HUESTON HENNIGAN LLP - edison.com · 21/02/2017 · Pac. Bell Tel. Co. v. So ... is not allowing...

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BRIEF OF SOUTHERN CALIFORNIA EDISON CO. AS AMICUS CURIAE ISO PG&E'S RENEWED

MOTION FOR LEGAL DETERMINATION 5269734

HUESTON HENNIGAN LLP John C. Hueston, State Bar No. 164921 [email protected] Moez M. Kaba, State Bar No. 257456 [email protected] 523 West 6th Street, Suite 400 Los Angeles, CA 90014 Telephone: (213) 788-4340 Facsimile: (888) 775-0898 Attorneys for Amicus Curiae Southern California Edison Company

SUPERIOR COURT OF THE STATE OF CALIFORNIA

COUNTY OF SACRAMENTO

Coordination Proceeding Special Title (CRC 3.550), BUTTE FIRE CASES,

Case No. JCCP 4853 BRIEF OF SOUTHERN CALIFORNIA EDISON COMPANY AS AMICUS CURIAE IN SUPPORT OF PACIFIC GAS & ELECTRIC COMPANY’S RENEWED MOTION FOR A LEGAL DETERMINATION OF INVERSE CONDEMNATION LIABILITY PURSUANT TO C.C.P. § 1260.040 Date: March 15, 2018 Time: 10:00 a.m. Dept.: 42 Judge: Hon. Allen H. Sumner

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TABLE OF CONTENTS

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I. INTRODUCTION ................................................................................................................ 2

II. THE LEGAL ASSUMPTION UNDERLYING THE EXPANSION OF INVERSE CONDEMNATION HAS BEEN DISPROVED ................................................ 3

A. Privately Owned Utilities Make Substantial Contributions to California .................................................................................................................. 5

B. Privately Owned Utilities Serve the Public Good, But Lack Protections and Powers Necessary to Shoulder Inverse Condemnation Liability ............................................................................................ 7

C. Frequent and Intense Wildfires Are the “New Normal” in California ..................... 8

D. Judicial Expansion of Inverse Condemnation to Privately Owned Utilities Harms the Utilities and Many Other Interests .......................................... 10

1. Inverse Condemnation Liability Threatens to Make Privately Owned Utilities Economically Unsustainable ............................................ 10

2. Expansion of Inverse Condemnation to Private Utilities Threatens Numerous California Interests and Public Policies ................... 12

III. CONCLUSION ................................................................................................................... 14

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TABLE OF AUTHORITIES

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Cases

Aetna Life & Casualty Co. v. City of Los Angeles, 170 Cal.App.3d 865 (1985) .................................................................................................. 4

Albers v. Cty. of Los Angeles, 62 Cal. 2d 250 (1965) ........................................................................................................... 4

Barham v. S. Cal. Edison Co., 74 Cal.App.4th 744 (1999) ........................................................................................... 4, 5, 7

Belair v. Riverside Cty. Flood Control Dist., 47 Cal. 3d 550 (1988) ........................................................................................................... 2

Bunch v. Coachella Valley Water Dist., 15 Cal. 4th 432 (1997) .......................................................................................................... 2

Gutierrez v. Cty. of San Bernardino, 198 Cal.App.4th 831 (2011) ................................................................................................. 4

Holtz v. Superior Court, 3 Cal. 3d 296 (1970) ......................................................................................................... 2, 4

Magnuson-Hoyt v. Cty. of Contra Costa, 228 Cal.App.3d 139 (1991) .................................................................................................. 4

Mercury Cas. Co. v. Pasadena, 14 Cal.App.5th 917 (2017) ................................................................................................... 4

Pac. Bell Tel. Co. v. So. Cal. Edison Co., 208 Cal.App.4th 1400 (2012) ........................................................................................... 1, 5

Other Authorities

CAL FIRE, Incident Information: Number of Fires and Acres, CA.gov, (Jan. 24, 2018), http://cdfdata.fire.ca.gov/incidents/incidents_stats?year=2017 ................................ 9

Cal. Dep’t of Forestry & Fire Prot., Top 20 Most Destructive California Wildfires, CA.gov (Jan. 12, 2018), http://www.fire.ca.gov/communications/downloads/fact_sheets/Top20_Destruction.pdf .............................................................................................................................. 8

Cal. Energy Comm’n, Differences Between Publicly and Investor-Owned Utilities, CA.gov, http://www.energy.ca.gov/pou_reporting/background/difference_pou_iou.html ...................................................................................................................................... 2, 7

Chelsea Harvey, Here’s What We Know About Wildfires and Climate Change, Sci. Am. (Oct. 13, 2017), https://www.scientificamerican.com/article/heres-what-we-know-about-wildfires-and-climate-change/ .................................................................... 8

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TABLE OF AUTHORITIES (cont.)

