California fires causing bankruptcy concerns for IOUs


California’s investor-owned utilities (IoUs) face liability for damage caused by the state’s 2017 wildfires that could bankrupt them.

California experienced 394 wildfires at the end of 2017 seeing five of its 20 most destructive fires between October and December.

The total cost incurred, including fire suppression, insurance and recovery, could run up to $180 billion.

California courts have interpreted a law regarding utility liability to mean that if utility equipment was involved in the starting of the fire, or if the utilities acted negligently, then they must pay the associated damages.

With the frequency of fires however, there is a growing concern that IoUs could experience solvency challenges to the growing financial burden.

Regulators are tackling the question of how to determine the nature of “prudence”, as well weighing how to judge if weather conditions were normal or extreme, in order that the law be applied fairly.

Policy makers and legislators are attempting to balance the rights of the victims with the accountability of the IOUs.

Potential solutions to the issue of financial liability include reducing exposure through risk pools and settlements with insurers and others who contributed to the fire.

The concern about the utilities’ financial viability has brought forward potential solutions, including ways to reduce their exposure to liability through risk pools and settlements with their insurers and others who contributed to the fire.

Finances under fire

The first instance of this kind of liability was when the California Public Utilities Commission (CPUC) held SDG&E liable for damage caused by the wildfires of 2007.

The amount to be paid was $379 million.

SDG&E was found to be negligent under the state’s “strict liability” interpretation of the “inverse condemnation” doctrine. In other words utilities can be found liable if their infrastructure fails.

Similar circumstances occurred during October 2017 when 172 wildfires broke out in Northern California. 8 large fires ensued, 8,920 structures were destroyed and 44 people were killed.

On December 4, 122 wildfires broke out in Southern California. Six fires grew into large, fast moving conflagrations 1,370 structures were destroyed and two lives were lost.

PG&E was found liable by Cal Fire due to faulty equipment involved in 12 of the Northern Region fires and the utility potentially guilty of negligence and violations in eight.

PG&E could face up to $15 billion in liabilities.

Stock market activity shows increasing investor concern over utility liability, another contributing factor to the bankruptcy concerns.