California

‘All in this together.’ Newsom says protect utilities, spread costs of future wildfires

“It’s part of the state’s DNA,” Gov. Gavin Newsom talks climate change and wildfire risk

Gov. Gavin Newsom announced April 12, 2019 a panel's findings that California should change its laws on wildfire liabilities, giving PG&E and other utilities more protection against billion-dollar claims.
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Gov. Gavin Newsom announced April 12, 2019 a panel's findings that California should change its laws on wildfire liabilities, giving PG&E and other utilities more protection against billion-dollar claims.

Saying the costs of wildfires must be spread more broadly as climate change worsens, Gov. Gavin Newsom said California must consider dramatic changes in California law Friday to give bankrupt PG&E and other big utilities greater legal protection against liabilities that can spiral into the billions of dollars.

Releasing a wide-ranging suite of proposals from a “strike force” he created two months ago, Newsom stopped short of endorsing what is likely the most controversial recommendation: a shuffling of costs that would likely take money from insurance companies and utility ratepayers, while potentially trimming damage payouts to wildfire victims and their lawyers. So far the Legislature, angered by the wildfires blamed on PG&E, has shown little appetite for letting utilities off the hook for wildfire damages and explicitly rejected a similar recommendation last year.

But Newsom, calling for swift action from the Legislature, said changes to the liability laws must be under consideration.

“Everyone wants everyone else to pay for it,” Newsom said as he gestured to a slide showing the billions of wildfire damages incurred the past two years. “We’re all in this together .... We all have a burden and a responsibility.”

The task force wrote: “No single stakeholder created this crisis, and no single stakeholder should bear its full cost. Any real plan must allocate costs resulting from wildfires in a manner that shares the burden broadly among stakeholders, including utilities (ratepayers and investors), insurance companies, local governments, and attorneys.”

News of a possible change in the liability standards sent PG&E Corp.’s stock price up $3.95 a share, to $23.08.

Still, Newsom and his panel were unsparing in their criticism of PG&E, noting that the utility has been at fault for numerous fires and other disasters over the years. Newsom was urged to consider the “municipalization of all or a portion of PG&E’s operations” — a government takeover — or carve the utility into smaller and potentially safer pieces.

But the task force, made up of Newsom’s in-house advisers plus officials from Cal Fire, the Public Utilities Commission and other agencies, offered few details about either of those ideas. Nor did it provide a concrete plan for dealing with the company’s immediate crisis — the estimated $30 billion in wildfire liabilities from 2017 and the Camp Fire in 2018, which drove PG&E into bankruptcy shortly after Newsom took office in January.

Newsom said “all options are on the table” PG&E’s future if the company doesn’t cooperate with the state. “The state has suffered because of their neglect.”

PG&E, in a prepared statement, said it is “embracing the calls for change” and will work with the governor and others to “make the energy system safer.”

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The task force was adamant that PG&E and other utilities must be held accountable for their role in causing wildfires. It recommended changes to how the Public Utilities Commission regulates the companies by linking the rate-setting process and company profitability to fire safety performance.

At the same time, it also said it’s time to consider ways of shifting more of the cost burden to others, while acknowledging that any effort will cause enormous complications — particularly in the insurance business.

As it is, the panel said insurance companies are already raising rates and refusing to renew homeowner policies in fire-prone regions of California, and changes in the liability laws could make insurers even more reluctant to offer coverage in fire zones. Insurers are already suing PG&E to recover the more than $8 billion in claims they expect to face from the Camp Fire alone.

“Shifting more of the direct financial burden of wildfires to insurance companies may also affect the cost and availability of property insurance” in high-risk areas, the panel wrote.

And Newsom, without adopting any specific proposal, acknowledged that getting major changes through the Legislature won’t be easy.

“This is tough stuff; this is the sausage making,” he said, before taking a swipe at his nemesis Donald Trump: “Unlike the president of the United States, I’m not a dictator.” Still, he called on the Legislature to “get something big done” before the session ends July 12. And he said the political climate has likely changed after the devastation of the Camp Fire, which drove PG&E into bankruptcy and left the other big utilities saddled with severely weakened credit ratings.

“It’s a different world completely,” he told reporters at a press conference at the Office of Emergency Services operations center near Mather business park.

The panel offered up multiple ideas for shifting costs. One would be the creation of a state-run “wildfire fund” to help utilities deal with the immediate costs of mega-fires, enabling them to pay claims to victims more quickly. The fund “would create a buffer to absorb a significant portion of the wildfire liability costs that might otherwise be passed on to ratepayers,” the panel wrote.

The fund would be financed by “a substantial contribution” from utility shareholders. But a key element in making the program work would come from the insurance industry, which would have to “accept a cap” on how much carriers could collect from utilities when they sue for reimbursement.

As an alternative, the panel suggested that utilities be given greater legal protection against fire liabilities — an idea likely to turn into a major fight in the Legislature.

California Gov. Gavin Newsom on Jan. 14, 2019, held a press conference to discuss PG&E’s plan to declare bankruptcy.

In passing SB 901 last year, lawmakers gave the Public Utilities Commission more leeway to allow utilities to pass wildfire costs onto ratepayers. But they refused to enact the broader legal reforms the companies sought and are now being recommended by the governor’s strike force.

Reacting to Friday’s announcement, state Sen. Bill Dodd, D-Napa, author of SB 901, said he’s willing to “partner and refine a package of reforms to protect the state in this ‘new normal.’”

Specifically, Newsom is being urged to seek changes to the legal doctrine known as “inverse condemnation.”

Under the current system, inverse condemnation makes California utilities liable if their transmission wires or other facilities cause a fire, regardless of whether the companies were negligent or not. The Public Utilities Commission can allow the utilities to charge ratepayers for those costs — if the utilities acted “prudently” — but the process can take years and in the meantime utilities’ finances can deteriorate rapidly. Wall Street has already downgraded the credit ratings of California’s other two big utilities, Southern California Edison and San Diego Gas & Electric, and Newsom’s task force warned they could be in danger of bankruptcy if changes aren’t made in the law.

Replacing the current legal model with what Newsom called a “fault-based standard” would alleviate some of the utilities’ burden, but make it harder for insurers and fire victims to get compensated.

Dario de Ghetaldi, a Bay Area lawyer who represents fire victims suing PG&E, called the idea “dumb.”

“It puts the burden on all the innocent people ... who were damaged,” he said.

An insurance industry representative said homeowners’ rights to recover damages should remain a top priority, but didn’t comment directly about the task force’s proposals. “We stand ready to work collaboratively to tackle these challenging issues,” said Jeremy Merz, a vice president with the American Property Casualty Insurance Association, in a prepared statement.

Some of the recommendations unveiled Friday dovetail with initiatives Newsom has already taken, such as redeploying National Guard troops from the Mexican border to help with firefighting, and working with the federal government to manage forests more aggressively. The panel urged the state to consider a funding mechanism to help homeowners retrofit their homes for fire resiliency — one day after a McClatchy investigation revealed that homes built to modern fire-resistant standards were far more likely to survive November’s devastating Camp Fire.

Newsom quoted from the McClatchy report, saying more old homes need to be retrofitted.

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