Here’s decision we’ve been anticipating in a case and issue we’ve been following for a while, the question of whether private utilities can be held liable under an inverse condemnation theory for much of the damages caused by the recent California wildfires.
Short story from the Northern District of California Bankruptcy Court: yes, private utilities can be liable in inverse condemnation:
What Debtors advocate here is to set aside a well-seasoned principle of strict liability. Failing that, they are seeking a solution, fire cost reimbursement, in search of a problem, CPUC’s refusal or unwillingness to allow recovery by a blameless (prudent) investor-owned utility. As noted, they cite no instance when the CPUC denied inverse condemnation cost reimbursement to a prudent operator. And it is the role of the legislative branch, not the judicial branch, to fix problems in advance. As recently as this past July, the California legislature refused Debtors’ request to restrict inverse condemnation. There is simply no reason to suggest that this court can expect the California Supreme Court to step up and do it. If the problem could be alleviated or eliminated by an amendment to the Public Utilities Code to relax or eliminate the prudent operator standard, that too is for the legislature not the court.
. . .
Thus, this court concludes that the doctrine of inverse condemnation is applicable to Debtors and the California Supreme Court would likewise leave it in place.
Slip op. at 10-11.
A little context might help. PG&E argued that it was unconstitutional under the Fifth Amendment to hold it liable pursuant to California law for inverse condemnation unless it could automatically pass on the costs of any judgments to its “public” (ratepayers). After all, it correctly asserted, the guiding principle of takings liability is to ensure that the costs of those things deemed to be in the public interest are not placed on a single property owner whose property is to be used for the public, but are distributed among all those who benefit. See Armstrong v. United States, 364 U.S. 40, 49 (1960) (“The Fifth Amendment’s guarantee that private property shall not be taken for a public use without just compensation was designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.”). PG&E argued that governments spread the costs of inverse condemnation judgments indirectly though taxation, so private entities subject to inverse liability are entitled by the U.S. Constitution to the same power.
Under California law, however, a private utility such as PG&E cannot raise its rates without the approval of the state Public Utility Commission, and then only after the PUC concludes that the utility acted as a “prudent manager.” As the bankruptcy court noted, “[e]ssentially, the CPUC evaluates a private utility’s behavior to ensure that it has comported with best practices before it is able to pass on costs to the ratepayers.” Slip op. at 5. PG&E pointed out that in an earlier ruling in another case involving a southern California utility, the PUC had concluded that the prudent manager standard isn’t part of the inverse condemnation calculus, and denied that utility the ability to raise its rates to alleviate the cost of wildfire inverse judgments. This, PG&E argued, showed that — unlike governments — it could not automatically pass on inverse costs. Lacking that power, California’s inverse condemnation liability is a taking of PG&E’s property (to transfer to the wildfire victims) without just compensation.
The bankruptcy court soundly rejected the argument, primarily because even though PG&E could not pass on costs automatically, it hasn’t shown that it would be denied a rate increase by the PUC. Here’s what we think are the two key passages in the decision which highlight the court’s rationale. First:
Debtors assert that this regulatory process now severely prejudices them because the SDG&E Decision deemed inverse condemnation “not relevant” to rate setting, and thus Debtors are not guaranteed the ability to pass on their inverse condemnation losses by recovery from ratepayers. Id. at 20-21. Nothing has been submitted to show that Debtors have ever been denied cost recovery under this principle when they have been found prudent.
Slip op. at 5. Second:
First, Debtors seem to misread the SDG&E Decision regarding inverse condemnation. The case merely restates that the prudent manager standard operates without regard to inverse condemnation or traditional tort negligence. It does not state that inverse condemnation costs will never be passed on to ratepayers. In fact, the prudent manager standard virtually guarantees cost spreading if the utility acted prudently, which is a far more lenient standard than strict liability. Thus, Debtors are likely guaranteed cost spreading if they act prudently. In any case, as Debtors have yet to ask the CPUC for permission to raise rates as a result of the Wildfires, this amounts to speculation of how the CPUC will act. Debtors’ argument does not offer a datum to predict a California Supreme Court decision here.
Slip op. at 10.
In short, just because the PUC has concluded that inverse condemnation doesn’t require a rate hike, PG&E might be able to obtain a rate hike if it shows it acted as a prudent manager.
More on the decision from JD Morris (San Francisco Chronicle) in this story, “PG&E loses gambit to avoid California’s inverse condemnation rules,” and this one “PG&E Loses Fight Over Wildfire Policy That Led to Its Bankruptcy” from Bloomberg.
The bankruptcy court will shortly certify the issue for immediate appeal to the Ninth Circuit, and given the high stakes and the players involved, we expect that is exactly what will happen. Stay tuned.