Amicus Curiae Brief — San Diego Gas & Electric Company, Petitioner v. California Public Utilities Commission

No. 18-1368

IN THE

Supreme Court of the United States

SAN DIEGO GAS & ELECTRIC COMPANY,

Petitioner,

v.

PUBLIC UTILITIES COMMISSION OF THE

STATE OF CALIFORNIA,

Respondent.

On Petition For a Writ of Certiorari

to the California Court of Appeal,

Fourth Appellate District

MOTION FOR LEAVE TO FILE BRIEF AND

BRIEF OF AMICI CURIAE SHAREHOLDERS IN

CALIFORNIA INVESTOR-OWNED UTILITIES

IN SUPPORT OF PETITIONER

JAMES O. JOHNSTON

JONES DAY

555 S Flower Street

Los Angeles, CA 90071

ANDREW J.M. BENTZ

JONES DAY

51 Louisiana Ave., NW

Washington, DC 20001

ILANA GELFMAN

Counsel of Record

JONES DAY

100 High Street

Boston, MA 02110

(617) 960-3939

igelfman@jonesday.com

Counsel for Amici Curiae

MOTION FOR LEAVE TO FILE BRIEF OF

SHAREHOLDERS IN CALIFORNIA INVESTOROWNED UTILITIES AMICI CURIAE

IN SUPPORT OF PETITIONER

The proposed amici are institutional equity investors who own a substantial portion of the common equity of PG&E Corporation, which is the parent of Pacific

Gas and Electric Company. PG&E is the largest of the

four investor-owned utilities in California. Many of the

investors also own equity in the other investor-owned

utilities, including Petitioner San Diego Gas & Electric

(SDG&E). Proposed amici respectfully move under Supreme Court Rule 37.2(b) for leave to file a brief as

amici curiae in support of petitioner.

All parties were timely notified of proposed

amici’s intent to file this brief. Petitioner consented to

the filing of the brief. Respondents the Public Utilities

Commission of the State of California, Utility Consumers’ Action Network, and Protect Our Communities also consented. Respondents Ruth Henricks and

San Diego Consumers’ Action Network declined to

consent. Respondents The Utilities Reform Network

and Mussey Grade Road Alliance did not respond to

the notification and request for consent.

This case presents the important issue of whether

California can continue to impose strict liability for inverse condemnation on a privately owned utility while

not ensuring that the cost of the liability is spread to

the ratepayers who benefit from utility service. California’s investor-owned utilities have faced severe liability for California wildfires under California’s inverse condemnation system. The investors in those

utilities have an interest in this case not only because

of their current investments, but also because they

will be an important source of the capital that California’s investor-owned utilities need in the future to

make critical investments in safety and reliability.

But the future of California’s privately owned utilities

is uncertain. Under the judicial and regulatory system

at issue in this case, the utilities are strictly liable for

the State’s increasingly catastrophic wildfires when

caused by the normal operation of utility equipment

but often forbidden from sharing that liability with

ratepayers who benefit from utility service. This takings regime is unconstitutional.

Indeed, the regime has already sent PG&E into

bankruptcy and destabilized California’s other investor-owned utilities, which collectively supply threequarters of the State’s electricity. Without a fix, the

privately owned utilities will continue to be financially instable, causing far-reaching effects on ratepayers, wildfire victims, the economy, and the environment.

For the foregoing reasons, the motion should be

granted.

Respectfully submitted,

JAMES O. JOHNSTON

JONES DAY

555 S Flower Street

Los Angeles, CA 90071

ANDREW J.M. BENTZ

JONES DAY

51 Louisiana Ave., NW

Washington, DC 20001

ILANA GELFMAN

Counsel of Record

JONES DAY

100 High Street

Boston, MA 02110

(617) 960-3939

igelfman@jonesday.com

Counsel for Amici Curiae

MAY 30, 2019

i

QUESTION PRESENTED

Whether it is an uncompensated taking for public

use in violation of the Fifth and Fourteenth Amendments for a State to impose strict liability for inverse

condemnation on a privately owned utility without ensuring that the cost of that liability is spread to the

benefitted ratepayers.

ii

RULE 29.6 DISCLOSURE STATEMENT AND

IDENTITY OF AMICI CURIAE

The following entities are the amici curiae to this

brief and provide the statements below in accordance

with Supreme Court Rule 29.6.



683 Capital Partners L.P. has no parent

corporation and no publicly held company

owns 10% or more of its stock.



Abrams Capital Management, L.P. has no

parent corporation and no publicly held

company owns 10% or more of its stock.



