EIX, PCG, SRE: The Five Things You Need to Know About the Exposure of California’s Utilities to Wildfires Under Inverse Condemnation and Tort Liability
Eric Selmon Hugh Wynne
Office: +1-646-843-7200 Office: +1-917-999-8556
Email: email@example.com Email: firstname.lastname@example.org
SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES
December 6, 2017
EIX, PCG, SRE:
The Five Things You Need to Know About the Exposure of California’s Utilities
to Wildfires Under Inverse Condemnation and Tort Liability
On Thursday, November 30, the California Public Utility Commission (CPUC) denied the application of SRE’s electric utility subsidiary, San Diego Gas & Electric, to recover costs incurred in settlements with plaintiffs in cases stemming from wildfires in 2007. The CPUC’s decision has been portrayed as imposing an asymmetrical risk on California’s utilities, requiring them to pay potentially unlimited damages under the principle of inverse condemnation, regardless of whether the utility was at fault, while denying them the ability to recover these damages from ratepayers.
We believe this perception reflects an incorrect understanding of the principle of inverse condemnation and of the legal and regulatory protections available to utilities. We set out below the key facts regarding the extent of utilities’ liability under inverse condemnation in California, the standard for the recovery from ratepayers of any damages paid, and the standards for the determination of utilities’ liability under the legal principle of tort liability.
- First, the strict liability of California’s utilities under the principle of inverse condemnation only applies in respect of property damage, and not to damages for injury or death or for lost wages or business revenues. Inverse condemnation does not create the potential, therefore, for virtually unlimited liability for all damages caused, for example, by a wildfire.
- Second, for a utility to be liable for property damage under the principle of inverse condemnation, the utility must be the actual and proximate cause of the property damage.
- Third, under the principle of inverse condemnation, utilities are permitted to recover from ratepayers any damages paid out for property damage, implying no net liability, provided, however, that the utility did not cause the property damage through its own negligence.
- In proceedings before the California Public Utility Commission, utilities bear the burden of proof that their negligence did not cause the property damage.
- This fact has contributed to investor concern that utilities will routinely be found to have been negligent by the CPUC, voiding the possibility of recovery.
- Fourth, in almost all cases involving property damage from wildfires, plaintiffs have sought recovery of property damage under the principle of inverse condemnation and, simultaneously, have sought recovery of all damages, including economic damages (lost wages or business revenues) or compensation for injury or death, under the legal principle of tort liability.
- Tort liability suits are brought in state courts, whether the burden of proof is on the plaintiff and which apply a more stringent legal standard of proof.
- For a plaintiff to recover compensation from utility under a tort liability suit the plaintiff must prove the utility to have breached its duty of care towards the plaintiff, i.e. that negligence by the utility was the cause of the loss, in addition to proving that the utility was the actual and proximate cause of the damages.
- Thus, if the court finds that the utility has not been negligent, the utility can:
- Avoid paying damages for economic losses, injury or death; and
- Use the court’s finding to apply to the CPUC for recovery from ratepayers of any compensation paid for property damage under inverse condemnation, on the grounds that the utility’s negligence did not contribute to the loss.
- While the CPUC would still review the utility’s case for prudency, it would be highly unlikely for the CPUC to contest the finding of a state court and, if it were to do so, our view is that it would lose its case on appeal in a California appeals court.
- Fifth, plaintiffs seeking the award of punitive damages against a utility would be required to meet an even more stringent standard, needing to prove that:
- the utility was the actual and proximate cause of the injury or loss,
- the utility breached its duty of care towards the plaintiff, i.e. that negligence by the utility was the cause of the loss, and
- this negligence rises to the standard of willful misconduct. While specific definitions of “willful” vary, the common theme is that it requires a conscious disregard of probable harm.
- Given this high standard, and the California utilities’ focus on vegetation management and wildfire prevention over the past two years, we believe the probability that punitive damages are awarded in wildfires cases is extremely low.
- In summary, the principle of inverse condemnation does not put California’s utilities at the mercy of the whims of the CPUC. Rather, utilities may litigate the cases brought against them in state courts, where it is the plaintiffs that must prove negligence and must meet a high legal standard to do so. Should the plaintiffs fail to prove negligence, the utility can:
- petition the CPUC for recovery from ratepayers of any compensation paid for property damage under the principle of inverse condemnation;
- avoid paying compensation for economic damages, injury or death;
- avoid punitive damages.
Exhibit 1: Heat Map: Preferences Among Utilities, IPP and Clean Technology
Source: SSR analysis
©2017, SSR LLC, 225 High Ridge Road, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein. The views and other information provided are subject to change without notice. This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results.