Six years ago, Pacific Gas & Electric filed for bankruptcy after fueling devastating wildfires, including one that destroyed the town of Paradise and led to more than 100 deaths.
Wall Street investors lost confidence and rating agencies threatened to downgrade California's investor-owned utilities, prompting lawmakers to come up with an innovative solution: establishing a $21-billion Forest Fire FundDivide equally between stakeholders and utility customers.
Now, after two massive wildfires destroyed thousands of homes and killed at least two dozen people in and around Los Angeles, the state's wildfire funding will face its first major test if another utility is responsible for fueling the blazes.
Even the lawmaker who introduced the legislation to create the wildfire fund isn't sure whether his efforts to mitigate the risk to utility companies — allowing them to continue operating in a state prone to increased wildfire risk — are enough.
“This is a very deep test case,” said Christopher Holden, a former Democratic legislator who sponsored the bill that created the fund. “It's a new frontier,” said Holden, a Pasadena resident who had to evacuate during the Eaton fire.
“It was a new frontier when we wrote the bill — and now, five years later, we're crossing another frontier.”
If investigators determine that a utility company caused the Eaton or Palisades fires, it could send shock waves throughout the utility industry and the broader insurance market.
Mark Toney, TURN executive director of The Utility Reform Network, said the massive scope of the LA County fire raised significant questions about the fund's ability to cover insurance liability. While the fund could help bail out utility companies for fires, it's uncertain whether it could cover future fires.
“Does finance work properly?” Tony said. “Who pays?”
The cause of the fire is yet to be ascertained.
Investigators looking into the Eaton fire — which caused at least 17 deaths and damaged 7,000 structures across Pasadena and Altadena — are focusing on the Southern California area around Edison. Power transmission tower in Eaton Canyon.
Edison Eaton denied wrongdoing in the fire. In a statement to The Times, it said its work to mitigate wildfires had reduced the risk of catastrophic fires by 85% to 90% compared to the pre-2018 risk.
Los Angeles Department of Water and PowerThe municipal utility, which operates in Pacific Palisades, did not opt for the wildfire fund because it says it would be too expensive for its customers. If the large municipal utility is responsible for the Palisades fire, the city of LA could face excessive financial costs.
But the fire, which started in the Skull Rock area north of Sunset Boulevard, appears to be human-caused, sources familiar with the investigation told The Times. Authorities are investigating whether a small fire caused by fireworks on New Year's Eve may have somehow rekindled the January 7 incident.
Michael Vara, an energy and climate scholar at Stanford University, said not only California's wildfire funding, but the state's entire insurance landscape, should be overhauled if a utility company is found to have caused the massive L.A. fire.
“The big question is how much coverage is available and affordable overall?” Vara, who served on the California Disaster Response Council, the fund's oversight body, said. “California, I think, is going to face bigger challenges than it has in the last few years, for its primary insurers and other companies to access these global reinsurance markets to fund losses after a disaster.”
Under California law, utility companies are strictly liable for all fire-related damage to real property, including homes.
The wildfire fund is a new model in which the state's three largest owner-operated utilities — Pacific Gas & Electric Co. and San Diego Gas & Electric Co. and Southern California Edison – can be paid into one fund. It was determined that their equipment caused the fire. When that happens, they will be responsible for the first $1 billion in losses. After that, the forest fire fund will pay.
“If wildfire funding wasn't there today, Edison could be in real trouble,” Wara said. “We could see something similar to what happened at PG&E after the Camp Fire.”
Then, Wara said, utilities were held to a strict liability standard: If electrical appliances were found to have caused a fire, they were on the hook.
Now, Vara said, if Edison eventually takes over, the company can go to the wildfire fund to get the money.
“It's very important to ensure that victims are made whole, at least for their property losses,” he said.
While it's too early to assess damage in the Eaton Fire, Wara said thousands of structures have been lost in an area where the median home value is about $1.3 million. The cost, he said, will reach 10 billion dollars.