Caspian Capital LP has no parent corporation

and no publicly held company owns 10% or

more of its stock.



Knighthead Master Fund, LP has no parent

corporation and no publicly held company

owns 10% or more of its stock.



Knighthead (NY) Fund, LP has no parent

corporation and no publicly held company

owns 10% or more of its stock.



Knighthead Annuity & Life Assurance

Company has no parent corporation and no

publicly held company owns 10% or more of its

stock.



Latigo Partners, LP has no parent corporation

and no publicly held company owns 10% or

more of its stock.



Newtyn Management, LLC has no parent

corporation and no publicly held company

owns 10% or more of its stock.

iii



Nut Tree Capital Management L.P. has no

parent corporation and no publicly held

company owns 10% or more of its stock.



Pentwater Capital Management LP has no

parent corporation and no publicly held

company owns 10% or more of its stock.



Stonehill Capital Management, LLC has no

parent corporation and no publicly held

company owns 10% or more of its stock.



Warlander Asset Management L.P. has no

parent corporation and no publicly held

company owns 10% or more of its stock.



York Capital Management Global Advisors,

LLC has no parent corporation. Credit Suisse

Manager Holdings, an Affiliate of Credit

Suisse AG, owns 10% or more of the equity

interests of York Capital Management Global

Advisors, LLC.

Amici are acting in their individual capacities but

authorized the filing of this single submission for the

purpose of administrative efficiency. Each of the amici

is expressing its independent views, and counsel does

not have the actual or apparent authority to obligate

any one entity to act in concert with any other entity

with respect to equity securities. Amici have not

agreed to act in concert with respect to their

respective interests in equity securities of the

investor-owned utilities described in this brief.

iv

TABLE OF CONTENTS

Page

QUESTION PRESENTED..........................................i

RULE 29.6 DISCLOSURE STATEMENT

AND IDENTITY OF AMICI CURIAE ............... ii

TABLE OF AUTHORITIES ....................................... v

INTEREST OF AMICI CURIAE ............................... 1

SUMMARY OF ARGUMENT .................................... 2

ARGUMENT .............................................................. 2

I.

CALIFORNIA’S INVERSE-CONDEMNATION

REGIME THREATENS THE FINANCIAL

HEALTH OF INVESTOR-OWNED UTILITIES ............. 5

II. CALIFORNIA’S INVERSE-CONDEMNATION

REGIME NEGATIVELY AFFECTS MANY

STAKEHOLDERS ................................................... 11

CONCLUSION ......................................................... 16

v

TABLE OF AUTHORITIES

Page(s)

CASES

Barham v. S. California Edison Co.,

74 Cal. App. 4th 744 (1999) ............................... 3, 4

Locklin v. City of Lafayette,

7 Cal. 4th 327 (1994) .............................................. 3

Pac. Bell Tel. Co. v. S. California

Edison Co.,

208 Cal. App. 4th 1400 (2012) ....................... 3, 4, 5

OTHER AUTHORITIES

J. Arnold,

CPUC Denies SDG&E Wildfire

Recovery; Notes “Incorrect Premise”

Of IC Doctrine (Nov. 30, 2017) .............................. 6

A. Bary,

As Bad as it Gets? PG&E Suspends

Dividend, Tumbles 16%,

BARRON’S (Dec. 21, 2017) ....................................... 9

M. Chediak & K. Porter,

PG&E Bankruptcy Looms, CEO to

Exit as Fire Costs Dwarf Cash,

BLOOMBERG (Jan. 14, 2019) ................................... 9

N. Fabiola & S. Kirong,

S&P Downgrades PG&E Over

California Wildfire Risks,

S&P GLOBAL MARKET INTELLIGENCE

(Feb. 26, 2018) ........................................................ 7

FORTUNE 500 .............................................................. 13

vi

TABLE OF AUTHORITIES

(continued)

Page(s)

G. Gordon & K. Prior,

PCG Has Suspended Dividends,

Citing Uncertainty Regarding

Wildfire-related Liabilities

(Dec. 21, 2017) ........................................................ 7

G. Grosberg & S. Millman,

PG&E Corp. and Subsidiary

Downgraded to ‘BBB’ on Initial

Results of Wildfire Investigation;

