Paying Their Fair Share: Inverse Condemnation and California’s Investor-Owned Utilities

By Gabe Rosen*

Investor-owned utilities in California, most prominently PG&E, have been responsible for many of the recent wildfires devastating the state.[i] Five of the 10 deadliest wildfires from 2015 to 2019 were linked to PG&E, such as the Paradise wildfire.[ii] In response to these wildfires, the California legislature passed A.B. 1054, an omnibus reform bill.[iii] Before the bill’s enactment, multiple reports were published indicating the importance of reforming the state’s wildfire liability regime related to investor-owned utilities.[iv] One of the considered reforms was switching from the state’s pre-existing strict liability standard, known as “inverse condemnation,” to a negligence standard.[v] The hope was to prompt equitable risk-reduction measures by allocating the costs of risk away from general ratepayers and onto local property owners.[vi]

A.B. 1054 ultimately left out any provisions replacing inverse condemnation, instead refining the related “prudent manager” standard used to assess whether a utility, once liability attaches, can pass its costs onto ratepayers.[vii] Legal uncertainty about whether the legislature has the authority to alter the inverse condemnation standard may have impacted this decision.[viii] The inverse condemnation standard itself was the subject of debate during PG&E’s recent federal bankruptcy proceedings.[ix] The California Supreme Court should bring clarity to these issues by explicitly addressing the constitutional applicability of inverse condemnation to investor-owned utilities.

[x] Inverse condemnation is triggered whenever private property is “taken or damaged for a public use.”[xi] No standard of care analysis is used. Instead, the key question is whether there was “any actual physical injury to real property proximately caused by a public improvement as deliberately designed and constructed.”[xii] When an investor-owned utility is found liable for harm under inverse condemnation, it may apply to the California Public Utilities Commission (CPUC) for permission to pass related incurred costs onto ratepayers.[xiii] The CPUC evaluates these applications by applying what has been termed the “prudent manager” standard.[xiv] This standard is analogous to negligence standards under tort doctrine. If their actions satisfy that standard, investor-owned-utilities can then raise their rates according to the incurred costs.[xv] Under this two-prong liability regime, ratepayers can end up footing the bill for harms incurred by otherwise non-negligent utilities.[xvi] An alternative would involve placing such costs instead on insurers and property owners living within high-risk areas.[xvii] The continued existence of this two-prong liability regime was subjected to scrutiny within proceedings before the United States Bankruptcy Court for the Northern District of California.[xviii]

During federal bankruptcy proceedings related to the California wildfires, PG&E tried to contest the applicability of inverse condemnation to their activities.[xix] PG&E’s main contention was that the regulatory landscape, as defined by CPUC’s actions, had shifted in a manner rendering past precedent non-dispositive.[xx] Before addressing this claim, the federal bankruptcy court noted that inverse condemnation has been applied to private entities in general since 1894.[xxi] However, in the 126 years since, the California Supreme Court has never explicitly ruled on this issue as it relates to investor-owned utilities.[xxii] This left the federal bankruptcy court to piece together how the California Supreme Court would rule on such an issue.[xxiii] The main precedents cited were from intermediate courts of appeal in California.[xxiv] While these cases were decided before the recent waves of wildfires in the state, they remain good law under the federal bankruptcy court’s assessment of the contemporary regulatory landscape.[xxv] Based on these findings, the federal bankruptcy court held that inverse condemnation continues to apply to investor-owned utilities, such as PG&E.[xxvi]  While PG&E did not appeal the federal bankruptcy court’s ruling, it is debatable whether that court’s holding should be the final word on the subject. The need for continued judicial dialogue on the issue stems from California’s recent enactment of A.B. 1054.

Part of A.B. 1054’s stated purpose was to encourage utilities to engage in wildfire mitigation efforts.[xxvii] The drafters of the bill did not include any provisions altering inverse condemnation.[xxviii] However, the bill did clarify the prudent manager standard as it pertains to wildfires from January 1, 2019 and onward.[xxix] Utilities had testified before the Commission on Catastrophic Wildfire Cost and Recovery that they found the original regulatory language governing the standard difficult to comply with.[xxx] The updated language provided by A.B. 1054 states that “an electrical corporation’s conduct was reasonable if that conduct, related to the ignition, was consistent with actions that a reasonable utility would have undertaken in good faith under similar circumstances, at the relevant point in time, and based on the information available to the electrical corporation at the time, as provided.”[xxxi] This revision established a new framework for the prudent manager standard that the CPUC can build on through future proceedings. The impact on the ground this reform will have remains to be seen.

