Wild Fire Fund

So the $20 or so billion is now depleted from the first event testing the fund, should we re-up the fund or reform? Why does this experience feel like Enron all over again.

I vividly remember the immediate post-fire days sitting in the hotel and learning about what was coming next. Smoke was rising from the foothills. The snow fell on the mountains a week or so later, a cruel reminder of nature’s randomness. But as I saw these contradictions, I began to think about “this fire situation.” At first, I thought, no way it was SCE’s fault. The power was out. We were without power for hours before the fire. How could it happen? In the days following, we began to hear about the potential of Edison having fault. Confusing “mass tort” with “class action” (birds of a similar color), I wanted to figure out how we could keep the $20 billion to use the money to rebuild Altadena while also ensuring the Fund was not depleted. I know, I have these idealistic goals but it is who I am.

This week, I have been bombarded with advertisements on my LA Times App, telling me to get with my elected to “save” the Wildfire Fund. It was sponsored by the utilities. I started to think about the whole concept. What are we saving?

Unfortunately, the fund was conceived with the best intentions, but the road to hell is paved with good intentions too. I was getting my head around the whole concept in January but let it sit on the back burner. I got more involved with the financing piece. I touched on the issue at the request of Congress to understand how the settlement could fit into the broader $40 billion ask back in April, but it was a mere sidebar in the broader conversation. People were looking at the settlement as a financing tool as well, but again, timing is going to be difficult to predict in a complex litigation like this one.

But alas, like many other issues lately it seems, the issue returned. The ads came. People asked me what to do? What is this wildfire fund and how does it affect us? Do we reform it or just re-up the account? The ads always tell a story. We are not talking about the current payouts which will affect Altadena, but looking over the horizon (as I am trying to do these days). Might be time for Altadena to start to consider what this whole situation is about.

The fund has created a “floor” and the wrong incentives to address these concerns. It “pays out” and has no “replenishment.” But the biggest issue I see is this “quasi-governmental role” conferred onto the so called Independently Owned Utilities or IOUs (ironic acronym again, just like DOA), also known as Southern California Edison, (SCE), (the defendant in the Altadena fire), Pacific Gas and Electric or PG & E, and San Diego Gas and Electric (SDGE).

The legal basis for this whole “regime” is something called “inverse condemnation.” Inverse Condemnation essentially means that since the utilities are “quasi-governmental” due to the high level of regulation they operate under, they are effectively held to the same standards the government would be if they were to “condemn” land and take it under eminent domain as found in the California Constitution (the concept of condemnation of private property).

The courts have found, and legislation has taken the position, utilities, while private corporations, are a public use, and therefore subject to “inverse condemnation” under the California Constitution. Private utilities are the bane of California. As we have tried to balance privatization, we have been ham handed. Enron first. Now these wildfire funds. What we have created is something other than what was intended. To fix it, we get to “undo” the policy, or we just keep going the same way.

Ok, a lot of heady stuff there. If it sounds confusing, it is. After the fires in Northern California effectively bankrupted PG & E, the goal was to ensure these events would not do so again because of the need of the private corporation to meet the utilities needs of the residents of the State.

As a result of these “contortions,” the private utilities get to assess, for at least part of the fund, a fee on customers to pay for this “fund” to “monetize damages” otherwise affecting shareholders to ensure the companies do not go into bankruptcy and creditors (i.e. litigants in cases) are not left out in the cold. Ratepayers therefore are putting money into an account to be used to pay for the potential negligence (there are some standards but effectively negligence) of the utilities. The shareholders do the same, but who pays the profits to get the funds into the account? Yup, the ratepayers.

The above is “public risk, private rewards.” Sounds too good to be true but here it Anyone here in the early 2000s remembers the privatization of the California utilities and Enron. Why do we even mess with private utilities? It never works.

I get the reason, but the practice is opens the door to so much which can be reformed. Why should we in Altadena pay for the cost of the company’s negligence going forward through our rates?

Then there are the legal fees. While a structured settlement should reduce the need for lawyers, the structure as it exists today is a wild fire damages attorney’s dream. 25-30% of the funds in the account are the customary fees available to plaintiff’s attorneys working on contingency. $6 billion. Yes, the attorneys will argue there is a lot to be done, but let’s also admit, a lot of the settlement will be pre-packaged by the Court. In fact, SCE is trying to get a structured settlement in place (as I predicted back in January, though my idea was to remove liability in return for using the $20 billion to rebuild Altadena and then take that money and return it to the fund). Right church, wrong pew as they say.

So what happens next? What does reform look like? I am not sure. I am trying to make it so we understand what we have created here.

If we, the residents of California, the users of these utilities are paying for the liability coverage for these organizations, effectively creating an insurance of last resort for the “negligence” of these companies to keep them in business, why do we not get the “upside” as well? Why do we get all the risk and no upside? What is the quid for the pro quo? Ah, the theme of California these days- give something without getting something, whether it is redistricting or these utilities.

It feels like Enron all over again- a public policy created but without the necessary structures in place to protect Californians, designed by the same utilities who will be subject to the policy.

These organizations are going to continue to come back and make business decisions with the public taking the risk. The time has come to just call it like it is.

We effectively recapitalize these utilities as a result of these disasters. What about an insurance company now deciding not to cover disasters in the event of utility causes? Have we created a moral hazard and effectively an insurer of last resort?

To me though, public utilities are just that- public, regardless of who owns the entity itself. They serve everyone. Therefore, why are we allowing private organizations to benefit from public backing of risk? Privatization had a role in the 1980s and 1990s, but look at the Enron example. I remember rolling black outs and I am sure many others do too.

What about a third way, neither government nor private? The Wildfire fund was a good idea but an imperfect one. It papered over a problem with a solution. The solution may lead to a broader, more comprehensive solution, one which will be far more structurally sound than the system we have in place today, if we use this moment to not just move on.

Take the time to address the question “in regular order,” the same as they have done to our multiple policy requests this session. Who would have thought an entire city would burn due to utility negligence, but here you have it. Now we have to think about what’s next? Is this a chance to actually do something to reform or just continue the game as it goes? We need to redefine the “how” we are managing these events and risks.