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Commissioner Informational Webinar on Impacts of Climate Change and Resulting Resiliency, at 48:25-48:40, http://www.adminmonitor.com/ca/cpuc/other/20180207/ .................................................. 13

Eleanor Cummins, How the End of the Drought Likely Exacerbated the Deadly California Wildfires, Slate (Oct. 10, 2017) ........................................................................... 8

Inst. of the Env’t & Sustainability, Univ. of Cal., Los Angeles, Research Project: Climate Change in the Los Angeles Region, https://www.ioes.ucla.edu/project/climate-change-in-the-los-angeles-region ..................... 8

Ivan Penn, Edison and Tesla Unveil Giant Energy Storage System, L.A. Times (Jan. 30, 2017), http://www.latimes.com/business/la-fi-tesla-energy-storage-20170131-story.html ............................................................................................................. 6

John T. Abatzoglou & A. Park Williams, Impact of Anthropogenic Climate Change on Wildfire Across Western US Forests, 113-42 Proc. Nat’l Acad. Sci. (Oct. 2016) ..................................................................................................................................... 8

Little Hoover Comm’n, Fire on the Mountain: Rethinking Forest Management in the Sierra Nevada (Feb. 2018) .............................................................................................. 9

Melissa Palmer & Elizabeth Espinosa, “We Don’t Even Call It Fire Season Anymore . . . It’s Year Round”: Cal Fire, KTLA (Dec. 11, 2017), http://ktla.com/2017/12/11/we-dont-even-call-it-fire-season-anymore-its-year-round-cal-fire/ ............................................................................................................... 9

Michael L. Mann et al., Modeling Residential Development in California from 2000 to 2050: Integrating Wildfire Risk, Wildland and Agricultural Encroachment, 41 Land Use Pol’y 438 (Nov. 2014) ........................................................... 9

Mike Yamato, Market Notes Tuesday December 12, 2017, Investitute (Dec. 12, 2017), https://investitute.com/activity-news/market-notes-tuesday-december-12-2017/ .............................................................................................................................. 13

Robinson Meyer, Has Climate Change Intensified 2017’s Western Wildfires?, The Atlantic (Sep. 7, 2017), https://www.theatlantic.com/science/archive/2017/09/why-is-2017-so-bad-for-wildfires-climate-change/539130/ .................................................................................. 8

Ruben Vives et al., Southern California’s Fire Devastation Is “the New Normal,” Gov. Brown Says, L.A. Times (Dec. 10, 2017), http://www.latimes.com/local/lanow/la-me-socal-fires-20171210-story.html ..................... 9

So. Cal. Edison, Overview: Who We Are, https://sce.com/wps/portal/home/about-us/who-we-are ....................................................................................................................... 5

Constitutional Provisions

Cal. Const., art. I, § 19 ...................................................................................................................... 3

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- 1 - BRIEF OF SOUTHERN CALIFORNIA EDISON CO. AS AMICUS CURIAE ISO PG&E'S RENEWED


STATEMENT OF INTEREST OF AMICUS CURIAE

Amicus curiae Southern California Edison Company (“SCE”) is one of the largest providers

of electrical power to California residents. It has been serving Californians for over 125 years and

currently delivers power to 15 million people and businesses in 50,000 square miles across central,

coastal and southern California. Like Pacific Gas and Electric Company (“PG&E”), SCE is a

privately owned utility. That is, SCE is not owned by a government entity, like Sacramento

Municipal Utility District, but instead is a subsidiary of Edison International, a publicly traded

company. Although it provides a public good, SCE does not enjoy many of the benefits of a

government entity. For example, unlike a government entity that can elect to increase taxes or fees

to cover increased costs, SCE may not unilaterally raise its rates in order to make up for losses it

suffers. This important distinction between a government entity and a privately owned utility was

brought into sharp focus when the California Public Utilities Commission (“PUC”) denied San

Diego Gas and Electric Co.’s request to recover uninsured losses arising out of 2007 wildfires in its

rates. Likewise, SCE does not enjoy the benefit of sovereign immunity.

SCE has a particular interest in the case at bar because application of the judicially created

doctrine of inverse condemnation to privately owned utilities has a substantial impact on SCE (as it

does for PG&E). As described more fully herein, SCE submits that inverse condemnation, a claim

that has been justified only insofar as it compensates citizens where the government has damaged

their property for the public good, should not apply to privately owned utilities at all. If inverse

condemnation is applied to privately owned utilities, those utilities must be entitled to recover in

rates the costs of the “strict liability” that inverse condemnation imposes.1 Currently, courts are

applying inverse condemnation to privately owned utilities, but the state (acting through the PUC)

is not allowing those utilities to socialize the costs of such liability.2 The uncertainty created as a

1 Pac. Bell Tel. Co. v. So. Cal. Edison Co., 208 Cal. App. 4th 1400, 1408 (2012) (applying inverse condemnation with strict liability to damage resulting from a wildfire accident). 2 See Declaration of Moez Kaba In Support of SCE’s Amicus Curiae Brief (“Kaba Decl.”), ¶ 2 & Ex. 1 (PUC Decision Denying Application of SDG&E) at 65 (PUC finding that “inverse condemnation principles … [were] not relevant” to whether it would approve SDG&E’s requested rate recovery).