Still CreditWatch Negative,

RATINGSDIRECT (June 13, 2018) ............................ 7

E. Howland,

Utilities To Fight Climate Risk Via

Insurance, Upgrades, S&P Says,

2018 CQFENRPT (Nov. 14, 2018) ....................... 10

C. Linnane,

PG&E Stock At Its Lowest In 15

Years On Concern Over California

Utility’s Wildfire Liability,

MARKET WATCH (Nov. 15, 2018) ............................ 9

J. Myers,

AccuWeather Predicts 2018 Wildfires

Will Cost California Total Economic

Losses of $400 Billion,

ACCUWEATHER (Nov. 24, 2018) ........................... 14

M. Pamer & E. Espinosa,

‘We Don’t Even Call It Fire Season

Anymore ... It’s Year Round’: Cal

Fire, KTLA5 NEWS (Dec. 11, 2017) ...................... 14

vii

TABLE OF AUTHORITIES

(continued)

Page(s)

PG&E Corporation and Pacific Gas and

Electric Company,

2018 Joint Annual Report to

Shareholders (Apr. 24, 2019) ............................... 10

PG&E,

Edison Stocks Plummet As Fires

Rage On, PACIFIC COAST BUSINESS

TIMES (Nov. 12, 2018) ............................................ 9

I. Penn,

Blamed For Wildfires, PG&E Seeks

Higher Electricity Rates,

NEW YORK TIMES (Apr. 23, 2019) ........................ 12

I. Penn,

PG&E’s Wildfire Plan Includes More

Blackouts, More Tree Trimming and

Higher Rates,

THE NEW YORK TIMES (Feb. 7, 2019) ................... 13

Proposed Guidance Decision, Order

Instituting Rulemaking to Implement

Electric Utility Wildfire Mitigation

Plans Pursuant to Senate Bill 901,

Rulemaking 18-10-007

(Apr. 29, 2019) ................................................ 14, 15

Rating Action: Moody’s Downgrades

Edison International To Baa3 And

Southern California Edison To

Baa2; Outlooks Negative,

MoODY’S INVESTORS SERVICE

(Mar. 5, 2019) ......................................................... 8

viii

TABLE OF AUTHORITIES

(continued)

Page(s)

D. Rice,

USA Had World’s 3 Costliest

Natural Disasters In 2018 And

Camp Fire Was The Worst,

USA TODAY (Jan 8, 2019) .................................... 14

M. Rocco,

PG&E Shares Tumble As S&P Cuts

Rating To Junk,

FINANCIAL TIMES (Jan. 8, 2019) ............................. 7

San Diego Gas & Electric Co.

Downgraded To ‘BBB+’, Outlook

Remains Negative,

S&P GLOBAL RATINGS (Jan. 21, 2019) ................... 8

Supreme Court Rule 37.6 ............................................ 1

Will California Still Have An InvestmentGrade Investor-Owned Electric

Utility?,

S&P GLOBAL RATINGS (Jan. 21, 2019) ............... 6, 8

Wildfires And Climate Change:

California’s Energy Future, A Report

From Governor Newsome’s Strike

Force (Apr. 12, 2019)

(“Strike Force Report”)................................. passim

C. Wootson,

The Deadliest, Most Destructive

Wildfire In California’s History Has

Finally Been Contained,

THE WASHINGTON POST (Nov. 26, 2018) .............. 14

ix

TABLE OF AUTHORITIES

(continued)

Page(s)

M. Yamamoto,

Market Notes: Tuesday,

December 12, 2017 ................................................. 7

1

INTEREST OF AMICI CURIAE

Amici curiae are institutional equity investors

who manage funds for university endowments, pension funds, charitable foundations, and individuals.

Together, these investors own a substantial portion of

the common equity of PG&E Corporation, which is the

parent of Pacific Gas and Electric Company (PG&E).

PG&E is the largest of the four investor-owned utilities in California, providing natural gas and electricity to more than sixteen million customers. Many of

the investors also own equity in the other investorowned utilities, including Petitioner San Diego Gas &

Electric (SDG&E).1

Amici have an interest in this case not only because of their current investments in California’s investor-owned utilities, but also because they are an

important source of the capital that these utilities will

need in the future to make critical investments in

safety, reliability, and clean energy. The utilities’ ability to make those investments is in jeopardy. Under

California’s illogical judicial and regulatory regime,

investor-owned utilities are strictly liable for the

State’s increasingly catastrophic wildfires when

caused, even in part, by normal operation of utility

equipment. At the same time, investor-owned utilities

are heavily regulated by the State and not always able

to share that liability with ratepayers who benefit

from utility service. This takings regime is unconstitutional. And without a change, investors (like amici)

1 In accordance with Supreme Court Rule 37.6, this brief

was not authored in whole or in part by any party or counsel for

any party. No person or party other than amici and their counsel

made a monetary contribution to the preparation or submission

of this brief.

2

will be unwilling to provide the capital that the privately owned utilities need for ongoing operations and

improvements, causing far-reaching effects for the

utilities’ customers, California, and the nation.

