Once again, California is burning—and the potential liability for Pacific Gas & Electric is reaching staggering proportions. Defense counsel from firms including Cravath, Swaine & Moore; Wilson Sonsini Goodrich & Rosati and Quinn Emanuel Urquhart & Sullivan are being hard-pressed to contain it.
The for-profit utility already took a $2.5 billion charge in June to cover lawsuit payouts after investigators found its power lines sparked several blazes last summer. Some experts estimate PG&E’s total liability stemming from the 2017 Wine Country fires could top $15 billion.
That’s not all.
There’s a whole new batch of fires burning now—their cause is still to be determined—including one in Mendocino that’s making my Marin County air smoky. It just became the largest fire in the state’s history, burning about 300,000 acres so far and threatening 11,300 structures. It’s not expected to be contained until September 1.
Still, PG&E isn’t about to start writing blank checks. According to court papers, the company has hired a top team from Cravath that includes firm chairman Evan Chesler and litigation partners Timothy Cameron, Kevin Orsini and Damaris Hernández to battle 200-plus suits stemming from the Wine Country fires.
PG&E has also tapped Wilson Sonsini partners Keith Eggelton, John Flynn, Rodney Strickland Jr. and Colleen Bal—likewise all veteran litigators.
They’re facing off against a veritable army of plaintiffs lawyers including Elizabeth Cabraser of Lieff Cabraser Heimann & Bernstein in coordinated proceedings before San Francisco Superior Court Judge Curtis E.A. Karnow.
The plaintiffs say PG&E “knowingly operating aging, improperly maintained infrastructure that it ‘ran to failure,’” and that “PG&E’s corporate culture emphasized cutting corners and putting profits over safety.”
So far, the PG&E team has struck out on one key question: the availability of inverse condemnation.
It’s an obscure corner of eminent domain law, giving private parties the right to compensation from a public entity if their property is “damaged” for public use.
The underlying concept is that electricity is an “improvement for public use.” We all benefit from power transmitted on lines, so we should share the burden when something goes wrong.
But PG&E isn’t a public entity. It’s a private corporation. Nonetheless, California courts in prior decisions have held that private utilities (for example, Pacific Bell) are still on the hook for inverse condemnation based on their monopolistic or quasi-monopolistic status.
From PG&E’s point of view, the problem is that it can’t simply pass on these heightened costs to ratepayers—it can only raise its rates if the state Public Utility Commission says OK.
“By the end of the argument before me,” wrote Karnow in May, “it became clear that PG&E’s position was founded on the fact that for privately owned utilities, there is never a guarantee that the regulatory agency will permit cost spreading via e.g. increased rates, whereas with publicly owned utilities there is always some tax revenue to fall back on. These facts, PG&E argued, mean that it is never possible for privately owned utilities to be subject to inverse condemnation.”
But Karnow noted that this position is “flatly contradicted” by prior appellate holdings—although the California Supreme Court has never ruled on the question.
It so happens PG&E has a petition pending before the state high court that raises just this issue.
It stems from litigation over yet another California fire—the 2015 Butte fire in the Sierra Nevada foothills that destroyed 549 houses and killed two people. The fire was started by a pine tree that came in contact with a PG&E powerline, state investigators found.
PG&E lost on inverse condemnation in that case too. Now, a team from Quinn Emanuel led by name partner Kathleen Sullivan is urging the state high court to decide whether inverse condemnation liability applies to privately owned utilities if they can’t automatically pass along the costs.
“Privately owned utilities serve over 75 percent of the state’s residents across 75 percent of the state’s territory, and play a vital role in California and its economy. And inverse condemnation claims against privately owned utilities are escalating exponentially as wildfires in California become more endemic and severe,” Sullivan wrote. “But privately owned utilities are now caught in an untenable legal whipsaw.”
(For the record: If the state high court should side with the utilities, that doesn’t mean they’re home free. Property owners could still win damages based on negligence. The company is also lobbying lawmakers in Sacramento for a legislative fix, seeking a state-authorized financing plan to cover legal claims.)
Especially alarming to PG&E: A recent decision by the state utilities commission involving San Diego Gas & Electric. In that case, the commission denied the private utility’s application for recovery of inverse condemnation costs from several 2007 wildfires.
Sullivan—apparently the go-to lawyer for utilities on inverse condemnation cases—is representing San Diego Gas & Electric in an appeal to the Fourth Appellate District that challenges the utility commission’s decision.
She argues that it “raises serious constitutional questions under the Takings Clause, because it forces SDG&E alone to bear inverse condemnation costs that should be spread across the benefitted ratepaying public.”
There are practical consequences too. The decision “threatens to impair privately owned utilities’ ability to raise funds in the capital markets, obtain adequate insurance, and provide uninterrupted service to all communities,” she wrote.
Still, things could be worse for PG&E. In July, Sullivan notched a crucial win for the company.
Last year, a state court judge in Sacramento ruled PG&E could be held liable in the Butte fire not just for compensatory damages based on inverse condemnation, but for punitive damages as well—an unprecedented ruling which almost surely would have added billions to the tab.
On appeal, the Quinn team convinced the Third Appellate District to side with PG&E and nix the punitives.
“Although plaintiffs dismiss the company’s risk management controls and fire mitigation efforts as a mere ‘façade,’ they fail to produce clear and convincing evidence from which a reasonable jury could find that PG&E consciously disregarded the risk of wildfire or willfully ignored fire safety standards,” the panel held. The “evidence, at most, supports a theory that PG&E acted carelessly or negligently, not despicably.”
Not despicable. For PG&E, that counts as a win.
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