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result of the conflict between the courts (who justify the application of inverse condemnation by

assuming that the privately owned utilities can raise rates) and the PUC (which has rejected inverse

condemnation considerations in considering requested rate recovery) has significant impacts on

amicus curiae, its employees, its investors, and ultimately its customers.

Critically, this Court will be the first to address the applicability of inverse condemnation to

privately owned utilities in light of the PUC’s clear indication that privately owned utilities have no

guarantee of socializing inverse condemnation losses by adjusting their rates. Consequently,

amicus curiae respectfully urges this Court to grant PG&E’s renewed motion for legal

determination, and find that inverse condemnation does not apply to PG&E in the Butte Fire cases.

I. INTRODUCTION

A majority of homes, businesses, and government buildings in California rely on privately

owned utilities to deliver their electricity.3 But creating, maintaining, and improving an electric grid

is an expensive and risky enterprise, particularly at a time when climate change and drought have

created an unprecedented risk of wildfires in California.

The California Supreme Court has long recognized that public improvements and

infrastructure provide indispensable benefits to the people of California, and that courts must

exercise caution so as to “avoid[] deterrence of beneficial projects.”4 For example, in Holtz v.

Superior Court, the Court cautioned against an “open-ended, absolute liability rule of inverse

condemnation” because “compensation allowed too liberally will seriously impede, if not stop,

beneficial public improvements because of the greatly increased cost.”5 In Bunch, addressing

inverse condemnation in the context of public flood control improvements, the Court held: “A

public agency that undertakes to construct or operate” a public improvement “clearly must not be

made the absolute insurer” of the lands its infrastructure improves.6

3 Cal. Energy Comm’n, Differences Between Publicly and Investor-Owned Utilities, CA.gov, http://www.energy.ca.gov/pou_reporting/background/difference_pou_iou.html. 4 Belair v. Riverside Cty. Flood Control Dist., 47 Cal. 3d 550, 565 n.6 (1988). 5 3 Cal. 3d 296, 304 (1970) (internal citations and quotations omitted). 6 Bunch v. Coachella Valley Water Dist., 15 Cal. 4th 432, 442 (1997).

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That logic applies with even greater force to privately owned utilities, which must operate

as sustainable businesses to survive. Such utilities rely on PUC-approved rates, private credit,

investment, and insurance rather than tax dollars, and they do not enjoy the general tort immunity

that makes inverse condemnation necessary against government agencies. While government

entities, including municipal entities, can pass on losses through higher taxes or rates, privately

owned utilities do not have any guarantee that they can do so by raising rates for those they serve.

In exchange for making substantial investments to promote the public good, under the current

system, these private entities risk being held liable for damages to property even if the privately

owned utility bears no fault whatsoever for the loss. Moreover, privately owned utilities cannot

unilaterally pass on the heavy losses they may sustain when courts permit injured parties to recover

against them under an inverse condemnation theory. The courts’ actions risk effectively making

privately owned utilities absolute insurers of property across large swaths of land – an outcome not

contemplated or supported by the Takings Clause.

The court should restore rationality to California’s Takings Clause jurisprudence by holding

that liability under inverse condemnation principles does not extend to privately owned utilities that

cannot socialize losses.

II. THE LEGAL ASSUMPTION UNDERLYING THE EXPANSION OF INVERSE

CONDEMNATION HAS BEEN DISPROVED

The California Constitution requires the government to pay just compensation when it takes

or damages private property for a public purpose.7 Based on the requirement that compensation be

paid where property is “taken or damaged for public use,” California courts have developed a body

of decisions applying this rule not merely to traditional takings, but also to instances in which the

government, in furtherance of some public purpose, damages private property: a so-called “inverse

7 Cal. Const., art. I, § 19 (“Private property may be taken or damaged for a public use and only when just compensation … has first been paid to … the owner.”).

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condemnation.”8 Such a claim is to be brought only against a “public entity,” which has loss-

shifting powers.9

“[T]he underlying purpose of . . . inverse . . . condemnation is to distribute throughout the

community the loss inflicted upon the individual by the making of the public improvements: to

socialize the burden … that should be assumed by society.”10 Because “the cost of such damage

can be better absorbed, and with infinitely less hardship, by the taxpayers as a whole than by the

owners of the individual parcels damaged,” inverse liability serves as a buffer against the risks

created by public works.11 In the same way that a governmental agency can socialize costs through

taxes, a government-owned utility can socialize costs through rate increases.12 This “loss

distribution premise” is the constitutional “underpinning [of] inverse condemnation damages.”13

Without it, the doctrine is inapplicable: It would impose “strict liability” on an entity that does not

have the requisite right to spread inverse condemnation losses to the community. Countless

decisions have reaffirmed that spreading and socializing losses throughout the community is the

policy behind, intended effect of, and, most importantly, the constitutional justification for,

permitting claims of inverse condemnation.14

In Barham v. Southern California Edison Company,15 the Court of Appeal permitted an

inverse condemnation claim to proceed against SCE, even though it is a privately owned utility.

