Wildfire liability a barrier for PG&E
State rule clouds future after bankruptcy filing
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.”
A California legal doctrine that can strictly impose liability for wildfires on utilities casts a shadow over PG&E’s future.