There will likely be some situations where the choice of liability standard would not have an effect on the overarching liability determination. Investor-owned utilities are responsible for the management of physical electricity infrastructure, including transmission towers.[xxxii] When transmission towers are left up for decades, their load-bearing wires can be affected by environmental conditions.[xxxiii] In fact, a live wire, flung from a decaying transmission tower by fierce winds, appears to have been the cause of the wildfire that destroyed Paradise, California.[xxxiv] The transmission tower, Tower 27/222, was left in use 25 years past its “useful life” as defined by PG&E’s own operations guidelines.[xxxv] In such a case, liability likely would have still attached even under a negligence standard. Regardless, the relative merits of switching to a negligence standard cannot be properly examined going forward until the constitutional question about changing inverse condemnation is addressed.

An explicit ruling from the California Supreme Court would provide strong guidance for any future policy debates around wildfire liability reform. The possibility of such a future debate occurring depends on the effectiveness of A.B. 1054’s provisions. It is this author’s hope that these measures will prove enough to ensure the appropriate actors pay their fair share by adopting prudent risk-avoidance measures.

*Gabe Rosen is a Junior Editor on MJEAL. They can be reached via email at rosengm@umich.edu.  


[i] Ivan Penn et al., How PG&E Ignored Fire Risks in Favor of Profits, N.Y. Times (Mar. 18, 2019), https://www.nytimes.com/interactive/2019/03/18/business/pge-california-wildfires.html.

[ii] Id.

[iii] Ivan Penn & Peter Eavis, California Lawmakers Give Utilities a Backstop on Wildfire Liability, N.Y. Times (Jul. 11, 2019), https://www.nytimes.com/2019/07/11/business/energy-environment/wildfire-california-utilities.html.

[iv] See, e.g., Gabriel Petek, Legislative Analyst’s Office, Allocating Utility Wildfire Costs: Options and Issues for Consideration (2019), https://lao.ca.gov/reports/2019/4079/allocating-wildfire-costs-062119.pdf.

[v] Id. at 14.

[vi] Id. at 14-15.

[vii] 2019 Cal Stats. ch. 79

[viii] Petek, supra note 4 at 15.

[ix] In re PG&E Corp., 611 B.R. 110, 113 (Bankr. N.D. Cal. 2019).

[x] Id. at 114.

[xi] Id. at 113.

[xii] Aetna Life & Cas. Co. v. City of L.A., 170 Cal. App. 3d 865, 873 (1985).

[xiii] In re PG&E Corp., 611 B.R. at 113.

[xiv] Id. at 114.

[xv] Id. at 114.

[xvi] Petek, supra note 4 at 14.

[xvii] Id. at 14-15.

[xviii] In re PG&E Corp., 611 B.R. at 112.

[xix] Id. at 112.

[xx] Id. at 112.

[xxi] Id. at 113.

[xxii] Id. at 115.

[xxiii] Id. at 116.

[xxiv] Id. at 117.

[xxv] Id. at 118.

[xxvi] Id. at 118.

[xxvii] 2019 Cal Stats. ch. 79

[xxviii] 2019 Cal Stats. ch. 79

[xxix] 2019 Cal Stats. ch. 79

[xxx] Evan Johnson et al., Commission on Catastrophic Wildfire Cost and Recovery, Final Report of the Commission on Catastrophic Wildfire Cost and Recovery 7 (2019), http://opr.ca.gov/docs/20190618-Commission_on_Catastrophic_Wildfire_Report_FINAL_for_transmittal.pdf.

[xxxi] 2019 Cal Stats. ch. 79

[xxxii] Ivan Penn et al., supra note 1.

[xxxiii] Id.

[xxxiv] Id.

[xxxv] Id.

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