To Make Sure Utilities Survive, California Needs Liability Law Reform

As much as global warming is to blame for PG&E’s financial woes, state policy is equally responsible.

This piece was first published in the LA Times on February 25, 2019. It is reprinted with their permission.

When PG&E filed for bankruptcy protection in January, several observers declared the electric utility the first casualty of climate change. But as much as global warming is to blame for PG&E’s financial woes, state policy is equally responsible.

California has a legal regime, practically unique in the country, that holds utilities strictly liable for all property damage associated with wildfires if their infrastructure is found to be a cause of ignition — whether the utility was negligent or not.

This strict liability approach wasn’t so problematic historically, when wildfires and the damage they cause were more manageable. But as climate change produces ever larger and more frequent mega-fires, California’s policy is concentrating risk in a way that could threaten the financial stability of utilities, burden consumers and undermine the state’s climate and energy goals.

To preserve the health of its utilities, California will need to reform its strict liability laws and support better wildfire risk management.

Electric utilities are state-granted monopolies that provide a public service, the cost of which they can — theoretically — spread across all beneficiaries. California courts have treated such utilities as public entities, requiring them to compensate property owners for any damage caused by their infrastructure.

The courts have interpreted a wildfire started by utility equipment as just such a “taking,” allowing property owners to seek compensation for damage through a doctrine known as “inverse condemnation.” Unlike in a tort case, in an inverse condemnation lawsuit, utilities have to pay even if they are not at fault.

Utilities may invest in cost-effective risk reduction and even be diligent managers, but they cannot control the climate. When a drought combines with a heat wave and extreme wind to blow debris into a power line, creating a spark, a small fire can quickly become a conflagration — and a bill that reaches into the tens of billions. This catastrophic level of risk is making it difficult for utilities to transfer risk to commercial insurance markets or even to the financial market.

In other states that face high risks of natural hazards — wildfires, floods, storms, hurricanes — electric utilities are responsible only for the damage done to their own systems. Hurricanes have caused massive disruptions to electric infrastructure in states like Florida and Louisiana. But for the most part, electric utilities in those states did not have to pay for damages caused to people’s homes.

Not so in California. While the costs to repair a system damaged by a hurricane can be large, the costs to repair damage to everyone else’s property from that same disaster is many orders of magnitude higher.

Of course, our first response to climate change should be the aggressive pursuit of a carbon-free economy. But just as business-as-usual emissions are no longer tenable, neither is business-as-usual disaster policy.

Paying for property damage caused by growing wildfires will continue to be a monumental task for California and the West. But by aligning incentives, prioritizing cost-effective risk reduction, diversifying risk and creating state regulations that promote healthy risk transfer markets, California would be much better poised to manage the challenge.

Reform would not let utilities off the hook for negligent behavior or eliminate incentives for risk reduction, which are both addressed by American tort law. It could simply change the law to recognize that while there are steps that utilities can and should take to lower wildfire risk — insulating wires, hardening poles and de-energizing lines in high wind conditions — utilities cannot refuse to hang wires in high-risk areas. Nor do utilities have authority over land use patterns or development practices that increase such risks.

Reducing wildfire risks is a shared responsibility. The cost of such risks needs to be a shared responsibility, too. We can’t prevent the uptick in disasters we now face as a result of global warming. But we can dramatically reduce the economic pain they cause.

Carolyn Kousky

Executive Director, Wharton Risk Center
Carolyn Kousky is the executive director of the Wharton Risk Center at the University of Pennsylvania.