A political firestorm is about to hit the Capitol: Who will pay for wildfire damages?
Asked this spring to identify the most important issue facing California lawmakers, the leader of the state Senate didn’t hesitate: wildfires.
Two months later—with fires blazing from the Oregon border to San Diego—legislators are poised to wade into a political firestorm sparked by last year’s historic fires and mudslides, which destroyed about 10,000 buildings and killed at least 66 people.
The biggest fight will be over liability—who pays for billions of dollars of damages from the loss of so many homes, businesses and lives? Expect another battle over how much utilities like Pacific Gas & Electric can pass liability costs onto their customers—and whether the state should step in to help. The backdrop for the drama: The scientific expectation that hotter, drier conditions brought on by climate change make it likely that California will suffer more large, intense fires.
All of this will play out in the Capitol in a special committee formed to create new laws aimed at preventing wildfires and improving the response to them. The committee has just a few weeks to figure it out because lawmakers are on summer recess for the rest of July and the legislative session ends on Aug. 31.
Interest groups with huge clout are gearing up. On one side are power companies that supply electricity to Californians and campaign cash to politicians. Their allies include an influential union representing electrical workers, and some environmentalists who see utilities as key players in California’s fight against climate change. On the other side stand different moneyed interests and political juice: insurance companies, plaintiffs’ lawyers and a coalition of fire victims that includes local governments and well-to-do homeowners.
“Even if it wasn’t contentious, it’s just complicated,” said Sen. Bill Dodd, a Napa Democrat who represents thousands of victims of last year’s Wine Country fires and is a co-chair of the new committee. “There are so many potential winners and losers depending on what decisions are made.”
Gov. Jerry Brown and legislative leaders have vowed they won’t retroactively change liability laws for the 2017 fires, which caused damages that will likely top $10 billion. But lawmakers will discuss changing liability laws to limit the financial burden on utilities in the future, when the next wildfires ignite.
The key issue is a legal doctrine called “inverse condemnation,” a fancy way of saying “with great power comes great responsibility.” Courts have ruled that the state Constitution gives utilities eminent domain rights—the power to take private land for public use. Subsequent rulings determined that utilities bear the associated responsibility in the form of strict liability. Under inverse condemnation, utilities are liable for any wildfire damage traced to their equipment—even if they were not negligent in maintaining it.
PG&E and other utilities are pushing to change inverse condemnation, arguing that it—combined with regulators’ decision barring San Diego Gas & Electric from passing liability costs on to customers following a 2007 wildfire—could cripple them.
“Without reform, the application of inverse condemnation directly threatens our shared energy future and the financial viability of California’s utilities that could unjustly face billions of dollars in liability without any ability to spread these costs across customers—irrespective of whether they are at fault for these wildfires,” said a statement from PG&E spokesman James Noonan.
Cal Fire investigations allege that PG&E’s equipment was involved in 16 of last year’s fires, and that in 11 of those the company violated state codes that require keeping trees and shrubs away from power lines. The company says it met the state’s standards. Investigators have not yet determined the cause of the Tubbs Fire, the deadliest of last year’s blazes.
The utilities argue that climate change contributes to wildfires, and that liability rules should reflect a “new normal” that involves greater risk.
“If we are operating the system and we’ve done everything we can and yet the environment around us causes a problem that leads to a large disastrous fire, the (legal) structure needs to be modernized to reflect today’s new challenges,” said Eugene Mitchell, vice president of San Diego Gas & Electric, which is widely praised for making its power system safer after the 2007 fire by replacing wood poles with steel and creating a high-tech weather center that tracks conditions before fires erupt.
Insurance companies and fire victims want to keep the inverse condemnation law—seeing the enormous liability it creates as an incentive for utilities to do everything possible to make the electrical system safe.
“You have to maintain some type of liability so that you continue to have responsible parties,” said Mark Sektnan, vice president of the Property Casualty Insurers Association of America.
Currently insurers pay their policy-holders after a disaster, then turn to utilities for reimbursement. Without that, insurers would likely charge homeowners more.
Other issues lawmakers will likely debate include how to strengthen the electrical system to prevent future fires and how much utilities can spread liability costs onto customers. A new bill proposed by Democratic Assemblyman Bill Quirk of Hayward would allow PG&E to access state-authorized bonds to pay off damages from last year’s fires. PG&E customers would pay off the debt, though at a lower rate than if PG&E had to borrow from another source, the bill says.
“One way or another, ratepayers are going to be part of the solution and it’s just a matter of what’s the venue: bankruptcy court or the state Legislature?” said Scott Wetch, a lobbyist for the electrical workers union.
Though raising rates for customers is politically unpopular, Wetch says it’s no different than how other businesses handle disaster—whether it’s an unexpected freeze that causes vegetable prices to rise, or an explosion at an oil refinery that triggers a jump in prices at the pump.
Issuing bonds to PG&E would amount to a bailout, said Patrick McCallum, a lobbyist whose Santa Rosa home burned down in October. He has since become a leading voice advocating in the Capitol on behalf of fire victims. But he said his group would not oppose the legislation if lawmakers prioritize a new fire prevention strategy and maintain inverse condemnation.
Doubts about whether California will change the liability law caused Standard & Poors to downgrade its rating outlook for two of the state’s utilities this week: “Time is of the essence because the 2018 legislative session ends in just under eight weeks and wildfires continue to rapidly and actively spread throughout California,” said the July 9 report by S&P Global Ratings.
Lower credit ratings make it more expensive for utilities to borrow money that allows them to build clean-energy projects such as charging stations for electric cars and battery storage for solar power—items lawmakers and Brown have prioritized in California’s fight against global warming.
“The utilities have financed a big part of the climate change agenda we’ve accomplished,” said environmental lobbyist V. John White. “We can’t have paralysis on building the infrastructure we need to meet our greenhouse gas reduction targets.”
It adds up to a monumental heap of fallout from recent wildfires. And it explains why Senate leader Toni Atkins, a San Diego Democrat, was so quick to say in May that the mop-up is the biggest issue facing the Legislature:
“This new coined phrase, ‘new normal,’ is really something we’re going to have to grapple with in terms of climate change and what it means for us, and the cost to California.”
Correction: This story has been updated to remove a reference to Patrick McCallum suing PG&E. He is considering filing a lawsuit but has not yet done so.