Future of PG&E, other state utilities, may depend on state legislation next year

State lawmakers are split on how the Legislature should address wildfire-related costs and liability for utilities, with a primary focus on Pacific Gas & Electric Co.

Some want to save the embattled utility from bankruptcy in what critics have called a bailout while others are calling for drastic changes to be imposed on the company in the wake of allegations by plaintiffs in lawsuits that PG&E equipment caused what is now the worst wildfire in state history.

The blaze was second only to last year’s wildfires, which were also alleged in lawsuits to have been caused by the utility’s poor infrastructure and management.

State Sen. Jerry Hill, D-San Mateo, and Assemblyman Chris Holden, D-Pasadena, stand on opposite sides of proposed legislation designed to extend liability protections from SB 901 to the state’s largest utility for potential costs related to wildfires in 2018.

SB 901, passed in September and introduced by state Sen. Bill Todd, D-Napa, affords utilities more flexibility in covering costs from last year’s wildfires and in those to come but not fires started in 2018. It will allow PG&E to pass wildfire-associated costs from 2017 onto ratepayers with approval from the California Public Utilities Commission.

The legislation empowers the commission to employ a stress test to determine the maximum amount PG&E can pay without going bankrupt, as it has repeatedly warned it would, and shift the remainder of the balance to the utility’s customers through higher electricity bills.

Holden plans to propose legislation filling that hole in coverage by offering the same option for wildfires started in 2018, according to legal observers.

“I’m very concerned,” Holden said in December. “I think there are a very fragile set of circumstances.”

A PG&E spokesperson could not be reached for comment for this story.

But in an SEC filing last month, the company warned: “While the cause of the Camp Fire is still under investigation, if the Utility’s equipment is determined to be the cause, the Utility could be subject to significant liability in excess of insurance coverage that would be expected to have a material impact on PG&E Corporation’s and the Utility’s financial condition, results of operations, liquidity, and cash flows.”

The chairman of the Assembly Utilities and Energy Committee was forced to delay the bill’s introduction from December to January because of renewed scrutiny aimed at PG&E following the Camp Fire, according to The Utility Reform Network Executive Director Mark Toney.

But Hill, who was a vocal opponent of SB 901, has urged lawmakers to consider PG&E’s history of misconduct and negligence before approving further legislation forcing ratepayers to foot the bill.

“What would be the incentive now for PG&E to act any differently when they know they can get a bailout?” Hill asked.

The controversy concerning legal culpability centers around the standard of strict liability under inverse condemnation utilities are held to when their equipment or infrastructure cause fires, which in turn destroy personal property. Utilities are liable for all resulting damages, regardless of whether they were negligent or engaged in any wrongful conduct.

Utilities have argued the legal doctrine keeping it accountable for damages, which is unique to California, unfairly holds them to an unreasonable standard, according to Bradford Kuhn of Nossaman LLP, who chairs his firm’s eminent domain and valuation practice group.

“To apply a blatant strict liability standard regardless of whether you did something wrong is a hard position for utilities to take,” Kuhn said. “That’s a hard position for them to sustain permanently as wildfire risks increase with climate change issues and as California builds out into more dense areas.”

PG&E has maintained that last year’s historically hot and dry weather was beyond its control and that increasingly destructive wildfires are to be expected because of climate change. Gov. Jerry Brown reinforced the utility’s claims by calling the state’s most recent wildfires “the new normal” in August.

Brown suggested legislation in July which aimed to upend the current system of inverse condemnation, instructing the courts to consider whether a utility acted reasonably and complied with safety regulations.

The courts would have to “balance the public benefit of the electrical infrastructure with the harm caused to private property and determine whether the utility acted reasonably,” according to the proposal. State lawmakers abandoned the initiative at the beginning of August because there was not enough time to settle the contentious issues before the end of the legislative session, according to Hill.

The Utility Reform Network has similarly argued for treating all wildfire damage and liability under the same standard of reasonable conduct. It has advocated for a state catastrophic wildfire insurance fund patterned after Florida’s hurricane disaster fund, which would also be paid for through a property tax.

“Let’s look at all wildfire liability and not just isolate the utilities…,” Toney, the network’s executive director, said. “But if fires are caused by negligence, that shouldn’t be covered under the fund.”

Governor-elect Gavin Newsom worked closely with PG&E as mayor of San Francisco from 2004 to 2011. He has opposed efforts to convert it into a municipal utility. Nearly all of the utility’s top executives, including CEO Geisha Williams, contributed to his gubernatorial campaign.

Attorneys representing thousands of plaintiffs from last year’s fires have been critical of utilities’ efforts to change inverse condemnation laws. They argued the wildfires were avoidable had PG&E, which has spent at least $6.2 million lobbying state legislators since the 2016 election cycle according to the Secretary of State, properly managed its equipment and operations leading up to the blazes.

“PG&E’s well-documented disregard for safety regulations, and blind eye towards the use of effective maintenance and inspection practices for their facilities and equipment in light of an aging infrastructure, lies at the root of the various factors which caused and contributed to causing some of the most destructive and deadly wildfires California has ever seen…,” wrote Frank Pitre of Cotchett, Pitre & McCarthy LLP in a complaint. The co-lead attorney for the individual plaintiffs said the North Bay lawsuits are on track to start August 2019.

The Department of Forestry and Fire Protection found PG&E in violation of state safety laws in 17 of last year’s fires. It referred its findings to the appropriate district attorneys’ offices for possible criminal prosecution, which may put the utility in violation of its parole following the 2010 San Bruno pipeline explosion.

JPMorgan Chase & Co. has estimated that PG&E faces as much as $17.3 billion in damages from wildfires that swept across Northern California last year. It has put the company’s potential liability at the forefront of the legislative debate as to whether inverse condemnation laws should be rewritten to give utilities more wiggle room and if it should be allowed to pass costs onto ratepayers.

PG&E was brandishing the threat of bankruptcy to force legislators to bail them out, according to Toney, who said they caved in passing SB 901. “It is a scare tactic that has no basis in reality,” he said.

The utility should instead be put on a payment plan “just like they’re trying to put ratepayers on,” if shareholders are not able to cover the extent of their liability, Toney added.

Morgan Stanley and Wells Fargo & Co. independently determined that if PG&E were held liable in the range of $10 billion to $15 billion for the 2017 blazes, as most industry experts estimate, the net cost to the utility would be as little as $3.75 billion to $5 billion since insurance companies are likely to settle their claims for cents on the dollar, according to Hill.

Since state regulators already determined PG&E can afford to pay out roughly $3 billion in costs related to the 2017 wildfires, the utility should have to securitize make the remainder of the balance, he added.

Converting the investor-owned-utility into a municipal utility is also on the table as a more sustainable solution, according to the state senator, who asserted that the Los Angeles Department of Water and Power is the largest municipal utility in the country and operates with lower rates and safer management.

Hill said California Public Utilities Commission President Michael Picker indicated that state regulators are “looking at and are making sure they have all the tools in place to do what they need to do to maybe structurally change PG&E.”

In a public commission meeting in December amid chants by protesters of “no bailout,” Picker said the company “lacks a clear vision for safety” and will face a comprehensive review because of alleged negligence leading up to the Camp Fire.

“There’s some fundamental problems here, so I think everything is on the table ranging from a state takeover to them being bought out by another company,” Toney said. “What is not on the table is business as usual.