SUMMARY OF ARGUMENT

This amici curiae brief explains why the question

presented is critically important to the future of California’s privately owned utilities and their investors,

as well as California’s citizens, economy, and environment. As applied to privately owned utilities, California’s inverse-condemnation regime is untethered to

the legal justification of cost spreading. This disconnect threatens the utilities’ financial stability. It

drives down credit ratings and stock prices, which increases costs of capital and utility rates. The disconnect also causes insurance premiums to balloon. California’s rule has far-reaching effects. It risks raising

consumer costs to unbearable levels, imperils wildlife

victims’ recovery, negatively affects the economy, and

exacerbates the threat of wildfires. For these reasons,

the Court should grant the petition.

ARGUMENT

There is a crisis in California. Record drought, excessive wind, over a hundred million standing dead

trees, and rampant development are the perfect recipe

for catastrophic wildfires. The unprecedented wildfires of 2017 and 2018 are the new normal and no alleviation is in sight. Wildfires And Climate Change:

California’s Energy Future, A Report From Governor

Newsome’s Strike Force 3 (Apr. 12, 2019) (“Strike

Force Report”). Add to this California’s unique inverse-condemnation system. That system imposes

strict liability on investor-owned utilities for wildfires

3

caused in the ordinary course of utility service (such

as when high winds blow a tree into a live power line),

but fails to ensure that utilities can recoup those costs.

The result is that “all parties lose”—the utilities and

their investors, ratepayers, and wildfire victims. Id.

As applied to investor-owned utilities, California’s

inverse-condemnation regime is detached from the legal mooring of cost spreading. Under California law, a

utility is strictly liable for wildfire damages where the

utility’s equipment is involved. See Pacific Bell Telephone Co. v. Southern California Edison Co., 208 Cal.

App. 4th 1400, 1408 (2012). The premise of this inverse-condemnation doctrine is “to distribute

throughout the community the loss inflicted upon the

individual by the making of public improvements.”

Locklin v. City of Lafayette, 7 Cal. 4th 327, 365 (1994).

When applied to government-owned utilities—which

have the coercive power of the state—inverse condemnation makes sense. The government owners of those

utilities can pay for liabilities by raising rates or taxes,

spreading losses throughout the community.

Applying similar logic, two intermediate California appellate courts extended that ancient doctrine—

historically applied only to government entities—to

privately owned utilities. The courts reasoned that the

California Public Utilities Commission, which sets the

utilities’ rates, would allow investor-owned utilities to

shift inverse-condemnation costs to the public that

benefits from utility service by increasing rates. See

Barham v. Southern California Edison Co., 74 Cal.

App. 4th 744, 752–53 (1999). The appellate courts expressly assumed that the state agency would allow

privately owned utilities to pass on inverse-condem-

4

nation liability through adjustments “during its periodic reviews.” Pacific Bell, 208 Cal. App. 4th at 1407–

08; see also Barham, 74 Cal. App. 4th at 752–53 (noting that the purpose of inverse condemnation is to

“spread among the benefiting community any burden

disproportionately borne by a member of that community”).

The courts’ assumption, however, turned out to be

wrong. In this case, the Commission refused to allow

SDG&E to pass on inverse-condemnation damages to

the public. The Commission called the cost-shifting

assumption “unsound” and insisted that condemnation liability was “not relevant” to rate recovery. Pet.

App. 75a, 91a.

This distorted system exposes investor-owned

utilities to unbounded liability that is confiscatory

and threatens their ability to raise enough capital to

sustain safe and reliable operations. California’s largest investor-owned utility, PG&E, has already declared bankruptcy after facing more than $30 billion

in alleged liabilities from wildfires.

California’s three largest privately owned utilities

supply three-quarters of the State’s electricity. Under

the existing inverse-condemnation regime, a large

majority of State residents now “face rising rates and

instability.” Strike Force Report 3. At the same time,

wildfire victims risk nonpayment or delay in recovery

from unstable or bankrupt utilities and the utilities

ability to invest in maintenance and technology to prevent future wildfires is crippled. See id. Ultimately,

both the California and national economies are adversely affected by California’s inverse-condemnation

system.

5

Answering the question presented is thus vitally

important, not only to the stability of California’s privately owned utilities, but also to numerous stakeholders.

I.