8 See e.g., Albers v. Cty. of Los Angeles, 62 Cal. 2d 250, 263–72 (1965). 9 Barham v. So. Cal. Edison Co., 74 Cal. App. 4th 744, 751 (1999). 10 Holtz, 3 Cal. 3d 295, 303 (1970) (internal citations and quotation marks omitted). 11 Albers, 62 Cal. 2d at 263. 12 See, e.g., Aetna Life & Casualty Co. v. City of Los Angeles, 170 Cal. App. 3d 865, 875 (1985) (applying inverse liability to the City of Los Angeles and its Department of Water and Power). 13 Gutierrez v. Cty. of San Bernardino, 198 Cal. App. 4th 831, 837 (2011) (internal quotations omitted). 14 See, e.g., Mercury Cas. Co. v. Pasadena, 14 Cal. App. 5th 917, 925–26 (2017) (“The fundamental policy underlying the concept of inverse condemnation is that the costs of a public improvement benefitting the community should be spread among those benefited rather than allocated to a single member of the community.”); Magnuson-Hoyt v. Cty. of Contra Costa, 228 Cal. App. 3d 139, 144 (1991) (same). 15 74 Cal. App. 4th 744 (1999).

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The Court expressly based its extension of inverse condemnation to SCE on the theory that the loss

distribution premise would apply to privately owned utilities just as it did to municipal utilities.

Barham assumed that a privately owned utility could raise rates the same way the government uses

taxes (or government-owned utilities use their rates) to “spread among the benefiting community

any burden disproportionately borne by a member of that community.”16

In 2012, SCE challenged that assumption in Pacific Bell v. Southern California Edison

Company. The challenge was unsuccessful, however, because the Pacific Bell court concluded that

there was no evidence that the PUC (the entity that decides what rates a utility can charge) would

ever prevent privately owned utilities from socializing losses by “pass[ing] on damages liability” to

the public through a rate adjustment.17 As explained in PG&E’s renewed motion for legal

determination, this critical assumption “underpinning” the extension of inverse condemnation

liability to privately owned utilities, has proven false.

A. Privately Owned Utilities Make Substantial Contributions to California

Privately owned utilities occupy a central role in California’s economic and civic life. Their

investments in human capital, infrastructure, improvements to public goods and safety help

energize the state’s vibrant economy and spur further innovation, all while providing an essential

service to residents and businesses across the state.

The public services provided by privately owned utilities are of fundamental importance to

California residents. SCE alone delivers power to millions of Californians.18 In order to deliver

power safely, reliably, and affordably, SCE maintains a vast electrical system containing more than

13,000 miles of transmission lines, 106,000 miles of distribution lines, more than 1.4 million

electric poles, and more than 720,000 distribution transformers.19

When these systems are disrupted, SCE quickly mobilizes to restore service and ensure that

customers do not go without power. When wildfires ravaged California in 2017, privately owned

16 Barham, 74 Cal. App. 4th at 752. 17 208 Cal. App. 4th at 1407. 18 So. Cal. Edison, Overview: Who We Are, https://sce.com/wps/portal/home/about-us/who-we-are 19 Id.

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utilities deployed thousands of employees and contractors to the impacted regions for emergency

response. SCE has also hosted tables at local assistance centers in Santa Barbara and Ventura

counties, and has identified wildfire-affected customers so that it can expedite needed service

changes for them.

The state’s three investor-owned utilities—SCE, PG&E, and San Diego Gas & Electric—

together employ more than 40,000 Californians. In 2017, SCE spent approximately $3.8 billion on

contracts with more than 3,200 suppliers, including $1.8 billion spent on diverse suppliers. Last

year, SCE paid almost $480 million in taxes and franchise fees, making it Los Angeles County’s

largest taxpayer.

Privately owned utilities make other, substantial investments in California, ranging from

developing infrastructure to investing in improvements for the public good. Privately owned

utilities are leading implementers of statewide environmental policies. SCE delivers more solar

power nationally than any other utility, and more than 28 percent of its energy comes from

renewable sources. SCE has entered into a partnership to develop one of the world’s largest energy

storage facilities, aimed at reducing California’s reliance on natural gas generation.20

Moreover, SCE and other privately owned utilities invest heavily in their systems to protect

against a variety of natural threats, including wildfires. Approximately 30 percent of SCE’s service

territory, covering 9 million acres, consists of high-risk fire areas. Unlike private insurance carriers,

who can limit their risk by choosing whom to cover, privately owned utilities have an obligation to

serve all customers in their service territories and cannot withdraw from fire-prone areas.

Privately owned utilities also make significant investments to reduce the risk of wildfires.

For instance, SCE has made efforts to reduce wildfire ignition risk and improve fire mitigation and

recovery efforts, including detailed action plans with focused investment and dedication of its

resources to risk-based planning and system design, enhanced operating policies, robust inspection

and maintenance programs, and effective community outreach and deployment plans. For example,

SCE annually inspects approximately 1 million trees near power lines and trims nearly 700,000 of

20 Ivan Penn, Edison and Tesla Unveil Giant Energy Storage System, L.A. Times (Jan. 30, 2017), http://www.latimes.com/business/la-fi-tesla-energy-storage-20170131-story.html.

