PG&E Faces Historic Financial Liability From California Wildfire

Corporations have been held financially responsible for environmental disasters in the past, but nothing compares to California real estate.

By Alan Neuhauser, Staff Writer Nov. 16, 2018,
U.S. News & World Report



PG&E disclosed that it had experienced damage to a transmission tower near the origin of the Camp Fire. (Noah Berger/AP)

California's electric utility is facing historic financial liability if it's deemed responsible for a deadly wildfire ravaging Northern California, but a lifeline from the state Friday suggested that it just may be taxpayers who help foot the bill.

Pacific Gas and Electric Co. this week disclosed that it had "experienced an outage" and damage to a transmission tower near the origin one of the largest of several fires burning in Northern and Southern California, the Camp Fire. The incident was apparently reported to the utility mere minutes before the blaze started.

PG&E's disclosure, contained in a regulatory filing, sent shockwaves through a state already reeling from the toll and magnitude of the blazes, which have blanketed much of it in acrid smoke. Under California law, if investigators determine that PG&E's equipment contributed to the fires, the utility could be on the hook for billions of dollars even if authorities conclude it wasn't negligent.

Damages could reach as much as $6.8 billion or even $15 billion, according to assessments by Moody's and Citigroup, respectively, amounts far beyond the utility's insurance coverage and the cash it has on hand.

"These numbers that we're seeing out of California – there's no other way to describe it – are orders of magnitude bigger than anything else that we've seen," says Noah Hall, law professor at Wayne State University. "The reality is that these wildfires are hitting private property, whereas a lot of the other disasters have wiped out water resources like the Gulf of Mexico or salmon fisheries. In terms of money, that doesn't compare to California real estate."

Comparisons with other environmental disasters, such as the oil spill in the Gulf of Mexico from the Deepwater Horizon explosion in 2010 or the spill from the Exxon Valdez in 1989, are difficult to draw. Certain laws, for example, apply only to environmental impacts on the ocean. BP, however, ended up paying more than $25 billion in civil damages claims related to the Deepwater Horizon debacle.

"When there's a large corporate actor, if they're seen as primarily responsible for widespread damage of all sorts arising from environmental impact, the BP case shows that you can end up being responsible for" significant damages, says Heidi Li Feldman, a law professor at the Georgetown University Law Center.

In disclosing the outage at the transmission tower, she adds, PG&E might be seeking to avoid one area of liability incurred by BP, which was accused of not sharing material information with investors and hit with a civil penalty of $525 million.

The Camp Fire is the deadliest and most destructive in state history, with at least 63 people dead and 600 people missing as of Friday morning. The Woolsey Fire in the southern part of the state, meanwhile, has left at least three people dead. All told, the season's conflagrations in California have scorched close to 1.7 million acres – an area larger than Delaware.

PG&E holds an insurance policy providing coverage of just $1.4 billion through next July, and it has only another $3.6 billion in cash. With more than 10,000 homes destroyed, it faces claims from thousands of homeowners and home insurance companies, as well as wrongful death lawsuits. The utility could also face civil fines, although experts say such a penalty would be surprising.

"The Public Utilities Commission is extremely unlikely to assess the penalty, because what the PUC is concerned about is avoiding a utility bankruptcy," says Michael Wara, director of the Climate and Energy Program at the Woods Institute at Stanford Law.

The head of the state's Public Utilities Commission signaled Friday that regulators wouldn't let the utility go bankrupt. The remarks caused shares of PG&E's parent company to bounce back after they'd tumbled to their lowest point in 15 years as investors reckoned with the prospect of bankruptcy.

"It's not good policy to have utilities unable to finance the services and infrastructure the state of California needs," commission President Michael Picker told Bloomberg. "They have to have stability and economic support to get the dollars they need right now."

A law signed by Gov. Jerry Brown earlier this year, he added, effectively limits how much in damages PG&E can be assessed: The Public Utilities Commission must factor how much the utility can pay without harming customers. The measure also allows PG&E and other utilities to issue bonds to help pay for damages – instruments that would be backed by surcharges on utilities' customers, but which utilities could spread over a period of decades to help minimize their impact.