CALIFORNIA’S INVERSE-CONDEMNATION REGIME

THREATENS THE FINANCIAL HEALTH OF

INVESTOR-OWNED UTILITIES

“Multi-billion dollar wildfire liabilities over the

last several years have crippled the financial health of

[California’s] privately and publicly owned electric

utilities.” Strike Force Report 2. Under existing law,

investor-owned utilities are in a Catch-22. They are

subject to strict liability for inverse condemnation under cases predicated on the idea that utilities can

spread the cost to all who benefit from utility operations. See Pacific Bell, 208 Cal. App. 4th at 1407–08.

But California regulators made it clear in this case

that privately owned utilities may not always recover

the costs of inverse condemnation liabilities. Pet. App.

75a. This system has dire consequences for those utilities.

To begin, the extent of potential inverse condemnation for wildfires is stunning. For the 2017 and 2018

wildfires, PG&E alone faces more than $30 billion in

alleged liabilities. See In re PG&E, No. 19-30088, Dkt.

28 (Declaration of J. Wells), at 3 (filed Jan. 29, 2019)

(“Wells Declaration”). The utility has been sued by

thousands of plaintiffs for those wildfires. Id. And under California’s current system, PG&E’s shareholders

may be forced to bear the entire burden of the wildfire

liabilities. This dynamic has already caused PG&E

shareholders to lose billions of dollars of market value.

6

Strict inverse-condemnation liability coupled with

uncertain regulatory approval of corresponding rate

increases has made it increasingly difficult for privately owned utilities to raise much needed capital.

See Strike Force Report 3. Over the next four years,

PG&E alone “expects to fund up to $28 billion in energy infrastructure investments.” PG&E Co. Cost of

Capital Application to the Public Utilities Commission

of California 1 (filed Apr. 22, 2019) (“Cost of Capital

2020”). These expenditures are critical. In addition to

ongoing investment in infrastructure (maintenance

and repairs), major capital is needed for wildfire prevention and mitigation, including measures such as

vegetation management, pole strengthening, and fire

detection. Utilities must also invest in infrastructure

to support clean and renewable energy. California has

set the country’s most aggressive clean-energy goals.

Strike Force Report 17. “California needs investmentworthy” utilities to “continue the state’s progress” toward those goals. Id. In the current situation, however, California may soon have no investment-worth

utilities. Will California Still Have An InvestmentGrade Investor-Owned Electric Utility?, S&P GLOBAL

RATINGS (Jan. 21, 2019).

It is easy to understand why an investor would

shy away from California’s privately owned utilities.

One analyst explained that “to the average investor”

inverse condemnation liability “seems a uniquely unpalatable proposition of socialized no-fault liability despite no assurance of presumed recovery in the …

rate-setting process.”2 Another noted that the system

2 J. Arnold, CPUC Denies SDG&E Wildfire Recovery; Notes

“Incorrect Premise” Of IC Doctrine 3 (Nov. 30, 2017).

7

makes privately owned utilities “uninvestable right

now.”3 Without a change in the law, “utilities will see

[the] material increase in their cost of capital persist

and amplify, stressing their ability to invest in [California] infrastructure and help the state meet its aggressive clean agenda.” 4

These concerns have proved true. Investor-owned

utilities’ credit ratings have fallen rapidly in recent

years. Early in 2018, as a result of the potential inverse-condemnation liability facing PG&E, the company’s credit rating was downgraded from an A to

BBB+ and placed on a negative ratings watch.5 Less

than four months later it was downgraded again because of “the company’s exposure to the California

wildfires and its ability to recover associated costs

from ratepayers” was in doubt under inverse condemnation.6 PG&E’s credit rating eventually fell to junk

status. 7 Southern California Edison (SCE) and

3 M. Yamamoto, Market Notes: Tuesday, December 12,

2017, https://tinyurl.com/y3u7uwx3.

4 G. Gordon & K. Prior, PCG Has Suspended Dividends,

Citing Uncertainty Regarding Wildfire-related Liabilities 2

(Dec. 21, 2017).

5 N. Fabiola & S. Kirong, S&P Downgrades PG&E Over

California Wildfire Risks, S&P GLOBAL MARKET INTELLIGENCE

(Feb. 26, 2018).

6 G. Grosberg & S. Millman, PG&E Corp. and Subsidiary

Downgraded to ‘BBB’ on Initial Results of Wildfire Investigation; Still CreditWatch Negative, RATINGSDIRECT (June 13,

2018).

7 M. Rocco, PG&E Shares Tumble As S&P Cuts Rating To

Junk,

FINANCIAL TIMES

(Jan.

8,

2019),

https://tinyurl.com/yybrm7lg.

8

SDG&E, California’s other investor-owned utilities,

also saw their credit ratings slashed.8

The utilities’ credit ratings fell so fast and so far

that Standard & Poor questioned whether California

would have even a single investment-grade utility left

at the start of the 2019 wildfire season. Will California

Still Have An Investment-Grade Investor-Owned Electric Utility?, S&P GLOBAL RATINGS (Jan. 21, 2019).