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them. SCE inspects another 2 million dead and dying trees that could pose a danger to power lines

and removes nearly 40,000 trees annually.

B. Privately Owned Utilities Serve the Public Good, But Lack Protections and

Powers Necessary to Shoulder Inverse Condemnation Liability

In 1999, Barham ruled for the first time that a privately owned utility was effectively a

governmental entity and could be subjected to inverse condemnation liability.21 As has been

demonstrated in the years since Barham, privately owned utilities occupy a space somewhere

between a private company and a municipal utility, shouldering many of the burdens of each type

of entity but lacking concomitant privileges and powers.

Unlike municipal utilities, privately owned utilities cannot rely on public funding or tax-

free bonds to raise capital, and must rely instead on private markets.22 Privately owned utilities are

also governed by boards and have fiduciary duties to their shareholders, including individual

California residents and institutional investors such as retirement funds.

The rates of privately owned utilities, unlike those of municipal utilities, are subject to

heavy regulation by the PUC. Moreover, unlike municipal utilities, privately owned utilities lack

protections such as immunity from general tort liability, the resources of state and local

governments to defend against litigation, and the taxing or unilateral rate-setting authority to spread

their costs or losses (a power the government enjoys even when those costs or losses result from

the government’s negligent conduct).23 Rather, privately owned utilities must obtain approval from

the PUC before raising rates to recover their costs, including losses sustained from litigation related

to wildfires that exceed insurance amounts. But the PUC has recently made clear that it does not

consider inverse condemnation losses a cognizable factor in ratemaking considerations.24

21 74 Cal. App. 4th at 752. 22 See Cal. Energy Comm’n, supra note 3. 23 See Moreland Inv. Co. v. Superior Court, 106 Cal. App. 3d 1017, 1022 (1980) (holding private utility is not a governmental agency in part because it cannot directly pass on eminent domain costs to rate payers). 24 See Kaba Decl., ¶ 2 & Ex. 1 (Decision Denying the Application of San Diego Gas & Electric Company for Authorization to Recover Costs Related to the 2007 Southern California Wildfires

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The present state of play is untenable: on the one hand, California courts have dramatically

expanded privately owned utilities’ exposure to claims of property loss and damage; on the other

hand, the PUC refuses to permit privately owned utilities to socialize inverse condemnation losses

through rate increases. Privately owned utilities have thus been dragooned into the role of general

insurers (and, in many cases, reinsurers) for California’s natural disasters. This poses a serious

danger to privately owned utilities, particularly now that they are facing a landscape that portends

ever more frequent and intense wildfires in future years, for which they may be found liable even if

they are completely without fault (i.e., even if the utility acted with prudence and caution).

C. Frequent and Intense Wildfires Are the “New Normal” in California

Wildfires have always been a part of California’s landscape due to the state’s geography,

ecology, and weather patterns. Recent experience, however, suggests that intense, devastating

wildfires are here to stay. The past year saw five of the most destructive wildfires in California

history.25 Climate change and human land use and management practices have combined to

increase the environmental, physical, and economic threats posed by wildfires.26 Hotter summers

and persistent droughts are projected to continue: by mid-century, average temperatures in the Los

Angeles region could rise by 4.3°F.27 An abundance of dying trees and dry vegetation—born after

winter rains but dried to kindling by scorching summer heat—provides fuel for these fires.28 Efforts

Recorded in the Wildfire Expense Memorandum Account, dated November 30, 2017) at 65 (PUC finding that “inverse condemnation principles . . . [were] not relevant” to whether it would approve SDG&E’s requested rate adjustment). 25 Cal. Dep’t of Forestry & Fire Prot., Top 20 Most Destructive California Wildfires, CA.gov (Jan. 12, 2018), http://www.fire.ca.gov/communications/downloads/fact_sheets/Top20_Destruction.pdf. 26 See, e.g., Kaba Decl. ¶ 3 & Ex. 2 (John T. Abatzoglou & A. Park Williams, Impact of Anthropogenic Climate Change on Wildfire Across Western US Forests, 113-42 Proc. Nat’l Acad. Sci. (Oct. 2016)) at 11770–75; Robinson Meyer, Has Climate Change Intensified 2017’s Western Wildfires?, The Atlantic (Sep. 7, 2017), https://www.theatlantic.com/science/archive/2017/09/why-is-2017-so-bad-for-wildfires-climate-change/539130/; Chelsea Harvey, Here’s What We Know About Wildfires and Climate Change, Sci. Am. (Oct. 13, 2017), https://www.scientificamerican.com/article/heres-what-we-know-about-wildfires-and-climate-change/. 27 Inst. of the Env’t & Sustainability, Univ. of Cal., Los Angeles, Research Project: Climate Change in the Los Angeles Region, https://www.ioes.ucla.edu/project/climate-change-in-the-los-angeles-region 28 Eleanor Cummins, How the End of the Drought Likely Exacerbated the Deadly California

