Edison under scrutiny for Eaton fire. Who pays liability will be ‘new frontier’ for California
Six years ago, Pacific Gas & Electric filed for bankruptcy after it was found liable for sparking a succession of devastating wildfires, including the blaze that destroyed the town of Paradise and led to more than 100 deaths.
Wall Street investors lost confidence and ratings agencies threatened to downgrade California’s investor-owned utilities, prompting legislators to come up with an innovative solution: the establishment of a $21-billion wildfire fund, split equally between shareholders and utility customers.
Now, after two major wildfires have destroyed thousands of homes and left at least two dozen dead in and around Los Angeles, the state’s wildfire fund would face its first major test if another utility is found liable for sparking the blazes.
Even the lawmaker who spearheaded legislation to set up the wildfire fund is not sure whether his efforts to mitigate the risk to utility companies — allowing them to keep functioning in a state prone to escalating risk of wildfires — is enough.
“This is the most profound test case that the fund will potentially be up against,” said Christopher Holden, a former Democratic legislator who sponsored the bill that created the fund. “This is a new frontier,” said Holden, who lives in Pasadena and had to evacuate during the Eaton fire.
“It was a new frontier when we wrote the bill — and now, just five years later, we’re going through another frontier.”
If investigators determine that a utility company caused the Eaton or Paradise fire, it could send shock waves across the utility industry and the broader insurance market.
Mark Toney, executive director of TURN, The Utility Reform Network, said the massive scope of the L.A. County fires raised significant questions about the fund’s ability to cover insurance liability. Even if the fund is able to bail out utility companies for the fires, it’s uncertain whether it could then cover fires that may crop up in the future.
“Will the fund work right?” Toney said. “Who ends up paying?”
The causes of the fires have yet to be determined.
Investigators looking into the Eaton fire — which caused at least 17 fatalities and damaged an estimated 7,000 structures across Pasadena and Altadena — are focusing on an area around a Southern California Edison electrical transmission tower in Eaton Canyon.
Edison has denied fault in the Eaton fire. In a statement to The Times, the company said that its work to mitigate wildfires had cut the risk of catastrophic fires by 85% to 90% compared with the risk before 2018.
The Los Angeles Department of Water and Power, the municipal utility that operates in Pacific Palisades, says it did not opt into the wildfire fund because it would have been too costly for its customers. If the large municipal utility was liable for the Palisades fire, the city of L.A. could face exorbitant financial costs.
But sources with knowledge of the investigation have told The Times that the fire, which started in the Skull Rock area north of Sunset Boulevard, appears to have human origins. Officials are looking into whether a small fire possibly sparked by New Year’s Eve fireworks could somehow have rekindled Jan 7.
Fire officials made the critical decision to forgo calling in extra firefighters to the level that they had during some similar weather events in the past, according to internal predeployment memos reviewed by The Times.
Michael Wara, an energy and climate scholar at Stanford University, said the state’s entire insurance landscape, not just the California’s wildfire fund, might have to be recalibrated if a utility company were found to have caused a major L.A. fire.
“The big question is how available and affordable is overall insurance?” said Wara, who has served on the California Catastrophe Council, the fund’s oversight body. “California, I think, is going to face greater challenges than it has over even the last few years, when it hasn’t been easy for its primary insurers and other entities to access these global reinsurance markets that fund losses after a catastrophe.”
Under California law, utility companies are strictly liable for all damages to real property associated with a fire, including houses.
The wildfire fund is a new model in which the state’s three big owner-operated utility companies — Pacific Gas & Electric Co., San Diego Gas & Electric Co. and Southern California Edison — pay into a fund, which they can then tap into if their equipment is determined to have caused a blaze. When that happens, they are responsible, on their own, for the first $1 billion of losses. After that, the wildfire fund will pay.
“If the wildfire fund did not exist today, Edison might be in real trouble,” Wara said. “We would see something probably similar to what happened to PG&E after the Camp fire.”
Back then, Wara said, utilities were held to a standard of strict liability: If electrical equipment was found to have caused the fire, they were on the hook.
Now, if Edison is ultimately held responsible, Wara said, the company can go to the wildfire fund and get money.
“That’s really important in terms of making sure that the victims are made whole, at least for their property losses,” he said.
Although it is too soon to estimate the damage of the Eaton fire, Wara said thousands of structures have been lost in an area where the average home value is around $1.3 million. Costs, he said, could reach $10 billion.
If officials find that Edison caused the fire but acted responsibly, Wara said, as much as half of the fund’s $21 billion could be depleted.