The financial fallout will pose tough questions for lawmakers and regulators as they recover from the fires. California is the only state where utilities face a strict liability standard, where they're forced to pay up simply if their equipment causes property damage, regardless whether they acted negligently in maintaining or operating the equipment.

The bill Brown, a Democrat, signed introduced a "reasonableness" standard for wildfires, easing the financial burden for utilities that took steps such as thinning vegetation around power lines. The measure followed an ambitious lobbying campaign by PG&E, which put forward a novel argument that the impacts of climate change – from persistent drought that's turned forests into tinder boxes to fire seasons that have stretched ever longer – had made the state's unique approach impractical and unfair. The new standard, however, doesn't take effect until Dec. 31.

"This is going to become a progressively more serious problem because there will always be sparks," says Michael Gerrard, professor at Columbia Law School and director of the school's Sabin Center for Climate Change Law. "As the forests and the wooded areas become ever more flammable – and as more and more population moves into the woodlands – we'll see more damages."

Legal scholars are watching whether PG&E also employs climate change as a defense in court. The approach would mark a reversal – typically it's been plaintiffs who have cited climate change, from crabbers on the West Coast seeking to hold fossil fuel companies responsible for rising ocean temperatures, to a group of young Americans accusing the U.S. government of creating an energy system that's contributing to global warming.

"I have not seen that raised as a defense, although I'm sure there are all sorts of cases raising 'natural' defenses – if I'm driving down the road and I slip because of the ice, how much of it is my fault and how much of it is the ice's fault?" Gerrard says. "It can be increasingly effective as the evidence of climate change's contribution to the fire hazard becomes clearer."

Such an approach – and particularly whether PG&E acted reasonably in the lead-up to the fires – is sure to attract sharp scrutiny from lawmakers, regulators and ratepayers. The utility in 2016 was convicted of six felonies for breaking federal safety laws in connection with the 2010 explosion of a gas pipeline that killed eight people in San Bruno, a suburb outside San Francisco. Among the accusations was that the utility had misled regulators, and it was hit with a $1.6 billion fine – the largest assessed against a U.S. utility – by the state's Public Utilities Commission.

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"Droughts have always happened. Ultimately, it comes down to whether or not an organization has effective systems in place to mitigate the risk," says attorney Mark Farley, who leads the major accident practice at Katten Muchin Rosenman in Houston and who has represented companies in some of the largest industrial accidents in the U.S. "The challenge for PG&E, from a reputational standpoint, is this isn't their first incident. Whether it's wildfires caused by their equipment or the terrible accident at San Bruno, the question that a lot of people are asking is whether or not the organization can be trusted to operate safely."

Such a shift in liability has significant economic implications far removed from wildfires damages, and especially for the insurance sector. Unlike a private company such as BP or Exxon, if an electric utility such as PG&E is freed from paying damages, it's insurers – and perhaps taxpayers in the event of a state bailout – that will find themselves forced to cover the property damages not paid by the utility, with impacts for potential homeowners.

"That has the potential to significantly impact the insurance industry, with the prospect potentially of reduced affordability and availability of homeowners' insurance," says Sean Hecht, co-executive director of the Emmett Institute on Climate Change and the Environment at UCLA Law. "To a certain extent, it's a zero-sum question if we have a fire caused by the utility, if the utility pays or the insurers pay."

It's an area – and a debate – where climate change has fast created a new legal landscape, one that may take months if not years to sort out.

"We might be seeing that they didn't maintain their power lines as well as they should have, but is $6 billion and the lost lives – let's just start with the extent of destruction – was that foreseeable absent climate change? Branches hit electric wires – it doesn't normally burn down the state," Hall says. "If branches hitting electric wires causes that much damage, frankly, we need to rethink running wires everywhere. It can't be simple – if it is that simple, then welcome to the world of climate change."

Alan Neuhauser, Staff Writer