Inverse condemnation still applies to PG&E, bankruptcy judge confirms

The Pacific Gas & Electric Co. lost its bid to offset some of its mounting financial culpabilities in the midst of its bankruptcy by fighting a stringent liability doctrine which could largely affect its wildfire damage estimation proceedings.

Unwilling to disrupt other courts' rulings that have privately owned public utilities can be liable under inverse condemnation, U.S. Bankruptcy Judge Dennis J. Montali, who is overseeing PG&E's Chapter 11 proceedings, found on Wednesday that the doctrine applied to the utility as well.

PG&E was unable to be reached for comment.

"Those making claims against PG&E appreciate the judge's attention to detail, and we agree with his ruling," said Craig S. Simon, managing partner of Berger Kahn who is co-lead for subrogation plaintiffs in the Southern California fire cases and co-lead on the Tubbs Fire litigation pending in San Francisco Superior Court.

Montali's ruling now serves as a factor to consider in PG&E's separate wildfire liability estimation proceedings pending before U.S. District Judge James Donato. In re PG&E Corp. 3:19-CV-05257 (N.D. Cal., filed Aug. 22, 2019).

The damages that claimants are seeking in estimation include two types: damages that victims can only recover under the inverse condemnation theory, which includes their attorney fees in prosecuting their claims, and interest on their damages from the day they were harmed until the day they were compensated.

DUMAS

Now, Donato has to include those components of damages during estimation proceedings, which was something PG&E wanted to take off the table, according to Cecily A. Dumas of Baker & Hostetler LLP, who represents wildfire victims in the bankruptcy case.

"We're very pleased with the ruling. It's the correct interpretation of California law and based on the principle that PG&E has a monopoly as the largest utility in the state," she added. "We're glad that Judge Montali didn't go out on a limb, because had he made a different ruling, it would've been changing the law instead of interpreting existing California law."

Inverse condemnation is based on a no-fault theory of liability and is rooted in the state Constitution. The doctrine holds that just compensation must be paid to owners whose private properties were taken or damaged for public use.

PG&E filed for bankruptcy in Jan. 29 as potential liabilities mounted from the 2017 and 2018 wildfires in Northern California. PG&E Corporation 3:2019-bk-30088 (N.D. Cal., filed Jan. 29, 2019).

While PG&E acknowledged its equipment caused all those fires except for the Tubbs Fire, it has not admitted liability for any of them.

The utility previously argued to Montali that inverse condemnation shouldn't apply as it is not a governmental public entity, which means it doesn't have the freedom to socialize liability costs via rate hikes to customers.

Montali disagreed. In his written ruling issued Wednesday, Montali noted California courts have not limited the application of inverse condemnation to public entities since at least 1894.

As to PG&E's argument about the rate-setting issues restricted and regulated by the California Public Utilities Commission, Montali pointed out that a private utility's ability to spread rate costs to customers is largely decided by the prudent manager standard.

"Through case law, the CPUC has developed this standard to be a 'prudent manager' standard by which a private utility's liability to raise rates to reimburse it for losses incurred through inverse condemnation is judged by whether the utility acted as a prudent manager," Montali wrote.

But PG&E never provided examples to show the court it has ever been denied cost recovery when it was found to have prudently managed its equipment, Montali added.

The state Supreme Court still has to rule on whether inverse condemnation still applies to a privately owned utility. Absent that decision, Montali has to predict how the court would rule.

Given that it is the Legislature's job to clarify such issues of inverse condemnation, and given that it refused PG&E's request to restrict inverse condemnation earlier this year, "there is simply no reason to suggest that this court can expect the California Supreme Court to step up and do it," Montali wrote.

He added that he didn't see any changed circumstances that would indicate the high court would rule differently on inverse liability.

"This court is not tasked to determine what the law should be, and is merely tasked with interpreting what the law is and has been for 125 years," Montali wrote. "The California Legislature has not taken up debtors' cause to their satisfaction and this court will not attempt to take its place."