S&P explained it was possible “that our issuer credit

ratings … for all of California’s investor-owned regulated utilities could be below investment grade before

the start of the 2019 wildfire season.” Id. at 1.

S&P directly blamed California’s inverse-condemnation regime for the credit freefall: “[T]he legal doctrine of inverse condemnation effectively makes California’s electric utilities the state’s reinsurer, which

creates new risks that were never envisioned when investor-owned utilities were established.” Id. at 3. S&P

put it bluntly: “We don’t believe an electric utility is

large enough, sufficiently diversified, or adequately

capitalized to be a reinsurer.” Id.

These continual credit downgrades have been accompanied by a nosedive in the investor-owned utilities’ stock prices. Immediately after wildfires broke

8 See, e.g., San Diego Gas & Electric Co. Downgraded To

‘BBB+’, Outlook Remains Negative, S&P GLOBAL RATINGS (Jan.

21, 2019) (“The outlook [for SDG&E] is negative, reflecting the

unique and elevated credit risks that California’s electric utilities face because of climate change, their susceptibility to frequent and devastating wildfires, and the legal doctrine of inverse

condemnation.”); Rating Action: Moody’s Downgrades Edison International To Baa3 And Southern California Edison To Baa2;

Outlooks Negative, MoODY’S INVESTORS SERVICE (Mar. 5, 2019),

https://tinyurl.com/yy2ors5z.

9

out in 2017, PG&E’s and SCE’s stock prices plunged

40% and 30% respectively.9 And as the 2018 wildfire

raged in Paradise, California, PG&E’s stock lost half

its value.10 PG&E finally reached the breaking point

in January 2019, filing for bankruptcy.11

Decreasing credit ratings and falling stock prices

make it more difficult and more expensive to get capital. PG&E estimates that its cost of equity capital absent the risk of unreimbursed inverse condemnation

and catastrophic wildfires would be 11%, marginally

greater than its currently authorized cost of equity

capital of 10.25%. See Cost of Capital 2020 Prepared

Testimony, at p. 1-9 (filed Apr. 22, 2019) (“Cost of Capital 2020 Testimony”). PG&E’s cost of equity capital,

however, now could be greater than 18% due to wildfire risks. Id. As the company told the California Public Utilities Commission, “PG&E’s current inability to

raise capital at a reasonable price is, at a policy level,

primarily attributable to a fundamental problem: in

California, investors are required to bear the virtually

unlimited liability for wildfires caused by utility

equipment regardless of fault under the state’s doctrine of inverse condemnation.” Id. at p. 1-3.

9 See A. Bary, As Bad as it Gets? PG&E Suspends Dividend,

Tumbles 16%, BARRON’S (Dec. 21, 2017), https://tinyurl.com/y5yf3jwu; PG&E, Edison Stocks Plummet As Fires

Rage On, PACIFIC COAST BUSINESS TIMES (Nov. 12, 2018),

https://tinyurl.com/yyj6ynym.

10 C. Linnane, PG&E Stock At Its Lowest In 15 Years On

Concern Over California Utility’s Wildfire Liability, MARKET

WATCH (Nov. 15, 2018), https://tinyurl.com/y8ahadan.

11 M. Chediak & K. Porter, PG&E Bankruptcy Looms, CEO

to Exit as Fire Costs Dwarf Cash, BLOOMBERG (Jan. 14,

2019),https://tinyurl.com/y6qslcqz.

10

Making matters worse, the cost of insurance for

privately owned utilities has “skyrocketed”—indeed,

the situation is so bad that insurance is sometimes

“unavailable.” E. Howland, Utilities To Fight Climate

Risk Via Insurance, Upgrades, S&P Says, 2018

CQFENRPT 1673 (Nov. 14, 2018). Typically, utilities

purchase insurance to protect customers and investors from excessive risk. That includes protection from

liabilities for wildfires. But because of California’s inverse condemnation regime, “insurance for wildfire liabilities may not be available or may be available only

at rates that are prohibitively expensive.” Sempra Energy, Annual Report (Form 10-K), at 51, (Feb. 27,

2018). And “even if insurance for wildfire liabilities is

available,” it might not be enough “to cover potential

losses.” Id.

