of dollars in damages.

If the cause of the fires were to be laid PG&E’s door, Singleton commented, “I think the CPUC is going to look at the evidence and determine what PG&E’s level of culpability was. If the negligence isn’t overwhelming, given what they’ve done in the past, the CPUC just might allow a pass-through” — allowing the utility to charge ratepayers.

Utilities Commissioner Martha Aceves said in the Nov. 30 SDG&E decision that the strict liability applied to utilities in inverse condemnation cases rests on the incorrect premise that utilities are allowed to spread the costs of damages from wildfires to its ratepayers.

Aceves and Picker called on the state Legislature to re-examine the commission’s authority to apportion responsibility and costs when determining liability for wildfires so that utilities may be allowed to pass on some costs but not others, taking prudent management into account.