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to contain these fires by managing forests and fires have been historically ineffective—or worse,

counterproductive.29 Moreover, people continue to build residences in high-risk areas, increasing

the risk that fire will cause injury and property damage.30

Environmental and human factors indicate that wildfires are expected to increase not only

in number,31 but also in duration and intensity. In 2017, wildfires burned more than 505,000 acres

of land in California.32 Moreover, wildfires, which were traditionally concentrated in the fall

months, are increasingly likely to take place year-round.33

These wildfires are caused by trends that show no sign of abating, including: rising

temperatures and increased drought conditions; abundant fire fuel in the form of dead trees and dry

vegetation; a history of poor land management that exacerbated environmental risks; and increased

human development in high-risk areas. As Governor Brown declared, catastrophic wildfires have

become the “new normal” in California.34 Although the consequences for this “new normal”

should be borne by all Californians, the application of inverse condemnation forces privately

owned utilities to bear outsized financial exposure that results from California’s changing climate.

Wildfires, Slate (Oct. 10, 2017), http://www.slate.com/articles/health_and_science/science/2017/10/how_the_drought_fueled_california_s_wildfires.html 29 Kaba Decl. ¶ 4 & Ex. 3 (Little Hoover Comm’n, Fire on the Mountain: Rethinking Forest Management in the Sierra Nevada (Feb. 2018)) at 12–14. 30 Kaba Decl. ¶ 5 & Ex. 4 (Michael L. Mann et al., Modeling Residential Development in California from 2000 to 2050: Integrating Wildfire Risk, Wildland and Agricultural Encroachment, 41 Land Use Pol’y 438 (Nov. 2014)) at 438–52. 31 According to CAL FIRE, California agencies responded to 4,785 fires in 2016 and 7,117 fires in 2017. CAL FIRE, Incident Information: Number of Fires and Acres, CA.gov, (Jan. 24, 2018), http://cdfdata.fire.ca.gov/incidents/incidents_stats?year=2017 (including all wildfires responded to by CAL FIRE in both the State and Local Responsibility Areas as well as all large wildfires in the State Responsibility Area protected by CAL FIRE’s contract counties). 32 Id. 33 Melissa Palmer & Elizabeth Espinosa, “We Don’t Even Call It Fire Season Anymore . . . It’s Year Round”: Cal Fire, KTLA (Dec. 11, 2017), http://ktla.com/2017/12/11/we-dont-even-call-it-fire-season-anymore-its-year-round-cal-fire/. 34 Ruben Vives et al., Southern California’s Fire Devastation Is “the New Normal,” Gov. Brown Says, L.A. Times (Dec. 10, 2017), http://www.latimes.com/local/lanow/la-me-socal-fires-20171210-story.html.

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D. Judicial Expansion of Inverse Condemnation to Privately Owned Utilities

Harms the Utilities and Many Other Interests

Judicial action to unbind inverse condemnation from its traditional moorings—i.e.. to

permit inverse condemnation claims against entities that lack the ability to socialize losses—has

had cascading consequences for California’s privately owned utilities. Further, given the critical

role that utilities play as citizens, employers, and engines of economic growth in California, the

state’s economy, environment, and communities have also suffered reverberating repercussions.

1. Inverse Condemnation Liability Threatens to Make Privately Owned

Utilities Economically Unsustainable

Judicial expansion of inverse condemnation where privately owned utilities are not assured

that they may recover losses through rate adjustments has had a severely negative impact on the

well-being of California’s privately owned utilities. It jeopardizes their financial health, exposes

them to unprecedented financial burdens and disproportionate risk (which ultimately harms utility

customers), and subjects them to inconsistent standards of conduct.

Harm to the financial health of privately owned utilities: Participants in capital markets are

keenly aware that California’s privately owned utilities may be subject to “strict liability” under

principles of inverse condemnation, which could expose them to hundreds of millions, perhaps

billions, of dollars in unrecoverable losses for wildfires.35 For example, until October 6, 2017, the

Friday before the Wine Country wildfires began, PG&E’s stock was trading at approximately $70.

But from October 9, 2017 through December 29, 2017, PG&E’s stock tumbled to approximately

$45 – this 35% drop in its stock price represented billions of dollars in contraction in PG&E’s

35 See Kaba Decl. ¶ 6 & Ex. 5 (J.P.Morgan, North America Equity Research: Edison International, dated January 11, 2018) at 1 (noting that California’s inverse condemnation law significantly increases the risk of operating a utility in the state); Kaba Decl. ¶ 7 & Ex. 6 (Evercore ISI, CPUC Rejects Recovery of SDG&E Wildfire Costs; PCG’s Financial Risk Related to Inverse Condemnation Remains, dated December 1, 2017) at 2 (identifying California’s inverse condemnation law as a factor in PG&E’s stock price fluctuations); Kaba Decl. ¶ 8 & Ex. 7 (Deutsche Bank, Market Research: Earnings No Match for Wildfire Talk, dated November 13, 2017) at 1 (“The call included plenty of discussion of the question of California’s inverse condemnation doctrine for utilities which has been a subject of intense scrutiny of late among utility investors.”).

