Avoiding Another California Electricity Crisis

The adage about history not repeating itself but rhyming is inescapable in the California debate about potentially ruinous financial liabilities facing electric utilities in the aftermath of disasters worsened by climate change, such as last fall’s wildfires and mudslides.

And once again, the clean energy programs that utilities administer to help their customers save energy – and reduce the emissions driving that climate change – are at great risk. Energy efficiency, demand response, electricity storage, large-scale renewable power development and distributed energy resources are all threatened, if the state legislature doesn’t reform our wildfire liability doctrines.

In 2001, California’s two largest utilities were at or near insolvency due to sudden and unexpected liabilities that they could not, by law, charge to their customers. The ultimate consequences for those customers and the public interest were disastrous.  Natural gas deliveries nearly ceased to much of the state (the federal government had to issue an emergency order to keep supplies flowing). Rolling blackouts were a daily threat. Electricity rates ultimately soared by 40 percent, vital investments in energy efficiency and renewable energy were delayed (and almost suspended indefinitely), and some of California’s most important public policy decisions shifted from state regulators and legislators to a single federal bankruptcy judge. I represented NRDC in those proceedings. Back then, NRDC and its allies were able to convince the bankruptcy judge to order a resumption of the clean energy investments when utility creditors tried to seize them, but it was a near thing and there is no guarantee of success next time, if there is a next time. And there could be, very soon. 

Here’s what I wrote in 2001 at the height of that crisis, in an Electricity Journal article:

Based on the gap between runaway wholesale electricity costs and state-frozen retail electricity rates, the West’s two biggest electricity distribution companies – PG&E and Southern California Edison – claimed losses in excess of $12 billion from May 2000 to January 2001 on unreimbursed wholesale electricity purchases . . . [T]he distribution companies were on the brink of insolvency by early 2001.  

This time around, the issue is utilities’ probable liability for damages from wildfires and mudslides during and after October 2017, which may well end up reaching an inflation-adjusted total higher than what I was describing back in 2001. Under current California law, utilities need not be found to have acted negligently or unreasonably in order to be held liable for wildfire costs; it is enough that their facilities contributed to the damage. This results from judicial interpretation of Article I, section 19 of the California Constitution, which provides that “[p]rivate property may be taken or damaged for a public use only when just compensation” is paid.

The judges who made those rulings thought they were providing an efficient and equitable way to spread costs of natural disasters, by having all utility customers contribute the “just compensation” and eliminating any need to prove that utilities were at fault for widespread damage to which their equipment contributed. But there is substantial doubt whether the California Public Utilities Commission will approve such a passthrough of the latest wildfire costs, in light of recent Commission rulings.  That sets up the same kind of insolvency trap that snapped shut in 2001. And to my knowledge no other state holds utilities liable for all wildfire damages regardless of the standard of care they followed in installing and maintaining the facilities involved.

All Californians sympathize deeply with the victims of our recent catastrophes, which wreaked unprecedented destruction, north and south, and caused dozens of deaths. But victims’ interests won’t be served by pushing utilities into bankruptcy, converting wildfire sufferers into one more class of frustrated creditors pursuing inadequate funds.

Utility programs to advance pollution-free energy like energy efficiency, wind and solar generation, electricity storage, and distributed resources would lose out as well. The crippling of crucial clean energy partners and investors couldn’t come at a worse time, as California moves to cut its greenhouse gas emissions 40 percent below 1990 levels by 2030 and host an international conference in September on how to spur comparable progress worldwide.

California’s legislature needs to reexamine and reform our unique and unworkable wildfire liability doctrines before ending its current session. This isn’t all that is needed, of course; we have to recognize that climate change increases the probability of destructive wildfires and we have to rethink how we design our communities and insurance systems to reduce both individual and collective exposure, even as we double down on efforts to reduce the greenhouse gas emissions that are making everything worse on this and so many other fronts.

Here is the text of a joint letter making many of these points to California’s Governor and legislature, which includes my signature:

May 7, 2018

Dear Governor Brown, Senator Atkins, Speaker Rendon, and colleagues:

We are gravely concerned for the many families and communities around the state whose lives were devastated by the 2017 wildfires in California. These fires gave California its worst wildfire season on record and brought immense human, financial, and ecological losses to several parts of the state. And unfortunately, the state’s changing climate means that wildfires and other severe events with high potential for damage and injury are likely to occur more frequently and with more intensity.

We write as longtime leaders in the environmental and business communities to call your attention to a critical policy issue relating to the underlying exacerbator of this past year’s wildfires—climate change—which is also important for protecting consumers. All the state’s energy providers will have to be important partners in these efforts, and their continued viability is fundamental to achieving many of California’s future objectives, including both clean energy advancements and reduced wildfire danger.

Prevention is the best cure for climate change. California has already demonstrated unwavering leadership in reducing greenhouse gas emissions, supporting clean and emerging technologies, and developing a new, cleaner economy that protects and supports all residents of California and provides opportunities for all our communities.  California’s efforts must continue and, indeed, accelerate, for the state to achieve its appropriately ambitious economic and environmental goals.  At the heart of this endeavor must be continuing improvements in the performance of the energy and transportation sectors, leading to reduced emissions and improved environmental outcomes while maintaining a safe, reliable, and affordable backbone for economic activity across the state.

This progress requires a strong foundation in the state’s energy providers: utilities, clean energy companies, and other stakeholders who have and will continue to make critical investments in California’s clean energy progress.  Financially healthy public and investor-owned utilities are playing an essential partnership role in advancing renewable development, deploying smart and efficient grid technologies, facilitating the adoption of electric transportation, and more.  These utilities, through programs and policies overseen by the state, help direct millions of dollars of investment each year toward these important clean energy technologies. 

Today, the ongoing financial viability of all California utilities is in doubt at the same time that California is counting on their expertise and capital to help address the state’s clean energy needs and deal with the economic consequences of the 2017 wildfires.  If utilities are held to an unworkable, strict liability standard of responsibility for damages caused by severe weather events—events that ironically are exacerbated by the same climate change forces that the state is relying on utilities to combat—they may fail. 

The state must protect the victims of the wildfires and ensure that clean energy and climate progress continues.  We urge you to lead a diverse set of stakeholders in a process to devise an alternative path that protects customers, supports the victims of the wildfires, and holds electric utilities accountable where appropriate.  We are encouraged by the joint Governor and Legislator statement committing to partnering on solutions in 2018 that will make California more resilient to the impacts of natural disasters and climate change. We also urge you to pursue a framework to define and address utility and electric company roles in preventing and responding to climate change events and continuing critical investments needed to move forward the state’s clean energy economy.

Sincerely,

Peter Bradford

Former Chair, New York Public Service Commission; Former Chair, Maine Public Utilities Commission; Former Commissioner, U.S. Nuclear Regulatory Commission

Ralph Cavanagh

Senior Attorney and Co-Director of Energy Program, Natural Resources Defense Council

David J. Hayes

Former Deputy Secretary, U.S. Department of the Interior; Executive Director, Energy & Environmental Impact Center (NYU School of Law); Visiting Lecturer, Stanford Law School

Mindy Lubber

CEO and President, Ceres

Susan Tierney

Former Assistant Secretary for Policy, U.S. Department of Energy; Former Secretary of Environmental Affairs, Massachusetts; Former Commissioner, Massachusetts Department of Public Utilities

Jay Ziegler

Director, Policy and External Affairs, The Nature Conservancy

About the Authors

Ralph Cavanagh

Codirector, Energy program

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