The unfortunate trend of increased wildfires across the western landscape continued in 2018, both as to the number of fires and the acreage burned. Most disturbing is the growing severity and impacts of these fires in terms of human lives and lost property. California is at the epicenter of this trend, and experienced both its largest and deadliest fires in the state’s history within the span of a couple of months near the end of last year.1 The legal and public policy implications of more destructive wildfires continue to reverberate throughout the West and nationally. And while many sectors of the economy are at risk from the increasing impacts and potential liability posed by wildfire, most of the recent attention in this area has been focused on the energy sector, primarily electric utilities.
As a result, companies impacted by the growing threat of wildfire across the West, including electric utilities, should continue to monitor state and federal regulatory changes designed to address this risk. Key recent developments in California and other states, as well as noteworthy activity on this issue at the national level, are described in more detail below.
Recent State Activity
The most recent visible impact of wildfire on the utility sector is Pacific Gas and Electric’s (PG&E) decision to file for bankruptcy in the face of billions of dollars of potential liability resulting from a link between its transmission infrastructure and the ignition of wildfires in California during the past two years.2 With respect to liability, California is unique in that its courts have long imposed strict liability on utilities for wildfire damages.3 The theory behind strict liability is that the risk for public improvements (e.g., transmission infrastructure) should be spread across the public and therefore recoverable through rate adjustments. However, that theory was undermined in November 2017 when the California Public Utility Commission (CPUC) determined that San Diego Gas & Electric was not permitted to recover $379 million in wildfire-related liability costs because it had not acted reasonably in maintaining and operating its transmission system to minimize wildfire risks.4
In the aftermath of the destructive 2017 fire season, California enacted far-reaching legislation addressing the implications of wildfire risk.5 Included in this legislation were provisions to address the CPUC’s 2017 decision and create new standards to assess whether the recovery of wildfire-related costs is “just and reasonable.” There were other provisions to fund and accelerate projects to improve forest health and reduce fuel loads; to create a Commission on Catastrophic Wildfire Cost & Recovery with the responsibility to report on issues related to socializing wildfire costs by July 1, 2019; and to require utilities to comply with new operation and maintenance standards and file new Wildfire Mitigation Plans with the CPUC starting in February 2019. And cognizant of the threat to PG&E’s financial stability, the legislation limited the impact of liability from the 2017 fires through the use of new liability rules, a financial stress test applied to the utilities and new financial tools (e.g., rate recovery bonds). Despite this, the 2018 fire season resulted in new potential liabilities for PG&E, which led to the company’s bankruptcy filing.
The implications of the filing are widespread, raising significant concerns about its possible impact on (1) the cost of electric service to ratepayers, (2) long-term power purchase agreements that could affect renewable energy projects and climate-related goals, and (3) the ability of the victims of wildfire to recover damages for wildfire-related losses. As the bankruptcy moves forward, policy-makers will be paying close attention to how these issues are addressed in the proceedings.
While other states have not been as active as California in developing new legal and regulatory standards in response to the threat of wildfire, that is likely to change given the increasing risk overall and elevated focus on climate change in many states. Of note, there has already been activity at both the public utility commission level and the legislature in several states. In 2013, the Colorado General Assembly established a Wildfire Matters Review Committee, which has been active in recent years. In New Mexico, the Public Regulation Commission convened a wildfire task force in June 2013 in response to a utility-caused wildfire. One of its goals is to examine best practices for wildfire prevention and address issues such as utility easements, fuel clearing and vegetation management plans. And last year, Utah considered legislation to impose liability for firefighting costs under certain circumstances.6 Finally, while it does not appear that the courts in other states have yet adopted a strict liability standard for damages associated with utility infrastructure, there are (not surprisingly) examples of plaintiffs asserting such claims.7 Moreover, there are cases in Colorado and elsewhere holding that utilities are subject to a higher standard of care in negligence suits because the transmission of electricity is an inherently dangerous activity.8
Recent Federal Activity
Activity in this area has not been limited to the state level. The federal government has been increasingly responsive to the wildfire threat, and several of its actions can and should be of interest to the electric utility sector.9 In late 2018, the president issued an Executive Order to increase federal activity and investment on actions to reduce the fire risk associated with federally managed forests and rangelands.10 In addition to directing specific actions to reduce hazardous fuel loads and high-risk conditions on federal lands, the order calls for the creation of a strategy to support the development of projects and partnerships that protect habitat and communities and reduce risks to physical infrastructure. The order also directs collaborative efforts with the private sector.