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market capitalization. The stock price for SCE’s parent company, Edison International, followed

suit once the Southern California wildfires broke out. Whereas Edison’s stock had previously been

trading at about $80 on December 4, 2017, the day the Thomas Fire broke out, news of the fires

caused its stock price to fall by over 14% two days later, representing billions in reduction in its

market capitalization.

These fluctuations in PG&E’s and Edison’s stock prices—which impact their ability to raise

capital in the equity markets needed to fund necessary electrical infrastructure—occurred before

any fault has been determined. The market’s response reflects concern that, even if PG&E and SCE

followed all applicable regulations and were not at fault for causing the fires, they could still be

liable for unrecoverable losses under inverse condemnation principles.

As the PUC has noted, “[r]easonable financial health is necessary so that each utility may

serve reliable, safe and adequate electricity at just and reasonable rates.”36 After all, adequate

capital is essential for utilities to operate, maintain, modernize, and expand their electrical

transmission and distribution facilities. Such efforts benefit the public in real and immeasurable

ways.37

Privately owned utilities must not bear a disproportionate share of risk: The magnitude of

losses stemming from the 2017 wildfires is unprecedented. And all indications suggest that

wildfires will only increase in number, duration, and intensity. Even though the factors

contributing to this “new normal” are varied and many, under these expanded principles of inverse

condemnation, privately owned utilities’ customers (and if not treated appropriately, shareholders)

are expected to shoulder all the risk – even when the utilities comply with all safety and

maintenance regulations and have acted with due care. This effectively transmutes utilities into

general insurers or reinsurers for all public harm stemming from natural disasters, especially

wildfires, which implicate electrical facilities in the chain of proximate causation. This arrangement

36 Kaba Decl. ¶ 9 & Ex. 8 (Interim Opinion Modifying Decision 01-03-082 to Change Restriction on Use of Surcharge Revenues, D.02-11-026) at § 3. 37 The PUC has also acknowledged that a key factor in the financial health of public utilities is creditworthiness, since a lack of access to credit significantly impedes the utilities’ ability to procure and supply electricity at reasonable cost. Id. at § 3.1.1.

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is inefficient and inequitable. It is inefficient because although they can promote public policy,

privately owned utilities cannot compel changes in policy or practice to mitigate human factors that

contribute to the “new normal” in California. It is inequitable because privately owned utilities are

saddled with all the damages even when wildfires are fueled (literally) by poor decision-making of

policymakers and other public actors.

Privately owned utilities are subjected to inconsistent standards: Disparate standards by

which utilities are measured have led to inconsistent and unreasonable conclusions by the courts

and PUC. On the one hand, California courts have extended the coverage of inverse condemnation

to privately owned utilities premised on the assumption that utilities can readily recover inverse

condemnation losses through rate increases.38 On the other hand, privately owned utilities must

obtain regulatory approval to recover costs of wildfire claims exceeding insurance amounts,

including settlements. But regulatory review is done in hindsight under a subjective “prudent

manager” standard that, according to the PUC’s most recent decision, does not require that the

utility’s imprudence actually start the fire.39 The disconnect between “strict liability” as applied by

the courts and rate recovery as decided by the PUC must be addressed.

2. Expansion of Inverse Condemnation to Private Utilities Threatens Numerous

California Interests and Public Policies

Judicial expansion of inverse condemnation also harms the public. Subjecting California’s

privately owned utilities to no-fault liability reduces the incentive to invest in California, makes

insurance more difficult and expensive for privately owned utilities, weakens the economy, and

sets back California’s environmental agenda.

Reduced investment in California: Considering California’s posture towards privately

owned utilities, stakeholders from investors to insurance providers now question the regulatory and

investment environment in California. Indeed, a major Wall Street firm recently declared that the

38 Barham v. S. Cal. Edison Co., 74. Cal. App. 4th 744, 752 (1999). 39 Kaba Decl., ¶ 2 & Ex. 1 (Decision Denying the Application of San Diego Gas & Electric Company for Authorization to Recover Costs Related to the 2007 Southern California Wildfires Recorded in the Wildfire Expense Memorandum Account, dated November 30, 2017) at 6, 10–11.

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state’s utilities are “uninvestable,” in part, because they are exposed to inverse condemnation

losses.40 This negative perception of California’s business environment could have extremely

unfavorable consequences. First, capital markets could shrink for California’s privately owned

utilities, since they are competing for capital against other utilities across the country that do not

carry the risk of unrecoverable inverse condemnation losses. The judicial expansion of inverse

condemnation coupled with the PUC’s refusal to permit rate adjustments could thus deprive the

state’s privately owned utilities of the resources needed to maintain and improve the safety of their

electrical infrastructure. Second, if left unchecked, this negative perception of California’s business

environment will have ripple effects beyond the utility industry and discourage investments in the

larger California economy.