To illustrate the problem, it cost PG&E $360 million to purchase $1.4 billion of insurance coverage for

liabilities, including wildfires, for August 2018

through July 2019.12 That coverage is exceedingly expensive (a 25% premium), but it pales in comparison

to the billions of dollars of strict liability PG&E estimates it may face from 2018 wildfires alone. Id. And

given the 2018 wildfires, which occurred after PG&E

purchased its existing policy, future coverage will be

even more expensive and inadequate, if it is available

at all. In other words, “PG&E is unable to purchase

affordable insurance that would cover the significant

risks to which its investors are currently exposed as a

12 PG&E Corporation and Pacific Gas and Electric Company,

2018 Joint Annual Report to Shareholders 163 (Apr. 24, 2019),

https://tinyurl.com/y4tczpwh.

11

result of inverse condemnation and wildfires.” Cost of

Capital 2020, at p. 1-10 n.14.

SCE has had a similar experience. It has found a

“diminishing general liability and wildfire insurance

market in California for investor-owned utilities, to

the extent even available.” Cost of Capital 2020 Testimony, Attachment 3, at p. 1-33. In 2017, SCE was able

to find only one insurer willing to give the utility an

additional $300 million in liability and wildlife insurance. The cost was $120.9 million with a $10 million

deductible. Id. at p. 1-33–1-34. That is an extraordinary 40% premium.

The situation is dismal for California’s privately

owned utilities. California courts foisted limitless liability upon the utilities, assuming they would be able

to share that liability with ratepayers. But the state

agency torpedoed that theory. With wildfire liabilities

compounding, California’s system is driving the investor-owned utilities’ credit ratings and stock prices into

the ground, which in turn is restricting their access to

capital. At the same time, California’s regime pushes

the utilities’ insurance costs ever higher, while also

limiting its availability. But the damage does not stop

with the utilities and their investors.

II. CALIFORNIA’S INVERSE-CONDEMNATION REGIME

NEGATIVELY AFFECTS MANY STAKEHOLDERS

Applying inverse condemnation to privately

owned utilities has negative affects beyond the utilities themselves. As the financial pressure on the utilities increases, the fallout spreads far and wide. Consumers, wildfire victims, the economy, and the environment are all adversely affected.

12

After the privately owned utilities and their investors, consumers feel the most immediate effects. Disallowing investor-owned utilities from sharing the liability with ratepayers actually hurts those ratepayers, because it makes capital and insurance more expensive, which drives rates up as utilities pass those

expenses on to customers. As two commissioners for

the California Public Utilities Commission warned,

“the financial pressure on utilities from the application of inverse condemnation may lead to higher rates

for ratepayers.” App. 92a. The Governor’s Strike Force

agreed, saying that inverse condemnation “drives up

costs for consumers.” Strike Force Report 27. Indeed,

PG&E has already asked regulators to raise rates by

more than 20% this year on account of its increased

cost of capital due to the 2018 wildfires.13 And given

that PG&E serves 16 million customers, many will be

affected.

The pinch felt by investor-owned utilities also

threatens potential recoveries for wildfire victims.

With those utilities facing massive liabilities and limited funds, victims may go uncompensated. As the

Governor’s Strike Force Report cautioned, “[v]ictims

face a great deal of uncertainty and diminished ability

to be compensated for their losses and harm.” Strike

Force Report 27.

Increasing costs of capital and insurance also

have a negative effect on the economy—both California’s and the nation’s. Privately owned utilities are

13 I. Penn, Blamed For Wildfires, PG&E Seeks Higher Electricity Rates, NEW YORK TIMES (Apr. 23, 2019), https://tinyurl.com/yyh36lyw.

13

deeply integral to the economy. For starters, California’s privately owned utilities employ more than

40,000 Californians and provide electric power to

three-quarters of California’s residents.14

In addition, privately owned utilities are vital to

California businesses, who rely on affordable and reliable energy. Without better wildfire prevention infrastructure, utilities will have to de-energize (that is,

turn the power off) when the risks of wildfires are

high. 15 And without electricity, businesses can lose

big.

It is not just California that is affected. Setting

aside that California has the fifth largest economy in

the world, fifty-four of the Fortune 500 companies are

located in California, including the tech giants Google,

Facebook, and Apple. 16 The Governor’s Strike Force

Report concluded: “If we continue on our current legal

and regulatory path,” there will be “more deadly and

destructive fires that put utilities near insolvency.”

Strike Force Report 2. Such an arrangement “is incompatible with an economy that requires safe, reliable, and affordable power.” Id.

Finally, the current system exacerbates the threat

to the environment. Catastrophic wildfires are in-

14 Wells Declaration 7 (PG&E employs 24,000); Sempra En-

ergy, Annual Report (Form 10-K), at 36 (SDG&E employed 4,116

as of 2017); Edison International, Annual Report (Form 10-K), at

1 (Feb. 22, 2018) (Edison employed 12,500 as of 2017).

