July 12, 2019 - From the July, 2019 issue

Commission on Catastrophic Wildfire Cost and Recovery Report Confirms Status Quo Not Sustainable

In 2018, the California Legislature created the Commission on Catastrophic Wildfire Cost and Recovery to study and evaluate strategies for balancing the cost impacts of wildfireand wildfire riskbetween ratepayers, utilities, and wildfire victims. After recieving the commission's report in June and facing a session deadline on July 12, the Legislature sent AB 1054, which incorporated many of the recommended revisions to wildfire liability rules made by the commission, to Governor Newsom's desk. TPR presents the following conversation with CPUC Commissioner and chair of the Wildfire Cost and Recovery Commission, Carla Peterman, to highlight the report's findings and discuss the conflicting but coequal concerns over the need to provide timely compensation to victims, reliable and affordable service to ratepayers, and necessary capital to maintain the state's electrical infrastructure.


Carla Peterman

"The goal of the Commission on Catastrophic Wildfire Cost and Recovery was to provide recommendations to the legislature on how to ensure equitable distribution of fire-related costs among ratepayers, wildfire victims, and utilities." —Carla Peterman

After six years as a Public Utilities Commissioner, you were tapped in 2019 to chair the temporary California Commission on Catastrophic Wildfire Cost and Recovery. What is the scope of the commission’s responsibilities. 

Carla Peterman: The Commission on Catastrophic Wildfire Cost and Recovery was established in 2018 after several catastrophic wildfires throughout the state. The damage caused by those events increased awareness about the real cost impacts of fires to utility ratepayers, wildfire victims, and utilities. The goal of this commission, as defined in our establishing legislation, SB 901, was to provide recommendations to the legislature on how to ensure equitable distribution of costs among affected parties. We delivered those recommendations in June.

Elaborate on the Catastrophic Wildfire Cost and Recovery Commission’s focus the immediate crisis requiring policy guidance.

Our commission focused on electric utilities because that was where we saw an immediate crisis in terms of both catastrophic fires and declining investment. But the lessons we’ve learned are also applicable to other types of fire situations.

While utility-caused fires are believed to comprise only 10 percent of fires in California, they are associated with greater destruction and economic damage than other types of fires because they often happen during heavy winds and in populated areas. In recent cases, the loss of life and property due to utility fires has been so significant that it has actually outstripped the utility’s insurance.

Over the last year, investor-owned utilities in particular have been challenged to pay all of their fire liabilities. At the extreme, we saw PG&E, the state’s largest utility, declare bankruptcy primarily due to their inability to pay for wildfire damage, let alone whatever damage may come in the future.

This exposure to liability and risk is now so high that investors are beginning to show concern about investing in California utilities. This is important because it impacts utilities’ cost of capital, which can ultimately increase costs for ratepayers. 

Elaborate on the recommendations included in your commission’s final report to the Governor and legislature.

Our report looks at three main areas for changes of law to better manage costs related to wildfires. The first relates to the legal framework through which utilities are held liable for fires (called the “inverse condemnation doctrine”). In California, a utility bears the economic costs of a fire if its equipment was involved in any way—whether the utility was negligent or not. In other states, utilities bear those costs only if they acted negligently. Our commission recommended changing California’s law to align with the standard across the country by holding utilities liable for fire costs only when its determined that they were negligent.

Secondly, we recommend revisiting and refining the standard for “prudent management” of the system: that is, under what circumstances should a utility be allowed to recover costs from electric customers? We made some suggestions that would further define those standards, generally in the direction of allowing utilities to receive more cost recovery.

The third area we look at is the state insurance market for homeowners and commercial property owners, and how to ensure that insurance is available and affordable to people in wildfire-prone areas. We made recommendations designed to combat rising rates and shrinkage of the existing insurance market for residential customers.

Many of our recommendations flowed from the input we received during our five-month public outreach process, during which we took expert testimony and public comment at five meetings across the state. The stakeholders we heard from included utilities, insurance companies, wildfire victims, ratepayer advocates, and environmental organizations, among others. On top of that, each of our five commissioners has a different area of expertise: finance, insurance, law, and so on. We considered all these perspectives when crafting our recommendations.

What were some of the themes you heard from the many stakeholders who testified? 

From wildfire victims, we heard about the importance of having their claims paid in a timely manner. The living expenses offered by most insurance companies ends after two years, so  people need to be able to recoup money from  the utility or responsible party as quickly as possible.

That consideration led to some hesitation about changing the current liability regime: people worried that absent a clear determination of utility responsibility, their claims settlements would be delayed. To address that concern, one of our recommendations is a state fund that would pay victims before a determination is reached, and then be reimbursed by the utility if they are deemed liable. The aim is to make sure that victims get paid as quickly as possible, while protecting utilities from undue costs.

From electric customers and small businesses, we heard concern over rising electric rates. Rates are already going up because utilities are making investments in wildfire mitigation and system resilience. The concern was that rates would go up even more if utilities had to pay for damages as well. We heard that we needed to find a way to socialize these costs beyond the ratepayer pool.

We also heard testimony from the investment community regarding why they perceive California utilities as particularly risky, as well as context about how other states handle these matters. The combination of increased costs of capital and a drop in utilities’ bond ratings due to declining investment could result in electricity rates rising by more than 7 percent.