Increased scarcity and cost of insurance coverage: As the PUC recently explained,

privately owned utilities in California are beginning to have difficulty “obtain[ing] insurance to . . .

cover the risk of fire both to their infrastructure and from their infrastructure.”41 This is because

carriers are increasingly reluctant to underwrite wildfire risk given climate change, growth in urban

wildland interface, wildfire history in California, all of which is compounded by that fact that

privately owned utilities are now exposed to potentially enormous, unrecoverable losses under

principles of inverse condemnation. In this environment, wildfire liability insurance coverage has

begun to contract, become prohibitively expensive, and may become unavailable for utilities.

Harm to the economy: Undermining the financial health of privately owned utilities is bad

for California workers. The state’s three privately owned utilities collectively employ more than

40,000 Californians—not to mention many thousands of independent contractors—providing them

with good, well-paying jobs with benefits. Furthermore, electrical energy is the lifeblood of

numerous other economic activities and industries in California. Hobbling California’s privately

40 Mike Yamato, Market Notes Tuesday December 12, 2017, Investitute (Dec. 12, 2017), https://investitute.com/activity-news/market-notes-tuesday-december-12-2017/. 41 Wednesday, Feb., 7, 2018 Commissioner Informational Webinar on Impacts of Climate Change and Resulting Resiliency, at 48:25-48:40, http://www.adminmonitor.com/ca/cpuc/other/20180207/.

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owned utilities undermines their ability to supply electrical energy efficiently, reliably, and at

competitive prices, which could have far-reaching consequences for California’s economy.

California will be unable to achieve its environmental objectives without support from

privately owned utilities: Electric utilities are uniquely positioned to facilitate the transformation to

a clean energy economy. They have the size, scope, and infrastructure assets needed to deliver

clean energy and support electrification for all customers. They also can have the capacity to

finance prudent investments to maintain and modernize their grids, with regulatory approval. If

California hopes to achieve its greenhouse gas and clean energy goals, privately owned utilities

must modernize their grids to integrate carbon-free energy, enable customer choices around

technology, and foster efficient, widespread electrification. California’s environmental agenda may

suffer significant setbacks if its privately owned utilities must redirect their funds to pay for inverse

condemnation losses.

III. CONCLUSION

Amicus curiae respectfully submit that inverse condemnation cannot legally apply to

privately owned utilities. Judicial expansion of this doctrine is deleterious to the viability of

privately owned utilities and the public interest. Amicus curiae urge the Court to grant PG&E’s

renewed motion for legal determination.

Dated: February 21, 2018 HUESTON HENNIGAN LLP

By: Moez Kaba Attorneys for Amicus Curiae Southern California Edison Company

PROOF OF SERVICE

I am employed in the County of Orange, State of California. I am over the age of 18 andnot a party to the within action. My business address is 620 Newport Center Drive, Suite 1300,Newport Beach, CA 92660.

On February 21, 2018, I served the foregoing document(s) described as:

BRIEF OF SOUTHERN CALIFORNIA EDISON COMPANY AS AMICUS CURIAE INSUPPORT OF PACIFIC GAS & ELECTRIC COMPANY'S RENEWED MOTION FOR ALEGAL DETERMINATION OF INVERSE CONDEMNTATION LIABILITY PURSUANT

TO C.C.P. § 1260

on the interested parties in this action as stated on the attached mailing list.

111 (BY PERSONAL SERVICE) I caused a true copy of the foregoing document(s) to beplaced in a sealed envelope and delivered by hand to the offices of each interested party atthe attached addressee(s) via messenger.

I declare under penalty of perjury under the laws of the State of California that theforegoing is true and correct.

Executed on February 21, 2018, at Newport Beach, California.

Sarah Jones(Type or print name)

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SERVICE LIST

Dario de GhetaldiAmanda RiddleClare Capaccioli VelasquezCOREY, LUZAICH, DE GHETALDI &RIDDLE LLP700 El Camino RealMillbrae, CA 94030Tel: 650-871-5666Fax: [email protected]@[email protected]@coreylaw.corn

Attorneys for Individual Plaintiffs

Frank M. PitreAlison E. CordovaCOTCHETT PITRE & McCARTHY LLP840 Malcolm Road, #200Burlingame, CA 94010Tel: 650-697-6000Fax: [email protected]@[email protected] (Assistant)[email protected] (Paralegal)


Steven M. CamporaCatia G. SaraivaDREYER BABICH BUCCOLA WOOD, et al.20 Bicentennial CircleSacramento, CA 95826Tel: 916-379-3500Fax: [email protected]@[email protected]@dbbwc.corn


Gerald SingletonErika L. VasquezAmanda LoCurtoSINGLETON LAW FIRM, APC115 West Plaza StreetSolana Beach, CA 92075Tel: 760-697-1330Fax: [email protected]@[email protected]@geraldsingleton.corn (Paralegal)

Co-Counsel:Demetrios A. SparacinoSPARACINO LAW CORPORATION525 B Street, #1500San Diego, CA 92101Tel: 619-955-5254Fax: [email protected]


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