Smoke from the Camp Fire in Butte County, California.
Photo by Senior Airman Crystal Housman, courtesy the California National Guard.Picture this: A tanker owned by the state of California is driven negligently, overturns in a city neighborhood, and spills gasoline all over the roadway and adjacent property.
Right behind the overturned tanker comes a car owned by the local utility, whose muffler becomes detached and drags on the ground. The muffler emits sparks, and seconds later the entire neighborhood erupts in flames.
Who is at fault?
You might think the state is solely responsible, or that both parties share responsibility. But if someone told you the law makes the private utility responsible for all the damage caused by its equipment, and therefore the entire cost of the fire – regardless of whether the utility maintained or operated its equipment negligently – I suspect you would respond that this law is unduly harsh. When it comes to wildfires and electric utilities, however, this is exactly how California law operates.
California’s largest utility, the Pacific Gas and Electric Company, recently asked state regulators to approve significant rate hikes: 12 percent by 2020 and 24 percent by 2022. The company said this request was a result of additional expected spending for wildfire mitigation and insurance costs, and doubtless it will use the additional money for both of those things if regulators approve the rate hike. But PG&E did not mention the massive liability it faces in the form of lawsuits alleging that the utility is to blame for sparking wildfires in the state. While PG&E has not commented on the amount of its potential liability beyond stating that it is “significant,” The Wall Street Journal reported that it potentially faces tens of billions of dollars in claims.
The state’s fire investigator found PG&E responsible for 17 major fires last year. Of those cases, 11 have been referred to county district attorneys. Authorities are still investigating whether the utility’s equipment contributed to this year’s Camp Fire, the deadliest in the state’s history, or to last year’s Tubbs Fire, the second-deadliest. Regardless of the state’s findings, the company is subject to an already-significant number of lawsuits seeking to make it pay fire-related costs and damages. Because California’s legal framework does not require the company to be negligent in order to be financially responsible for fire damage, PG&E faces the strong possibility of having to pay many of these claims.
Although he still blames climate change for California’s fires (consistent with his overheated rhetoric about the impending doom of the world), Gov. Jerry Brown has at least acknowledged that forest management plays a key role in how fires start and spread, or don’t. His recent executive order is a start toward moving policy in the right direction, although it does not go far enough.
Fire is a natural part of the ecosystems of the West, from the prairies to the Pacific. It keeps trees and brush from spreading into natural grasslands that are too dry and fire-prone to support timber in the long term. In moister areas where trees can flourish, fire periodically reduces the fuel load, so future burns are not as intense or extensive. This reduces scarring of the land and, in time, regenerates healthy forests.
Fire suppression began with the establishment of national and state forests, as well as private timber management. It has become more urgent as growing populations – and their residences – encroach on fire-prone land. But the more fires we suppress, the more intense are the fires that remain. It’s a predictable and oft-predicted phenomenon, and it has come to pass not only in California, but throughout the forests and other wildlands of the West.
In the mid-20th century, we managed these risks through controlled burns and regular timber harvests. But in the later decades of the last century and into this one, there has been increased opposition to many timber-cutting operations and the forest road construction they entail. Forest roads make it easier to access the site of small wildfires before they become big ones. Controlled burns are also harder to execute when populations move into areas on the fringes of the forest. As Jason Hayes, the director of environmental policy at the Mackinac Center for Public Policy, wrote in an opinion column for The Hill, “[…] a confusing mix of private property rights claims, environmental interests and historical uses are conflicting with a growing list of complex state and federal regulations.”
Through all of this, California has tried to shift the entire cost of the consequences of public policy onto the private investors who own and finance their electric utility. However, state law prevents shareholders from taking on so much of the burden that doing so would drive up the company’s capital costs. Legislators’ proposed solution, as often is the case in states where lawmakers don’t want to face up to the costs of their flawed policy choices, is to have PG&E borrow money via bonds to pay the assessed damages. A new state law allows the utility to turn fire-related expenses from last year’s fires into securitized debt if it wishes to do so; lawmakers may expand the law to include 2018 fires, too. But this only shifts costs for today’s fires onto tomorrow’s ratepayers, up to the point where PG&E eventually could not pay at all and would be driven into bankruptcy. Who would pay then?
Where mismanagement and negligence on the part of the utility is at fault for starting a fire, the utility should pay – but only to a point. If the fire also spreads far and fast into populated areas remote from the source of the fire, there should be some limit on the amount that can or should be assessed against the utility.
In the end, Californians pay for their policies, one way or the other. If the state has to pick up the tab, the cost gets covered via taxes. If it is the utilities, it is paid by utilities’ customers. And if nobody reimburses those who lose loved ones or property to preventable fires, they bear the costs themselves. The distortions induced by shifting costs artificially onto PG&E and other utilities serve only to raise their cost of capital, notwithstanding any legislative directives. This reduces future maintenance, which will lead to more accidents – and more fires. Driving PG&E into bankruptcy, or even making it pay only “until it hurts” as in proposed legislation, won’t stop fires from starting unless California simply turns out the lights.
Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book,
The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book
Looking Ahead: Life, Family, Wealth and Business After 55.
