(Bloomberg) -- Edison International and PG&E Corp. are trying to knock a hole in a California law that could put them on the hook for billions of dollars in damages for the worst wildfires in state history even if they did nothing wrong.
The owners of California’s two biggest utilities are going to court to limit their liability for a pair of smaller fires from 2015. Wins in those cases could shield them from massive payouts over the record-setting blazes last year outside Los Angeles and San Francisco.
The companies are in a bind the likes of which they’ve never faced -- and which they contend is fundamentally unfair. The California Constitution allows private property owners to hold the utilities 100 percent responsible for any losses caused by their equipment or power lines even if they didn’t act negligently. But PG&E and Southern California Edison say a recent decision by the state’s utilities regulator casts doubt on whether they’ll be able to pass on these costs to their customers in future electricity rate hikes.
Pacific Gas & Electric could face more than $15 billion in claims from the 2017 fires and Southern California Edison more than $4 billion, according to Fitch Ratings. The scale of the destruction by the fires and the uncertainty around whether the utilities will be stuck with the bill has prompted investors and insurers to jump ship and state politicians to worry about the companies being pushed into insolvency.
“We have an immediate crisis that is literally going to affect 70 percent of the population of the state of California that receives its electricity from the utilities,” Assemblyman Jim Patterson, a Republican from Fresno, said at a February hearing in Sacramento. “If this trend and this arc of facts continues, I think we’re headed toward bankruptcy.”
Edison and PG&E are trying to avoid such a doomsday scenario by asking judges overseeing lawsuits from separate blazes three years ago in the central Sierra foothills and southeastern California to rule that they shouldn’t be held liable for so-called inverse condemnation if they can’t recover their damages from ratepayers.
Wolfe Research said in March there are “no easy fixes” for the scores of lawsuits that have piled up against the utilities starting in October. But a Morgan Stanley analyst is bullish about the companies’ legal strategy, while acknowledging the matter may take years to resolve.
“We do believe that the fundamental core arguments that the utilities are presenting are likely to prevail,” Stephen Byrd said in an interview.
The underlying principle of inverse condemnation is that private property owners should be compensated for damage caused by public improvements, such as electricity lines and poles. In the case of the fires, property owners don’t have to show fault as long as the utilities’ equipment is determined to be the underlying cause of the conflagrations.
In the case of the 2015 Butte Fire that burned more than 70,000 acres and destroyed more than 500 homes in Amador and Calaveras counties, a judge concluded in June 2017 that PG&E was responsible because the utility admitted the culprit was a tree that fell into a power line. That left the company with an estimated tab of $750 million.
"The principle behind strict liability is that the party that’s best able to spread the costs should be held liable," said Alejandro Camacho, a professor of environmental law at the University of California at Irvine. "California has a fairly expansive view” and interprets the law to apply to privately owned utilities.
But unlike municipal utilities, privately owned ones like Pacific Gas & Electric and Southern California Edison can’t just pass on the costs from such calamities to their ratepayers. Instead, they have to go to the California Public Utilities Commission to prove their facilities were managed and operated prudently and reasonably in order to get permission for a rate increase.
In November, the CPUC denied such a request by Sempra Energy’s San Diego Gas & Electric to cover hundreds of millions of dollars it paid in settlements from wildfires that raged through Southern California in 2007. It was the first time a utility had asked the state’s regulator to raise rates for uninsured losses from increasingly frequent and destructive wildfires.
With the CPUC decision in hand, PG&E is set to appear Thursday before the Butte Fire judge, Allen Sumner, to urge him to throw out last summer’s ruling that had assumed the utility would be allowed to recover its losses.
The CPUC’s restriction of private utilities’ ability to spread the costs of inverse condemnation among its rate payers means "PG&E should not be treated as a public entity for purposes of inverse condemnation," the company said in a court filing.
A victory for the utility in the Butte Fire case would give it powerful ammunition to make the same argument in May when the inverse condemnation claims in the Wine Country fires are set for a hearing.
Steve Campora, a lawyer suing PG&E on behalf of victims of the Butte and Wine Country fires, said the company is misrepresenting the decision by the CPUC -- which found that SDG&E didn’t adequately manage its facilities leading up to the deadly wildfires a decade ago.
"If you don’t maintain your system reasonably and you’re negligent, you don’t get to pass that onto the ratepayers -- your shareholders are responsible," he said in an interview.
The utilities are “trying to get rid of inverse condemnation, they don’t like it,” Campora said. He cited their recent lobbying efforts in the state legislature in an attempt to change the law before official reports determine the cause of the Wine Country fires.
“Before the fire reports even come out, PG&E is screaming that they’re going to go bankrupt,” Campora said. “They know once the reports come out no one is going to feel sorry for them if they caused the fires.”
PG&E counters that inverse condemnation is “bad for customers and bad for the state of California.”
“Allowing essentially unlimited liability undermines the financial health of the state’s utilities, discourages investment in California and has the potential to materially impact the ability of utilities to access the capital markets to fund utility operations,” spokesman Keith Stephens said in a statement.
Edison and PG&E may have a good argument that the CPUC’s decision has limited their ability to spread their costs, said Shelley Saxer, a law professor at Pepperdine University in Malibu, California.
“But the PUC decision in this one instance doesn’t mean that they have foreclosed recovery of damages in other cases,” Saxer said.
California Supreme Court
Given the billions of dollars in damages at stake now, it’s likely that the California Supreme Court will have to resolve whether inverse condemnation can be applied to privately owned utilities, according to Saxer.
Edison is essentially using the same playbook as PG&E. It’s trying to set a favorable precedent in lawsuits over an older fire ahead of the onslaught of litigation it faces from December’s Thomas Fire, which became the state’s biggest wildfire on record after burning 282,000 acres (441 square miles) and destroying more than 1,000 structures in Santa Barbara and Ventura counties.
The utility is headed to court April 30 in Los Angeles to argue that it can’t be held liable for inverse condemnation in lawsuits brought over the 2015 Round Fire, which burned about 7,000 acres in Inyo and Mono counties when a tree fell on one of the utility’s tap lines.
The state’s three investor-owned utilities have said that inverse condemnation is bad policy and needs to be fixed. Edison International Chief Executive Officer Pedro Pizarro said this month he’s confident the issue will ultimately get solved -- either through the courts or the legislature -- because California needs financially healthy utilities.
Pizarro said he was “heartened" to see the joint statement from California Governor Jerry Brown and legislative leaders in March to make California more resilient against natural disasters and climate change, including updating utility liability rules.
Even if Edison and PG&E prevail on their argument that they can’t be sued for
inverse condemnation, they can still face negligence claims by property owners and insurers. The difference is that property owners will have to prove the utilities failed to operate responsibly.
The cases are: Butte Fire Cases, JCCP 4853, California Superior Court, Sacramento County; Haber v. Southern California Edison Co., BC585858, California Superior Court, Los Angeles County.
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