Wara said even if officials found Edison caused the fire, acting responsibly would have depleted half of the fund's $21 billion.
“It's half the fund on one fire — five years into the life of the fund,” said Wara, who served as California's wildfire commissioner and a member of the California Disaster Response Council, the oversight body for the California Wildfire Fund.
The problem is complicated by the fact that the wildfire fund has raised only $14 billion so far, because utility companies can't immediately expect ratepayers to pay half of the $21 billion.
“If you're an investor in PG&E or Edison, you look at this and say, 'Hmm, I thought this fund was good enough. Maybe now I'm not so sure.' Funds exist to provide trust. If funds are insufficient, trust will be limited.
The California Department of Forestry and Fire Protection, or Cal Fire, will investigate what caused the fire.
Then, the California Public Utilities Commission determines whether the utility acted reasonably or unreasonably, and if so, to what extent.
Vara said that if a utility is found to have failed to act prudently, it must repay the funds. However, the amount it pays limits the amount of repayments relative to the amount of their rate base.
Edison International Chief Executive Pedro Pizarro told Bloomberg Television that state regulations allowed the company's owner's liability to be $3.9 billion.
“If Edison is paying back the funds, the reason the cap exists is because it's basically the electricity customers paying back the funds,” Wara said. “Edison would go to the California Utilities Commission and say, 'This money should be spent on tariffs.'”
Funds should also pay for wrongful deaths, Wara said, but that's a different kind of claim.
“You have to show negligence, and actually it can be difficult to prove because Edison may have acted reasonably and still the fire was set by their equipment,” Wara said. “Edison would have a lot of reason to say that it acted reasonably, that it spent a lot of money to reduce risk, and that it has an agency that oversees all of this and approves and monitors compliance with its plans.”
However, even if the wildfire fund bails out Edison, there could be serious consequences for Edison and other utilities. If most of the $21 billion in wildfire funding runs out, it could hurt market sentiment for the fund, negatively impact utility company credit scores and throw investor-owned utilities — which cover about 80% of customers across the state of California — into chaos. .
By late Tuesday afternoon, shares of Edison International, the utility's parent company, were up less than 1% at $57.27, marking a more than 24% drop in the week since the fire. This represents a decline of more than $7 billion in the company's market value.
“If so [utility] The market collapses, and then we've got a catastrophic situation,” Holden said. “We have to protect the market going forward.”
Last fall, State regulators criticized Southern California Edison For lagging behind in inspecting transmission lines in areas prone to wildfires.
Application security officers and A Report The company's visual inspections of cracks in its transmission lines sometimes fail to detect dangerous problems.
“We didn't see any indication of a power anomaly in our telemetry,” Edison International CEO Pedro Pizarro said on Bloomberg TV on Monday. “Typically, if there's a fire across the infrastructure, you'd see a drop in voltage. We didn't see that in our study.
Pizarro said Edison shut down distribution lines near the start of Eaton Place before it exploded in a canyon near Altadena, but not transmission lines. “Transmission lines are bigger and stronger so they can operate safely at higher wind speeds,” he said.
Many of California's most destructive wildfires in past decades were caused by aging electrical equipment. The 2018 campfire was caused by 100-year-old high-voltage transmission towers. The 2019 Kinkade Fire was caused by a line built half a century ago. Vara said California's aging utility infrastructure, while being inspected, isn't working.
“The multi-exchange system in California is very antiquated,” Wara said. “There were pulses of construction activity leading up to the system we have, the last big one was when Pat Brown was governor. Maybe we shouldn't be relying on old infrastructure?”
In an era when hurricane-force winds sweep wildfires and inundate large areas, Tony questions whether it makes sense for a utility company to be responsible for the fate of every home. Forest fires are caused not only by misuse of equipment, but also by lightning, arson, legal fireworks, and then fueled by poor growth and inadequate cutting of vegetation and landscaping.
“It's a mistake to single out use,” Tony said. “It's time for a new paradigm. When it comes to the cost of rebuilding, utilities will never be enough.