Strict wild­fire li­a­bil­ity rule hin­ders PG&E

San Francisco Chronicle Late Edition - - FRONT PAGE - By J.D. Mor­ris

While bank­ruptcy will help Pa­cific Gas and Elec­tric Co. ad­dress its im­me­di­ate fi­nan­cial chal­lenges, it may do lit­tle to al­le­vi­ate longer-term head­winds posed by Cal­i­for­nia’s re­lent­lessly dev­as­tat­ing wildfires and the strict li­a­bil­ity the state im­poses on util­i­ties whose power lines cause them.

Thanks to a once-ob­scure le­gal doc­trine known as in­verse con­dem­na­tion, PG&E can be held li­able for dam­age caused by its equip­ment, even if the com­pany wasn’t neg­li­gent.

Rooted in the U.S. and state con­sti­tu­tions and im­posed on util­i­ties by Cal­i­for­nia courts with fair­ness in mind, in­verse con­dem­na­tion is seen by many as an in­creas­ingly in­sur­mount­able bar­rier

to PG&E’s fu­ture — one that could re­main af­ter the util­ity and its par­ent com­pany com­plete a bank­ruptcy re­or­ga­ni­za­tion.

But any re­form ef­fort would en­counter stiff op­po­si­tion from politi­cians, wild­fire vic­tims and oth­ers who could see it as yet an­other at­tempt to help the em­bat­tled util­ity avoid re­spon­si­bil­ity for dis­as­ters its equip­ment caused.

PG&E told in­vestors when it an­nounced its in­tent to seek pro­tec­tion from cred­i­tors last month that the strict li­a­bil­ity doc­trine was one of many fac­tors its board weighed be­fore de­cid­ing to pro­ceed with a fil­ing un­der Chap­ter 11 of the U.S. Bank­ruptcy Code.

Specif­i­cally, di­rec­tors con­sid­ered “the unique na­ture of Cal­i­for­nia’s doc­trine of in­verse con­dem­na­tion and whether it is pos­si­ble for PG&E to con­tinue to own and op­er­ate all of its cur­rent as­sets as an in­vestorowned util­ity sub­ject to that doc­trine,” the com­pany’s fil­ing with the Se­cu­ri­ties and Ex­change Com­mis­sion said.

Com­pound­ing the chal­lenge, courts have de­ter­mined the doc­trine ap­plies re­gard­less of whether util­ity reg­u­la­tors let PG&E re­cover costs from a spe­cific wild­fire from its cus­tomers, the com­pany has said.

PG&E says that means it could find it­self in a sit­u­a­tion where a court de­ter­mines the com­pany is re­spon­si­ble for a wild­fire be­cause of in­verse con­dem­na­tion, but reg­u­la­tors don’t al­low it to pass costs along to cus­tomers to help fi­nance the huge bill.

“The point of in­verse con­dem­na­tion law was to spread li­a­bil­ity across es­sen­tially all of so­ci­ety when some­thing that is used by all of so­ci­ety causes a prob­lem,” said Sev­erin Boren­stein, a UC Berke­ley en­ergy econ­o­mist. “But when you do that and then say, ‘And no, you can’t spread the costs,’ there is a bit of ten­sion there.”

It’s a ten­sion PG&E will prob­a­bly con­tinue try­ing to rec­on­cile, through ei­ther changes to how Cal­i­for­nia ap­plies in­verse con­dem­na­tion or other mea­sures.

PG&E still be­lieves that im­pos­ing strict li­a­bil­ity on the com­pany with­out tak­ing fault into con­sid­er­a­tion “is a flawed le­gal doc­trine and bad for our cus­tomers, our econ­omy and our state,” spokes­woman Lynsey Paulo said in an email.

“How­ever, we un­der­stand and ap­pre­ci­ate that there are di­verse opin­ions on this sub­ject and we re­main open to any and all so­lu­tions and paths that would po­ten­tially mit­i­gate the im­pacts of wildfires,” Paulo said.

One al­ter­na­tive PG&E is open to is a pos­si­ble “statewide wild­fire in­sur­ance fund” that would “as­sist in the event of cat­a­strophic wildfires,” Paulo said in the email.

PG&E tried un­suc­cess­fully to get free­dom from the doc­trine through state law­mak­ers in the wake of the 2017 Wine Coun­try wildfires. But in­verse con­dem­na­tion has proved to be a stub­born po­lit­i­cal prob­lem for PG&E.

