Gov. Gavin Newsom is right that California needs a new way to pay for the damage caused when power lines spark massive wildfires that destroy property and kill people and animals. Fires have ravaged the state over the last two years, and experts say this may be California’s “new normal.” And although the governor wants to “de-prioritize” building in high fire-risk areas, a quarter of Californians live in these dangerous zones now.
So it was appropriate for him to call on the Legislature earlier this month to figure how to do that before wildfire season kicks into high gear this summer. Newsom stopped short of endorsing a specific a path forward, noting that Gov. Jerry Brown failed last year when he pushed legislators to adopt his prescription. Instead, Newsom offered legislators a report from his wildfire “strike force” that outlined three options to more fairly allocate wildfire damage costs, while warning that if the state fails to take action, the “future is not very bright.”
That’s because wildfires have become so devastating, costs traditionally assigned to the state’s utilities are threatening those companies with insolvency. The state’s largest investor-owned utility, Pacific Gas & Electric, filed for bankruptcy protection in January in the face of some $30 billion in potential fire-related claims from 2017 and 2018. Yet if utilities aren’t required to cover those losses, insurers could be overwhelmed with claims and driven out of the market.
It’s fine for the governor to leave it to lawmakers to come up with a specific plan, so long as he doesn’t allow them to duck the task. It’s not fair to ratepayers, the public, the investor-owned utilities and the Californians who live in high-risk wildfire areas to put this off another year. Any true solution must include a change to the current and unsustainable system in which utilities are required to reimburse damaged property owners if their equipment starts a fire regardless of whether they were negligent.
This strict-liability system — called “inverse condemnation” — worked out pretty well in the days when fire damage remained fairly consistent and manageable from year to year. The idea was that utilities, which are required to serve all comers, can pass the cost of damages on to a broad base of ratepayers without inflicting too much pain on anyone. But the calculus changed in 2017 when wildfires tore through the state, reducing Santa Rosa neighborhoods to smoking rubble and setting the scene for deadly Montecito mudslides. It was the costliest fire year on record — until 2018, when the records were shattered again. Fire damage claims for 2018 may reach $20 billion. What’s more, regulators recently started making it harder for utilities to pass on wildfire costs to ratepayers if they are judged not to have been “prudent managers,” a subjective determination.
Scrapping the inverse condemnation standard is only one of the options for reallocating fire claims in the strike force’s report. The other two — a “bridge financing” fund to pay wildfire claims quickly and a wildfire fund that would pool capital from the state’s investor-owned utilities to pay claims — are not bad ideas at all. But they’re workable only as complements to a fault-based standard.
Invariably, changing liability rules will be the hot button in any debate about wildfire costs, and legislators will flinch at being seen as bailing out utilities. But no one is suggesting that utilities get a pass if a fire is started by a known safety threat that they failed to fix. Of course they must be held accountable when they are negligent.
Another important recommendation in the report was to reform the Public Utilities Commission, the state agency that regulates investor-owned utilities. Even the regulators themselves say they don’t have the resources to inspect utility equipment and force corrections, and instead act only after something’s gone wrong. Furthermore, the PUC has in the past been too cozy with utility executives. This is unacceptable. Proposals are needed to reform both the authority and the composition of the PUC, not just increase its budget or tinker with its operations.
While PG&E is going through the bankruptcy process, the other two large investor-owned utilities, Southern California Edison and San Diego Gas & Electric, have had their credit ratings downgraded because of uncertainty about future wildfires claims. That’s not just bad for utility investors, but also for ratepayers who absorb the utilities’ higher cost of doing business. Bankruptcies also threaten the state’s ability to meet its clean energy goals.