As Pacific Gas & Electric plunged into bankruptcy in January 2019, Standard & Poors (S&P) Global Ratings slashed the credit grade for California’s other two major electric utilities, Edison International and Sempra Energy, with the possibility of even further downgrades.
The reason? Inverse condemnation. Under California law, utilities can be held liable for any fires sparked by their equipment, even if all safety rules are followed.
Fires have become larger and increasingly common, and in addition to the credit downgrades, both Edison and Sempra could be just one fire away from ruin. Both are appealing to California lawmakers to revisit the legislation.
“This is a really serious issue that could absolutely impair the health of utilities in this state,” said Pedro Pizarro, Edison’s CEO,
“I don’t want to speculate about bankruptcy, but this is serious. And the current approach is just not sustainable.”
Whilst a solution is still to be found, there are potential ways forward.
Utilities and California lawmakers worked on a bill in 2018, which could potentially reduce the liability to utilities for wildfire-related damages in the state. The bill was passed in August but it doesn’t offer aid for 2018 fires, a critical issue after 2018’s fire season, and the deadliest in state history.
When it was confirmed that PG&E’s equipment was seen as a possible ignition source, the company estimated $30 billion in wildfire liabilities and filed for bankruptcy.
California’s governor, Gavin Newsom, assembled an advisory panel and told them to speed up efforts and produce a report by the middle of the second quarter of 2018. Utilities and legislators offered ideas, but a solution that will help the power companies without becoming a financial burden to the state, or raise the ire of ratepayers and voters isn’t guaranteed.
The concept of inverse condemnation is rooted in California’s constitution, meaning any direct changes would require a constitutional amendment. An amendment would need to win two-thirds majorities in both the US state assembly and Senate, and then be approved by voters.
“There’s no sense of anyone planning to do that, at least in the Democratic caucus,” said state Senator Jerry Hill.
The utilities say another option is for the legislature to change the way inverse condemnation is applied - instead of using a standard of strict liability, other aspects will have a mitigating effect, for instance the state could instead look at whether the utility acted reasonably in running its equipment. Precedent law has bearing here: a 1997 state Supreme Court ruling that used this standard in a water-related case.
“We’ve actually looked at this really closely, and we believe that under the law, yes, the legislature has the power to change that standard,” Pizarro said. “We’re not looking to get off the hook here if we’re negligent. If we’re negligent, we should be held accountable.”
However, utilities already pitched this idea in 2018, in a failed bid to change the law. Legislators said electric utilities and water districts were too different to make this a plausible solution.
Some legislators are focusing on alternative methods of compensation for fire victims, easing the pressure on utilities.
US assemblyman Chad Mayes introduced a bill in January 2019 to create a California Wildfire Catastrophe Fund. Utilities would contribute to the fund annually and a public authority would oversee it. The funds would be invested in bonds, and the proceeds used to settle fire claims.
There are details to still be worked out around issues around passing part of the cost onto customers, the possibility of state seed funding from its greenhouse gas cap-and-trade programme.
“The idea is to pre-fund the disaster, not post-fund the disaster,” said Mayes, a Republican representing desert communities around Palm Springs. With the law passed last year, “we tried to post-fund the disaster.”
What if nothing’s done?
There’s always the chance the state could refuse to contribute, and when PG&E announced its bankruptcy filing, the Newsom took no public steps to stop it.
The consequences of inaction however, can also be significant. Risks include utilities credit ratings being dropped to junk status, which would mean it would difficult to impossible for utilities to access further capital. Higher borrowing costs, in turn, mean higher monthly bills.
“The rating agencies are looking at California now and saying, ‘There’s just too much risk here,’ ” Pizarro said.