The momentum to address the growing risk of wildfire at the federal level has continued into early 2019. On January 2, 2019, then-Secretary Zinke signed Secretarial Order 3372, Reducing Wildfire Risks on Department of the Interior Land Through Active Management, directing the Department of the Interior to take several steps to implement the Executive Order and “ensure that the American people receive the maximum benefits from new and existing regulatory mechanisms designed to reduce the impacts of catastrophic wildfires.”11 The order directs the agency to take steps to address wildfire issues, including ensuring that all land management plans include fire management best practices; collaborating with the US Department of Agriculture on several actions designed to maximize wildfire management efforts among the agencies; and utilizing active land and vegetation management techniques to reduce fuel loads such as thinning, cutting and controlled burns.
Additionally, on February 15, 2019, the Bureau of Land Management issued a Finding of No Significant Impact and Record of Decision for a programmatic environmental assessment (pEA) on hazardous tree removal and vegetation management activities across approximately 551,000 acres of BLM-managed land in central and northern California.12 The decision would allow treatments within 200 feet of critical infrastructure on forest and woodlands managed by the BLM, though the scope of the treatments cannot exceed 20 percent of BLM-managed public land within a single watershed over a 10-year period. The decision does not authorize site-specific hazardous tree removal or vegetation management treatments; instead, each project will require a separate Decision Record and Finding of No Significant Impact to authorize treatments consistent with the pEA.
On the regulatory side, the North American Electric Reliability Corporation (NERC) has been active in promulgating and revising its mandatory and enforceable reliability standard related to transmission vegetation management.13 While NERC’s standards are focused specifically on reliability issues and not on wildfire risk, there is no doubt that vegetation management issues have been a factor in both wildfires and increased risk to the reliability of the bulk power system. More focus in this area is likely; NERC recently noted an increase in reported outages from non-compliance with its vegetation management standards and announced it would be “considering what additional efforts to undertake to address the increase in these types of cases.”14 In addition to regulation and enforcement, it is important to note that the federal government has been aggressive in recent years in asserting broad damage claims associated with wildfires caused by companies with operations on or adjacent to federal lands. The courts have upheld these claims, which in several instances have resulted in settlements in excess of $100 million for losses associated with firefighting costs, lost timber, loss of access to public lands and post-fire restoration work.15
Finally, on Capitol Hill, the new Democratic majority in the House of Representatives has already held several hearings on climate change. With increasing risk and a heightened recognition of the implications of wildfires in the aftermath of PG&E’s bankruptcy, it is very likely that wildfires will be the focus of several committees, including Natural Resources, Energy and Commerce, and the new Select Committee on the Climate Crisis.
Undeniably, the implications of wildfire are increasing the array of issues facing the electric utility industry. First, the increased risk of wildfire due to climate change and other factors poses a corresponding increased risk of liability for those operating transmission infrastructure. Second, and closely related, is simply the increased number of claims being filed against utilities associated with damages from wildfire, even where causation has yet to be determined. Third, there is a more active regulatory environment with new mandatory requirements, compliance monitoring and the need for new investments to protect and harden infrastructure. Fourth, given the financial implications associated with liability and increased operating costs, there is a greater need for public policy debates associated with liability standards and how to appropriately spread the costs associated with destructive wildfires; for local codes related to development in the wildland-urban interface; for actions to reduce the risk associated with poorly managed state and federal lands; and for an increase in public-private partnerships to reduce high-risk conditions leading to wildfire activity and to develop and deploy new technologies to improve situational awareness and better combat and suppress wildfires.
WilmerHale’s diverse practice groups, including our Energy, Environment and Natural Resources; Litigation; and Public Policy and Legislative Affairs teams, work closely together to serve the broad set of needs of our clients. We have significant experience and expertise with the issues facing electric utilities and can assist the industry in addressing emerging needs related to wildfire. Please contact us for more information.