State Sen. Bill Dodd, D-Napa, wrote a wild­fire bill that cre­ated a new process for PG&E to pass 2017 fire costs along to its cus­tomers with­out re­form­ing in­verse con­dem­na­tion. In an in­ter­view, he said he would have a hard time back­ing any leg­is­la­tion to give PG&E — or the state’s other in­vestor-owned util­i­ties — flex­i­bil­ity around the doc­trine now.

“The only way I could sup­port any move­ment on that is if I saw not anec­do­tal ev­i­dence — hard ev­i­dence — that PG&E fi­nally has a cul­ture of safety,” Dodd said. “Un­til that’s done, it’s a very hard dis­cus­sion to have.”

The wild­fire fund al­ter­na­tive Paulo iden­ti­fied could be eval­u­ated by a new com­mit­tee fo­cused on wildfires and util­i­ties that was au­tho­rized by Dodd’s bill, SB901. Gov. Gavin New­som ap­pointed his three mem­bers to the com­mit­tee just last month, and Dodd said it “ab­so­lutely” makes sense for them to study the is­sue.

Such a fund could ac­com­plish the same goal as in­verse con­dem­na­tion by pro­vid­ing a source of funds for a util­ity to draw on to make vic­tims whole when power lines cause fires through no neg­li­gence on the com­pany’s part.

“The ex­press goal of in­verse con­dem­na­tion is to put the owner back into the fi­nan­cial con­di­tion they would have been in had the in­verse con­dem­na­tion not oc­curred,” said Robert Thomas, a Hawaii lawyer who writes a blog on the topic at www.in­ver­sec­on­dem­na­tion. com. “It’s sim­ply a cost-spread­ing de­vice . ... In­sur­ance seems like, if it were to achieve that same thing, then at least in the­ory it sounds like some­thing that could be work­able.”

PG&E might even find a way to bring up in­verse con­dem­na­tion in bank­ruptcy court, Thomas said. He pointed to a re­cent opin­ion from a Ninth U.S. Cir­cuit Court of Ap­peals panel in a case in­volv­ing an in­verse con­dem­na­tion claim and the city of Stock­ton’s bank­ruptcy.

In a 2-1 de­ci­sion, the ap­peals court in San Fran­cisco held that Stock­ton could treat a cer­tain in­verse con­dem­na­tion claim just like any other un­se­cured claim in its bank­ruptcy case, putting it to­ward the back of the line and al­low­ing the city to jet­ti­son the debt. Thomas said the case, which in­volved a land dis­pute, has some par­al­lels to PG&E’s sit­u­a­tion.

But Dou­glas Baird, a law pro­fes­sor at the Univer­sity of Chicago, said he doesn’t think the case will prove de­ci­sive on how wild­fire vic­tims are treated in the PG&E bank­ruptcy.

“The ef­fect of the Ninth Cir­cuit’s ma­jor­ity opin­ion is they’re just say­ing these are or­di­nary, un­se­cured claims in bank­ruptcy that can be dis­charged,” Baird said af­ter re­view­ing the opin­ion. “But they’re not say­ing that some­how they’re un­usu­ally low” pri­or­ity.

The facts of that com­pli­cated case also dif­fer in key ways, mostly be­cause the plain­tiff “no longer had any in­ter­est in the prop­erty” in ques­tion, ac­cord­ing to Steve Cam­pora, an at­tor­ney who has sued PG&E.

“The only is­sue was whether or not he was en­ti­tled to more money,” Cam­pora said in an email. “The city could not be li­able for tak­ing prop­erty which he had no in­ter­est in.”

Re­gard­less, any ef­fort to weaken Cal­i­for­nia’s in­ter­pre­ta­tion of in­verse con­dem­na­tion — whether in court or the Leg­is­la­ture — would in­evitably face re­sis­tance from wild­fire vic­tim ad­vo­cates.

“That train has left the sta­tion,” said Frank Pitre, an­other lawyer su­ing PG&E on be­half of vic­tims of the 2017 and 2018 wildfires.

In­verse con­dem­na­tion is not the source of PG&E’s prob­lems, Pitre said.

“PG&E’s is­sues are cre­ated by the lack of pru­dent man­age­ment,” he said. “And I don’t say that lightly.”

Gabrielle Lurie / The Chron­i­cle 2018

A Cal­i­for­nia le­gal doc­trine that can strictly im­pose li­a­bil­ity for wildfires on util­i­ties casts a shadow over PG&E’s fu­ture.

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