My big takeaway from all this was that the status quo isn’t working for anyone. It’s not working for utilities, which are experiencing increasingly poor financial health and even bankruptcy. It’s not working for wildfire victims, who don’t have access to adequate insurance and aren’t guaranteed to recoup their losses in a reasonable timeframe. And it’s not working for electric customers, who are seeing their rates get higher and higher.

Our recommendations tried to address all of those concerns: ensuring that insurance is available, that the costs of wildfires are broadly socialized, and, most importantly, that we take action to mitigate and prevent wildfires. Avoiding these fires in the first place is the best-case scenario for everyone.

Drawing on  both your Public Utilities Commission & Energy Commission experience, and now this commission, how will the utility of tomorrow be different from today, given the climate change conditions facing California in coming years? 

We are already seeing some of the ways in which utilities are responding to our “new normal” conditions. One of those is improving intel about what’s happening on the ground. Wildfires evolve rapidly, and even a small ignition can become catastrophic because the wind can carry it so quickly. Spotting fires early on and putting them out before they have the chance to spread is key to reducing their damage. In San Diego in particular, we’ve seen greater investment in cameras and other detection devices to more quickly identify and address any potential issues.

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Another thing I think we will see in the future is more community preparation and building resilience. If a fire does happen, we need to mitigate the loss of life and property damage that could result from it. That means we need to harden homes by using more fire-resistant material, having more defensible space, ensuring adequate fire services, and developing strong evacuation plans.

Those are the types of things I think might improve at both the utility and community levels. But the fact is that producing electricity is inherently dangerous. That is true of distributed energy as well as centralized generation; if it involves wires and electrons, it carries a risk. And at the end of the day, California utilities have a legal responsibility to deliver power to everyone in the state who wants it—including people who live in forested or fire-prone conditions. As long as that is the case, some infrastructure will be at risk and fire will be a possibility.

In terms of energy policy, California essentially has adopted an all-electrification strategy. Is that agenda consistent with the wildfire mitigation strategies we need to safely & reliably supply energy throughout the state?

An overarching connective theme between wildfires and electrification is the need to address climate change and reduce greenhouse gas emissions. Moving to electrification is about utilizing our lowest-carbon energy resources, and we’ve done a great job as a state in decarbonizing the electric sector. We want to leverage that even more.

As we do so, we of course to be cognizant of the need for a resilient grid. A grid that relies on electricity will require our system to be more resilient than it has been in the past. But even if we weren’t moving toward electrification, we would still need to invest in grid hardening as part of adapting to climate change. So, I think we can do both. 

Again, drawing on you history as a California regulator, how well are utilities responding to increased interest in distributed energy and more localized energy production?

There is increased interest in distributed energy resources and microgrids as strategies for resilience. I think those options need to be on the table.

A leading wildfire prevention strategy at the moment is proactively shutting off the electric grid in weather conditions that suggest a high chance of fire. That has been successful in reducing fires, but it can also have important consequences for the community going without power. Several utilities are piloting microgrids as a way to provide at least enough power to meet critical needs during power shut-offs or catastrophes.

All the solutions out there have to work together. The biggest finding of our report was that there is no one silver bullet, either for wildfire mitigation or for handling the cost impacts of fires. We need to take action in both arenas, as well as for both customers and utilities. 

Given that your Commission was housed in the Governor’s Office of Planning and Research, does the report take up the issue of rebuilding/ developing in areas with high fire risk?

Our report acknowledges the importance of helping property owners in the Wildland Urban Interface (WUI) better understand the risks of being located there, as well as ensuring that insurance rates reflect that differentiated risk.

Insurance prices in the WUI are already higher than in other parts of the state. Our report calls for insurance companies to incorporate greater nuance in their risk modeling and assessments, and to consider any measures a homeowner or community may have taken to reduce their risks. We want to encourage property owners to live in areas with less risk, and if they do live in a high-risk area, to fortify their homes as much as possible.

Another of our recommendations is for a development fee on any new homes built in the WUI, with the revenue invested in wildfire mitigation and prevention.

What other state agencies did the Commission consult or collaborate with when crafting its recommendations?

Our enabling legislation specifically directed us to consult with the PUC and the Department of Insurance, which we did on a regular basis. Being in the Office of Planning and Research also allowed us access to staff who have been thinking about these issues for a long time. It was helpful for us to look across all these different agencies and their policies and see how they connect.

For that reason, we strongly suggest that our recommendations be thought of as a cohesive set. Each recommendation addresses one part of the bigger problem, being cognizant of the fact that fixing one issue can sometimes create another. Our goals were to make California utilities more investable, lower costs for ratepayers and improve transparency, and increase involvement from insurance companies and homeowners in wildfire prevention.

Lastly, having served now on the CPUC, Cal Energy, and Wildfire Commissions, what challenges facing grid resilience and fire safety keep you up at night?

What keeps me up at night are the next few years—the period before the commission’s recommendations and other strategies are fully implemented.

The intensity of California’s wildfires has increased significantly. But in general, our understanding of how fires spread is still nascent; the modeling is relatively new. We can’t even say with certainty whether our recent catastrophic fires were one in 20-year events, or one in 250-year events.

Our understanding of what we need to do to mitigate fires is improving, and there is definitely an understanding that we need to do more. But implementing our mitigation measures will take years, and we won’t know how successful they are until they are completed. This is the period when we have the most uncertainty. So, what keeps me up at night is the need for utility and insurance systems that protect everyone right now, even as we work toward more fundamental improvements.

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© 2019 The Planning Report | David Abel, Publisher, ABL, Inc.