“That’s half the fund in one fire — five years into the life of the fund,” said Wara, who has served as a wildfire commissioner for California and a member of the California Catastrophe Response Council, the oversight body of the California wildfire fund.
Officials are warning of windblown ash and other pollutants from Los Angeles-area fires and say air quality readers won’t pick up on the ash pollutants.
The problem is compounded by the fact that the wildfire fund has so far amassed only $14 billion, because utility companies cannot immediately expect ratepayers to pay their share of half the $21 billion.
“If you are an investor in PG&E or Edison, you might look at this and think, ‘Hmm, I thought the fund was big enough. Maybe now I’m not so sure.’ The fund is there to provide confidence. If the fund isn’t big enough, there will be less confidence.”
The California Department of Forestry and Fire Protection, or Cal Fire, will lead the investigation into what caused the fires.
Then, the California Public Utility Commission determines whether the utility company acted reasonably or unreasonably and, if so, to what degree.
If a utility was found to have failed to act prudently, Wara said, it would have to reimburse the fund. The amount it would pay, however, is capped on the size of the reimbursement relative to the size of their rate base.
Edison International Chief Executive Pedro Pizarro told Bloomberg Television that state regulations allowed the company’s holder liability to be capped at $3.9 billion.
“The reason the cap is there is if Edison is reimbursing the fund, that’s basically electricity customers reimbursing the fund,” Wara said. “Edison will go to the California Utility Commission and say, ‘We need this money to be expensed in rates.’”
The fund would also have to pay for wrongful deaths, Wara said, but that’s a different kind of claim.
“You have to show negligence, and that may be hard to prove, actually, because Edison may have acted reasonably, and yet the fire still was set by their equipment,” Wara said. “Edison would have a lot of reason to claim that it has acted reasonably, in a sense that it has spent enormous sums to try to reduce the risk, and there’s an agency that’s overseeing all of this and approving and monitoring compliance with its plans.”
For some in Altadena, the fire took away their place of work and their home.
Still, even if the wildfire fund bailed out Edison, there could be grave consequences for Edison and other utility companies. If a large portion of the wildfire fund’s $21 billion was depleted, that could affect market perception of the fund, negatively affect utility company credit scores, and plunge investor-owned utilities — which cover about 80% customers across the state of California — into chaos.
On Tuesday afternoon, shares for Edison International, the utility’s parent company, rose less than 1% to $57.27, marking a more than 24% drop in the week since the fires broke out. That represents a more than $7 billion decline in the company’s market cap.
“If the [utility] market collapses, then we’ve got a catastrophic situation,” Holden said. “We have to secure the market going forward.”
Last fall, state regulators criticized Southern California Edison for falling behind in inspecting transmission lines in areas at high risk of wildfires.
Utility safety officials also said in a report that the company’s visual inspections of splices in its transmission lines were sometimes failing to find dangerous problems.
“We have not seen in our telemetry any indication of an electrical anomaly,” Edison International CEO Pedro Pizarro said Monday on Bloomberg Television. “Typically, when you have a fire across infrastructure, you see voltage dropping. We have not seen that in our study.”
Pizarro said Edison had turned off distribution lines near the start of the Eaton blaze before it erupted in a canyon near Altadena, but not the transmission lines. “Transmission lines are larger and stronger,” he said, “and so they can operate safely at higher wind speeds.”
Widespread damage from wildfires has prompted calls for L.A. to drop its plans to host the World Cup, Super Bowl and Olympics over the next three years.
Several of California’s most destructive wildfires in the last decades have been caused by aging electrical equipment. The 2018 Camp fire was caused by 100-year-old high voltage transmission towers. The 2019 Kincade fire was caused by a line built half a century ago. It may be the case, Wara said, that California’s older utility infrastructure, even when inspected, is not up to the job.
“A lot of the transmission system in California is quite old,” Wara said. “There were pulses of construction activity that led to the system we have and the last big one was when Pat Brown was governor.. .If something failed on that tower that caused ground faults, at some point we need to ask ourselves... maybe we shouldn’t be relying on old infrastructure?”
In an era when hurricane-force winds can whip up wildfires that engulf vast areas, Toney questioned whether it made sense for a utility company to be responsible the fate of every home. Wildfires, he said, are caused not just by faulty utility equipment, but by lightning, arson, even legal fireworks, and then fueled by poor development and insufficient cutting back of vegetation and landscaping.
“It’s a mistake just to isolate utility,” Toney said. “It’s time for a new paradigm. When it comes to the cost of rebuilding, the utilities may not be big enough.”
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