15 I. Penn, PG&E’s Wildfire Plan Includes More Blackouts,

More Tree Trimming and Higher Rates, THE NEW YORK TIMES

(Feb. 7, 2019), https://tinyurl.com/ycx423gs.

16 FORTUNE 500, http://fortune.com/fortune500/list/.

14

creasingly frequent and “more damaging and destructive” than ever before. 17 “Fifteen of the 20 most destructive wildfires in the state’s history have occurred

since 2000; ten of the most destructive fires have occurred since 2015.” Strike Force Report 1. The 2018

Camp Fire in Northern California was the most destructive ever, burning more than 150,000 acres and

razing thousands of buildings.18 It was also the deadliest in California history.19 Some estimate damages

from the Camp Fire to exceed $16 billion20 and the total economic damage from the 2018 wildfires in California to be $400 billion.21

Privately owned utilities play a critical role in lowering the risk of catastrophic wildfires. Utilities deploy a variety of techniques to mitigate the risk of

wildfires. They use “vegetation management” and

“system hardening such as widespread electric line replacement with covered conductors designed to lower

wildfire ignitions.” Proposed Guidance Decision, Order Instituting Rulemaking to Implement Electric

Utility Wildfire Mitigation Plans Pursuant to Senate

17 M. Pamer & E. Espinosa, ‘We Don’t Even Call It Fire Season Anymore ... It’s Year Round’: Cal Fire, KTLA5 NEWS (Dec. 11,

2017), https://tinyurl.com/yadjxfus.

18 C. Wootson, The Deadliest, Most Destructive Wildfire In

California’s History Has Finally Been Contained, THE WASHINGTON POST (Nov. 26, 2018), https://tinyurl.com/y4wme4ch.

19 Id.

20 D. Rice, USA Had World’s 3 Costliest Natural Disasters In

2018 And Camp Fire Was The Worst, USA TODAY (Jan 8, 2019),

https://tinyurl.com/y2qa7t9m.

21 J. Myers, AccuWeather Predicts 2018 Wildfires Will Cost

California Total Economic Losses of $400 Billion, ACCUWEATHER

(Nov. 24, 2018), https://tinyurl.com/y2u9hrum.

15

Bill 901, at 8, Rulemaking 18-10-007, (Apr. 29, 2019).

The utilities are also developing “new inspection programs” and “situational awareness technology such as

weather stations, high definition cameras, and use of

computer modeling, weather and wind data and machine learning to predict where wildfires are most

likely to strike.” Id.

All of this costs money—a lot of money. For example, SCE proposed to harden its system by installing

covered conductors on 96 circuit miles of its system in

high fire risk areas. Proposed Decision Approving

Southern California Edison Company’s 2019 Wildfire

Mitigation Plan Pursuant to Senate Bill 901, at 13,

Rulemaking 18-10-007 (Apr. 29, 2019). The cost came

to $47.4 million. But 96 circuit-miles make up only

0.5% of the high risk areas in its service territory. Id.

Extrapolating, to address all of the high risk areas

just in SCE’s territory would cost well north of $9 billion. With restricted access to capital, climbing insurance premiums, and compounding wildfire liabilities,

privately owned utilities will not be able to invest in

these critical protections.

*

*

*

The petition presents a question of surpassing importance. Right now, investor-owned utilities are in

the worst of all possible worlds. With ever-increasing

wildfire danger and risk, they are held strictly liable

for wildfires caused by their equipment, yet they cannot be assured of recovering damages paid to wildfire

victims through the rate-setting mechanism. As a result of this confiscatory regulatory regime, shareholders have incurred massive losses and the private utilities cannot raise capital at reasonable, investment-

16

grade rates. Privately owned utilities also cannot obtain adequate insurance. And the effects of California’s system permeate far beyond the utilities. Consumers suffer. Wildfire victims suffer. The economy

suffers. And the environment suffers. Because the petition raises these important issues, the Court should

grant the petition.

CONCLUSION

The Court should grant the petition for writ of certiorari.

Respectfully submitted,

JAMES O. JOHNSTON

JONES DAY

555 S Flower Street

Los Angeles, CA 90071

ILANA GELFMAN

Counsel of Record

JONES DAY

100 High Street

Boston, MA 02110

(617) 960-3939

igelfman@jonesday.com

ANDREW J.M. BENTZ

JONES DAY

51 Louisiana Ave., NW

Washington, DC 20001

Counsel for Amici Curiae

MAY 30, 2019