Newsom team calls for less utility liability on wildfire—and ignites ‘a hornet’s nest’

In a comprehensive and already controversial report aimed at spreading the staggering cost of wildfires in California, an advisory panel to Gov. Gavin Newsom recommended on Friday that California ease strict liability laws that have already prompted the state’s largest utility to file for bankruptcy in this era of climate change.

The provocative—and politically challenging—recommendation was among three dramatic proposals by a “strike force” Newsom had tasked with drawing up a wildfire plan shortly after his January inauguration. Fire has been among the most daunting priorities for the nascent administration, which has had to deal not only with the aftermath of last year’s historically lethal Camp Fire in Butte County, but also with the Chapter 11 filing of Pacific Gas & Electric Co., the huge and unpopular electricity provider whose equipment is a prime suspect in the blaze.

Newsom said he hopes the report facilitates a tough conversation among utilities, insurance companies, attorneys, wildfire victims and others for crafting solutions in the next 90 days, when the Legislature has a bill deadline.

“I’m of the opinion that in order to maintain safe, reliable, affordable service—utilities and electricity—to meet our climate goals, to protect the victims of these fires, that we’re all in this together and we all have a role and responsibility to play,” Newsom said at a press conference a the headquarters of the California Governor’s Office of Emergency Services just outside Sacramento.

Credit rating agency Moody’s Investor Services responded positively Friday.

“None of the proposed concepts will alone mitigate the risk for California’s utilities, but combined, the strategies start to exhibit more promise,” said Moody’s vice president Toby Shea. “The credit impact won’t become clear until legislative details addressing liquidity and cost recovery are finalized.”

PG&E, which is relied upon by most of Northern California to keep the lights on, filed for Chapter 11 reorganization on Jan. 29 in the aftermath of the 2017 and 2018 wildfire seasons, the two most destructive in state history. The utility cited up to $30 billion in liabilities since many blazes have been linked to its equipment.

Currently, under a legal standard known as inverse condemnation, utilities are liable for any wildfire damage traced to their equipment even if they were not negligent in maintaining it. While utilities want to reduce that standard, lawmakers, as well as insurance companies and local governments, have resisted changes because it would shift costs to insurers and wildfire victims.

Last year, the state did adopt changes under SB 901 that made it easier for utilities to absorb the cost of fire damages by borrowing money and charging customers to pay it back over many years, a process called securitization. However, the process could take a long time, leaving utilities without timely access to financing.

The report noted the credit rating agencies, Moody’s, Standard & Poor’s and Fitch, downgraded California’s three large investor-owned utilities, “opining that the measure failed to adequately address the risks to the utilities’ financial health posed by inverse condemnation.” PG&E’s bonds are in junk status and Southern California Edison and San Diego Gas & Electric are at close to non-investment grade ratings.

The strike team offered a trio of options to Newsom:

  • Create a state fund to provide utilities access to cash to pay wildfire damage claims while state regulators decide if the utilities can pass the cost to ratepayers. This would be a relatively minimal change of SB 901 to address utility concerns about accessing money.
  • Change the strict liability under inverse condemnation to a fault-based standard. This would be the most controversial and politically difficult since it would shift the risk to insurance companies and uninsured property owners where the utility was not at fault. Insurance companies could raise rates dramatically or stop offering coverage.
  • Establish a wildfire fund by pooling money from the investor-owned utilities to pay for catastrophic wildfire claims. The fund would be limited to paying out only when the fire meets the legal threshold for a catastrophic wildfire.

Newsom said he wasn’t going to share his opinion on whether to change inverse condemnation and believes lawmakers are prepared to start a new round of negotiations in the aftermath of the Camp Fire in Butte County where 85 people were killed.

“It’s a different world completely,” the governor said.

Assemblyman Chris Holden, who chairs the Assembly utility committee, said he’s prepared to work on new legislation. “All stakeholders will have to sideline their agendas and step up as Californians to fix this problem,” he said in a statement, “and I’m ready to roll up my sleeves and do the hard work necessary.”

But, he added: “Inverse condemnation is a hornet’s nest. It’s a tough topic especially because of the constitutional questions around it. We would need a deeper and longer conversation around reforming inverse condemnation that I don’t see happening in 90 days.”

The report also recommends reforming the state’s investor-owned utility regulator, California Public Utilities Commission, and puts forth various options for PG&E as it works its way through bankruptcy proceedings, including municipalization.

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