Posted by Larry M. Elkin, CPA, CFP®
Smoke from the Camp Fire in Butte County, California.
Photo by Senior Airman Crystal Housman, courtesy the California National Guard.
Picture this: A tanker owned by the state of California is driven negligently, overturns in a city neighborhood, and spills gasoline all over the roadway and adjacent property.
Right behind the overturned tanker comes a car owned by the local utility, whose muffler becomes detached and drags on the ground. The muffler emits sparks, and seconds later the entire neighborhood erupts in flames.
Who is at fault?
You might think the state is solely responsible, or that both parties share responsibility. But if someone told you the law makes the private utility responsible for all the damage caused by its equipment, and therefore the entire cost of the fire – regardless of whether the utility maintained or operated its equipment negligently – I suspect you would respond that this law is unduly harsh. When it comes to wildfires and electric utilities, however, this is exactly how California law operates.
California’s largest utility, the Pacific Gas and Electric Company, recently asked state regulators to approve significant rate hikes: 12 percent by 2020 and 24 percent by 2022. The company said this request was a result of additional expected spending for wildfire mitigation and insurance costs, and doubtless it will use the additional money for both of those things if regulators approve the rate hike. But PG&E did not mention the massive liability it faces in the form of lawsuits alleging that the utility is to blame for sparking wildfires in the state. While PG&E has not commented on the amount of its potential liability beyond stating that it is “significant,” The Wall Street Journal reported that it potentially faces tens of billions of dollars in claims.
The state’s fire investigator found PG&E responsible for 17 major fires last year. Of those cases, 11 have been referred to county district attorneys. Authorities are still investigating whether the utility’s equipment contributed to this year’s Camp Fire, the deadliest in the state’s history, or to last year’s Tubbs Fire, the second-deadliest. Regardless of the state’s findings, the company is subject to an already-significant number of lawsuits seeking to make it pay fire-related costs and damages. Because California’s legal framework does not require the company to be negligent in order to be financially responsible for fire damage, PG&E faces the strong possibility of having to pay many of these claims.
Although he still blames climate change for California’s fires (consistent with his overheated rhetoric about the impending doom of the world), Gov. Jerry Brown has at least acknowledged that forest management plays a key role in how fires start and spread, or don’t. His recent executive order is a start toward moving policy in the right direction, although it does not go far enough.
Fire is a natural part of the ecosystems of the West, from the prairies to the Pacific. It keeps trees and brush from spreading into natural grasslands that are too dry and fire-prone to support timber in the long term. In moister areas where trees can flourish, fire periodically reduces the fuel load, so future burns are not as intense or extensive. This reduces scarring of the land and, in time, regenerates healthy forests.
Fire suppression began with the establishment of national and state forests, as well as private timber management. It has become more urgent as growing populations – and their residences – encroach on fire-prone land. But the more fires we suppress, the more intense are the fires that remain. It’s a predictable and oft-predicted phenomenon, and it has come to pass not only in California, but throughout the forests and other wildlands of the West.
In the mid-20th century, we managed these risks through controlled burns and regular timber harvests. But in the later decades of the last century and into this one, there has been increased opposition to many timber-cutting operations and the forest road construction they entail. Forest roads make it easier to access the site of small wildfires before they become big ones. Controlled burns are also harder to execute when populations move into areas on the fringes of the forest. As Jason Hayes, the director of environmental policy at the Mackinac Center for Public Policy, wrote in an opinion column for The Hill, “[…] a confusing mix of private property rights claims, environmental interests and historical uses are conflicting with a growing list of complex state and federal regulations.”
Through all of this, California has tried to shift the entire cost of the consequences of public policy onto the private investors who own and finance their electric utility. However, state law prevents shareholders from taking on so much of the burden that doing so would drive up the company’s capital costs. Legislators’ proposed solution, as often is the case in states where lawmakers don’t want to face up to the costs of their flawed policy choices, is to have PG&E borrow money via bonds to pay the assessed damages. A new state law allows the utility to turn fire-related expenses from last year’s fires into securitized debt if it wishes to do so; lawmakers may expand the law to include 2018 fires, too. But this only shifts costs for today’s fires onto tomorrow’s ratepayers, up to the point where PG&E eventually could not pay at all and would be driven into bankruptcy. Who would pay then?
Where mismanagement and negligence on the part of the utility is at fault for starting a fire, the utility should pay – but only to a point. If the fire also spreads far and fast into populated areas remote from the source of the fire, there should be some limit on the amount that can or should be assessed against the utility.
In the end, Californians pay for their policies, one way or the other. If the state has to pick up the tab, the cost gets covered via taxes. If it is the utilities, it is paid by utilities’ customers. And if nobody reimburses those who lose loved ones or property to preventable fires, they bear the costs themselves. The distortions induced by shifting costs artificially onto PG&E and other utilities serve only to raise their cost of capital, notwithstanding any legislative directives. This reduces future maintenance, which will lead to more accidents – and more fires. Driving PG&E into bankruptcy, or even making it pay only “until it hurts” as in proposed legislation, won’t stop fires from starting unless California simply turns out the lights.
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